You have just arranged for a $1,620,000 mortgage to finance the purchase of a la

Question

You have just arranged for a $1,620,000 mortgage to finance the purchase of a large tract of land. The mortgage has an APR of 6.2 percent, and it calls for monthly payments over the next 22 years. However, the loan has an eight-year balloon payment, meaning that the loan must be paid off then.

How big will the balloon payment be? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

You have just arranged for a $1,620,000 mortgage to finance the purchase of a large tract of land. The mortgage has an APR of 6.2 percent, and it calls for monthly payments over the next 22 years. However, the loan has an eight-year balloon payment, meaning that the loan must be paid off then.

Explanation / Answer

Hi,

Please find the answer as follows:

You need to calculate the amount of monthly payment over the period of 22 years first:

PV = 1620000 (indicates the value of loan)

Rate = 6.2%/12 (indicates the monthly rate of interest)

Nper = 22*12 = 264 (indicate the period over which payments are expected to be made)

FV = 0 (indicates future value, not relevant in this case)

PMT = ? (indicates the amount of monthly payment)

Monthly Payment Over 22 Years = PMT(Rate,Nper,PV,FV) = PMT(6.2%/12,264,-1620000,0) = 11258.10

Total Value after 22 Years = 264*11258.10 = 2972138.40

Payments for 8 Years = 8*12*11258.10 = 1080777.60

Balloon Payment = Total Value after 22 Years - Payments for 8 Years = 2972138.40 - 1080777.60 = 1891360.80

Thanks.

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