You need a 30 year, fixed rate mortgage to buy a new home for $240,000. Your mortgage bank will lend you the money at an APR of 5.25 percent for this 360-month loan. However, you can afford monthly payments of only $975, so you offer to pay off any remaining loan balance at the end of the loan in the form of a single balloon payment.
How large will this balloon payment have to be for you to keep your monthly payments at $975?
Normally mortgage payments are set such that after the loan payments have been made there is no balance on the loan. However, if the payments are not sufficient to pay off the loan completely, a balloon payment is left at the end of the loan.
Answer and Explanation:
We can solve for the balloon payment using a financial calculator:
I=5.25/12 - the monthly rate
PV=-240000, the amount borrowed
PMT=975, the monthly payment
The balloon payment will be $305,385.86. It is greater than the amount borrowed because the interest each month, $1050, is greater than the monthly payment.
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from Finance 102: Personal FinanceChapter 7 / Lesson 4