Consider a 5-year balloon loan for $400,000. The bank requires a monthly payment

Question

Consider a 5-year balloon loan for $400,000. The bank requires a monthly payment equal to that of a 30-year fixed-rate loan with a nominal annual rate of 4%. a. What is the monthly payment (PMT) on the loan prior to the balloon payment? Use the formula PMT = PV[r(1 + r)n]/[(1 + r)n - 1]. b. What is the balance (B) owed by the borrower when the balloon payment is due? Calculate algebraically using B = PV[(1 + r)n - (1 + r)p]/[(1 + r)n - 1] OR using your financial calculator. c. If you decide to refinance the balloon payment, how much will you repay over the life of the new loan?

Explanation / Answer

1. Monthly payment=PMT(4%/12,30*12,400000)=1909.66

2. Balance=FV(4%/12,12*5,-1909.66,400000)=361790.0525

3. PMT(4%/12,12*25,361790.0525)=1909.66

So, total payment=1909.66*12*25=572898

loan=361790.0525

interest payment=572898-361790.0525=211107.9

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