Learn calculate a balloon mortgage.
When purchasing a home, one of the major questions to be answered is "how much will the mortgage payment be on a monthly basis?" The monthly mortgage payment depends on which type of home loan you choose. One type of loan is called a balloon mortgage. A balloon mortgage bases the payments as if the loan was spread over 30 years, however, the balance of the loan is due after a shorter period of time, such as five or seven years.
Instructions
1. Understand the basics of how a balloon mortgage is written. Because most balloon mortgage payments are based on a 30-year schedule, they are written out so that the numbers add up to 30. The first number represents the initial term before the balloon payment is due and the second number represents the balance of the term. For instance, a 3/27 balloon loan means that after the first three years, the balloon payment is due. A 7/23 loan means that after seven years the balloon payments is due. A 10/20 balloon mortgage would mean that the balloon payment is due after ten years.
2. Understand the variables needed to calculate the balloon mortgage payment. Balloon mortgage payments use many of the same variables for their calculations as other loans. For example, to calculate the balloon mortgage payment, you will need to know the amount being borrowed and the interest rate. You will also need to choose the initial term before the balloon payment is due. For example, say someone was obtaining a mortgage on a $400,000 home at 6-percent interest with a 7/23 balloon mortgage.
3. Learn the standard mortgage equation. Remember that the payments associated with a balloon loan are spread over a fixed-rate term of 30 years. This means that you would use the standard fixed-rate mortgage equation to calculate your monthly payments.
M = (r / (1 - (1 + r)^-N))P
In this equation, M represents the monthly payment, P represents the principal of the loan, r represents the interest rate and n represents the total number of payments. There would be 360 payments for a 30-year loan.
4. Get the monthly interest rate for the loan. Because you are going to be making monthly payments, you must obtain the monthly interest rate in decimal form in order to complete the equation. To convert the interest rate to decimal form the equation reads:
Interest Rate / 100 / 12 = Monthly Interest Rate
The first division of 100 reduces the interest rate to decimal form, and the second gets the monthly interest rate because there are 12 months in a year. So if the interest rate was 6 percent the equation would read:
6 / 100 / 12 = .005
5. Plug the numbers into the fixed-rate mortgage equation. Using the example from above, the equation would read:
M = .005 / (1-(1+.005)^-360)*400,000
Note that ^ means to raise, and * is to multiply.
This calculates to a monthly payment of $2,398.20. This would be the monthly payment for this balloon mortgage arrangement.
6. Understand the equation for the amount due. The other imperative question is how much does the borrower still owe at the end of the initial term. This will be the balloon payment due. Using the example of a 7/23 mortgage at 6 percent with a $400,000 loan, the calculation would be the following:
Balloon Amount Due = P[(1+r)^N -- (1+r)^X]/[(1+r)^N -- 1]
P represents principal borrowed, r the interest rate, N the number of total payments in the loan and X the number of payments you made.
7. Calculate the amount due on the loan. Plugging in the variables from the above example, the equation would read:
$400,000*[(1+.005)^360 - (1+.005)^84]/[(1+.005)^360-1] = 358,557.51
This means the balloon payment due at the end of a 7-year term (represented in month form in the equation), you would owe a balance of $358,557.51
