Balloon Pay-off

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Equation / Last modified by Tim on 2015/07/13 11:27
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The Balloon Payment equation calculates the balloon payment required at the end of the loan term to settle a loan.

Description

This Equation will calculate the amount due for a mortgage with a Balloon Payment, based on an initial loan amount (P), for a fixed rate interest (i) loan or mortgage, on an amortization schedule for a set number of years (n), requiring a balloon payment after a specified term of years(T).  Balloon payments are required at the end of the contract time after the borrower has paid regular periodic payments (e.g. monthly mortgage payments) for a period of time.  Balloon note limit the long term interest rate risk for the lender, by limiting the duration of the fixed interest rate (i) to the balloon note period (pay num), even though the amortization period (n) may be much longer.

The total debt cost of these loans is lower than that of a conventional fixed-rate mortgage. An advantage of these loans is that they often have a lower interest rate, but the final balloon payment is substantial, and for some borrowers this can be a disadvantage.

An amortization table shows, for each payment period of a loan, the payment amount that is applied to principal and  the amount paid as Interest. For a standard fixed rate mortgage,  the payment in the beginning is applied more towards the interest than to the principal.  As the loan matures, the payment amount each month applied to principal increases, and the amount paid as interest decreases.

INPUTS

• P - (Principal) original loan amount
• n - (Amortization period) the number of years to payoff the loan if there were no balloon payment.
• i -  (annual rate) interest rate as a percentage; i.e., enter 4.6 for a 4.6% interest rate
• T- (Term) the year of the loan at the end of which the  balloon payment is due

Usage

In an example, the loan amount (P) is $50,0000. The loan is computed for a term (n) of 30 years and thus has a lower payment amount as the loan is amortized over the entire 30 years. The interest rate for this loan is set at a fixed 6%. And the balloon payment (pay num) is defined to come due after 5 years. Since at the beginning of an amortization schedule the payments are paying much more interest than principal, a relatively small part of the principal is paid by year 5. And thus the balloon payment due at the end of year 5, which pays off the loan balance, is:$46826.59.

History

A Balloon mortgages is a type of short-term mortgage that requires the borrower to make regular payments for a specific interval and then pay off the remaining balance. Balloon mortgages can take the form of interest-only loans or partially amortizing mortgages. This formula takes into account amortization.