Chapter 5, Problem 35P

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Chapter
Section

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

# AMORTIZATION SCHEDULE WITH A BALLOON PAYMENT You want to buy a house that costs \$140,000. You have \$14,000 for a down payment, but your credit is such that mortgage companies will not lend you the required \$126,000. However, the realtor persuades the seller to take a \$126,000 mortgage (called a seller take-back mortgage) at a rate of 5%, provided the loan is paid off in full in 3 years. You expect to inherit \$140,000 in 3 years; but right now all you have is \$14,000, and you can afford to make payments of no more than \$22,000 per year given your salary. (The loan would call for monthly payments, but assume end-of-year annual payments to simplify things.) a. If the loan was amortized over 3 years, how large would each annual payment be? Could you afford those payments? b. If the loan was amortized over 30 years, what would each payment be? Could you afford those payments? c. To satisfy the seller, the 30-year mortgage loan would be written as a balloon note, which means that at the end of the third 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, and what would the balloon payment be?

a.

Summary Introduction

To calculate: Amount of loan payment, if it was amortized for 3 years.

Balloon Payment:

It is the total amount which is paid at the end of the term of the loan. If there is a condition of paying the entire principal amount in lump sum at the end of the term then there is an involvement of balloon payment. Amount paid as balloon payment is generally higher in comparison of the amount paid in monthly installments.

Explanation

Annual payment on loan of \$126,000 for 3 years at 5 % interest is calculated by using āPMTā formula on excel,

b.

Summary Introduction

To calculate: Amount of loan payment, if it was amortized for 30 years.

Balloon Payment:

It is the total amount which is paid at the end of the term of the loan. If there is a condition of paying the entire principal amount in lump sum at the end of the term then there is an involvement of balloon payment. Amount paid as balloon payment is generally higher in comparison of the amount paid in monthly installments.

c.

Summary Introduction

To calculate: Balloon payment outstanding value at the end of three year after making payment of \$22,000 for the next three years.

Balloon Payment:

It is the total amount which is paid at the end of the term of the loan. If there is a condition of paying the entire principal amount in lump sum at the end of the term then there is an involvement of balloon payment. Amount paid as balloon payment is generally higher in comparison of the amount paid in monthly installments.

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