Balloon Mortgage Calculator

What is a Balloon Mortgage Calculator?

A Balloon Mortgage Calculator is a financial tool that helps borrowers estimate their monthly payments and final balloon payment for a balloon mortgage. In a balloon mortgage, the borrower makes regular monthly payments for a set period, typically 5 to 7 years, after which a large lump sum payment (the "balloon" payment) is due to pay off the remaining balance.

Formulas for Balloon Mortgage Calculation

The primary formulas used in balloon mortgage calculations are:

1. Monthly Payment:

\[P = L \frac{r(1+r)^n}{(1+r)^n-1}\]

2. Balloon Payment:

\[B = L(1+r)^m - P\frac{(1+r)^m-1}{r}\]

Where:

• P = Monthly Payment
• L = Loan Amount
• r = Monthly Interest Rate (Annual Rate / 12)
• n = Total Number of Payments (Loan Term in Years × 12)
• B = Balloon Payment
• m = Number of Payments in Balloon Period (Balloon Period in Years × 12)

Calculation Steps

1. Calculate the monthly interest rate by dividing the annual rate by 12.
2. Determine the total number of payments based on the full loan term.
3. Calculate the monthly payment using the first formula.
4. Determine the number of payments in the balloon period.
5. Calculate the balloon payment using the second formula.
6. Compute the total interest paid during the balloon period.

Example

Let's consider a scenario with the following details:

• Loan Amount: $200,000
• Interest Rate: 4% per year
• Loan Term: 30 years
• Balloon Period: 7 years

Calculation:

1. Monthly interest rate: 4% / 12 = 0.3333%
2. Total number of payments: 30 × 12 = 360
3. Monthly payment: $954.83
4. Number of payments in balloon period: 7 × 12 = 84
5. Balloon payment: $174,154.99
6. Total interest paid: $54,405.72

In this example, the borrower would pay $954.83 per month for 7 years, after which they would need to pay a balloon payment of $174,154.99 or refinance the loan. During the 7-year period, they would pay $54,405.72 in interest.

Note: Balloon mortgages can be risky as they require a large payment at the end of the balloon period. It's crucial to have a solid plan for handling the balloon payment when it comes due.