You want to buy a house that costs $170,000. You have $17,000 for a down payment

Question

You want to buy a house that costs $170,000. You have $17,000 for a down payment, but your credit is such that mortgage companies will not lend you the required $153,000. However, the realtor persuades the seller to take a $153,000 mortgage (called a seller take-back mortgage) at a rate of 10%, provided the loan is paid off in full in 3 years. You expect to inherit $170,000 in 3 years, but right now all you have is $17,000, and you can only afford to make payments of no more than $18,000 per year given your salary. (The loan would really call for monthly payments, but assume end-of-year annual payments to simplify things.) Round all answers to the nearest hundredth.

If the loan were amortized over 30 years, what would each payment be?

B. To satisfy the seller, the 30-year mortgage loan would be written as a "balloon note," which means that at the end of the 3rd year you would have to make the regular payment plus the remaining balance on the loan.

What would the loan balance be at the end of Year 3? What would the balloon payment be?



*Please advise how to calculate via Financial Calculator, thanks!

Explanation / Answer

To find how much each payment would be if the loan were amortized over 30 years, we enter the following: 153,000 [PV] 30 [N] 10 [I/Y] 0 [FV] [CPT] [PMT] = -16,230.12 To find the amount left on the balance at the end of Year 3, we simply input 3 as the new number of periods N and compute for the new FUTURE VALUE: 3 [N] [CPT] [FV] = -149,921.29 is the cash outflow (loan balance that must be paid) at the end of Year 3, after the third payment of 16,230.12. Including the 16230.12, the balloon payment at the end of Year 3 is 166,151.41

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