How to calculate balloon mortgage payment
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Our commercial mortgage calculator will help you calculate:
Principal and Interest (P&I) payments
Interest only payments
And balloon payments
The principal is the loan amount you will be applying for. How much it is depends on what your current finances and future business prospects can handle. Taken into consideration on the principal amount will be how much revenue the property will yield (Net Operating Income) and how much your total assets cover in relation to your total debt (Loan To Value) among other factors. The industry median interest rate for commercial mortgages is approximately 3% above the federal rate. The amount of interest that will be charged specifically to your loan will largely be determined by your credit score. Multifamily.Loans Inc will hotels near university at buffalo you access to the industry’s best loan rates no matter the property type, location or size.
A balloon payment schedule involves the borrower paying off the loan in small amounts with a large (balloon) payments during the loan term. Balloon payments can be a heavy shock to your finances, so the team at Multifamily.Loans will ensure that your cash flow is prepared to handle balloon payments with ease throughout how to calculate balloon mortgage payment loan term. The loan term is the duration of time that you will have to pay off the loan. Loan terms for commercial property is usually about 15-30 years. The loan term will affect whether your installments are big or small but they also affect how much you would have paid off at the end of the loan.
While our focus is mainly on commercial real estate loans, such as bank financing, CMBS loans, or HUD® multifamily loans, it may be of interest to business owners that SBA loans, loans guaranteed by the U.S. Small Business Administration, can fund equipment and working capital as well as commercial real estate.
Documentation How to calculate balloon mortgage payment for Commercial Mortgages
While documentation requirements for commercial loans vary from lender to lender, in general, lenders will require:
Asset statements
Corporate documents
Personal financial records
If the borrower is a business, particularly one which plans to occupy the building, additional information such as current leases, as well as other corporate documentation may be needed.
The more documentation required, the longer it may take to close the loan. In general, most commercial real estate loans, including CMBS and bank loans, will take approximately 3 months to close. While many lenders claim that they can close loans in 6 weeks or less, this is rarely the case. One major exception is hard money loans, which generally carry significantly higher interest rates (usually above 10%), and are often used for situations when a borrower has bad credit or legal issues. Hard money loans can often be funded in as little as one week.
Financial Calculators
How Does A Balloon Mortgage Work?
If you’re having a hard time finding a balloon mortgage, consider one of these loan alternatives.
Adjustable Rate Mortgage (ARM)
An ARM loan has an interest rate that changes along with market rates. When you sign onto an ARM, you begin with an initial fixed-rate period. This initial repayment period usually lasts 5 – 10 how to calculate balloon mortgage payment. The introductory interest rate you receive will be lower than current market rates and lower than what you could get with a fixed-rate loan. At the end of your fixed-rate period, your interest rate may increase or decrease, depending on how market rates move. ARMs have caps in place that limit how high your interest rate can rise. This means that you won’t have to worry about getting stuck with a loan that has an interest rate that’s 10 times higher than what you signed up for.
ARMs offer a great alternative to balloon mortgages because they give you access to a lower initial interest rate for at least a few years. During your initial repayment period, you pay less in monthly payments than you would with a fixed-rate loan. You can usually make a lump-sum payment toward your loan balance like you would with a balloon mortgage at any time. Make sure that your ARM loan terms don’t include a prepayment penalty if this is your plan.
If your plan falls through and you don’t receive the windfall of cash you were expecting, there’s no penalty. You can continue to make your payments on your ARM’s schedule until you own your home. You can also refinance your loan to a fixed-rate or longer term if you have trouble keeping up with your payments.
Fixed-Rate Mortgage
A fixed-rate loan is a type of home loan that holds a steady interest rate throughout its term. Your lender guarantees that your interest rate will stay the same when you sign onto a fixed-rate loan. This is true regardless of whether market rates go up or down. With a fixed-rate loan, you’ll pay the exact same amount every month unless you fall behind on your loan or you make an extra payment. A fixed-rate loan can be a great choice if you need a predictable monthly payment.
Like an ARM, you can usually make additional payments on a fixed-rate loan without issue if your loan terms don’t include a prepayment penalty. If you do decide to pay down your loan early, make sure you tell your lender that you want your extra payments to go toward your loan principal. Some lenders automatically apply any extra money you put down toward your next month’s payments. Also, like an ARM, there is no looming lump-sum payment you must make to stay in your home. You’re free to continue making your monthly payments or refinance if you don’t receive the money you were expecting.
Interest-Only Mortgage
An interest-only mortgage can allow you to move into your new home without a high monthly payment. Interest-only mortgages begin with a set introductory period. During this time, you’ll only need to pay monthly interest that accrues on your loan. When your introductory period ends, your mortgage company recalculates and restructures your loan and you switch to a standard monthly payment structure.
Interest-only loans can be a good alternative to balloon mortgages. Let’s how to calculate balloon mortgage payment you have a low income now but believe that your income will significantly increase in a few years. An interest-only mortgage can allow you to move in without a waiting period. However, interest-only mortgages will cost more over time than ARM or fixed-rate loans. Interest-only loans are also less common than fixed-rate and ARM loans, so you may need to contact a few lenders before you find one.
Balloon Loan Calculator
Balloon Mortgage Loan Overview
Balloon loans aren't as popular as they once were, but they're still around. They're an alternative to adjustable rate mortgages (ARMs) for people who are looking to get the lowest interest rate they can.
A balloon mortgage is a short-term loan where you make regular mortgage payments for a few years, then pay off the rest in one lump sum. This last payment is called a "balloon," because it swells enormously compared to the monthly payments you had been making.
Since few borrowers can afford to cover the entire balloon payment out of their available funds, they usually either refinance the loan or sell the property when the payment comes due. So that needs to be part of the plan going in.
Because balloon mortgages are short-term loans, lenders can offer lower sbi online banking saral login than they do on long-term loans, such as a 30-year mortgage. That's because the pricing on a 30-year loan has to take into account the possibility that interest rates may rise significantly over the next three decades.
Most balloon mortgages run five to seven years. The monthly payments are typically based on a 30-year amortization schedule; that is, the payments are the same how to calculate balloon mortgage payment they would be for a 30-year loan with the same interest rate, except for the balloon payment at the end.
Who would benefit from a balloon mortgage?
Balloon loans aren't for how to calculate balloon mortgage payment, but they can be a real plus for people in certain situations.
- Buyers who plan to sell the home in a few years, so they don't need a 30-year mortgage to begin with.
- Borrowers who expect mortgage rates to hold steady or decline over the comings years, so they will benefit from refinancing
- Homebuyers who can't afford a large down payment and are looking to build some equity before refinancing
- Buyers who are looking to maximize what they can borrow by keeping their monthly payments as low as possible.
- A buyer with an irregular but substantial income who expects to pay the loan off quickly, but wants the flexibility to make minimal payments when funds are tight.
In this example, we will compare two mortgages for $100,000. The first is a 30/15 balloon mortgage. It is amortized over 30 years. The balloon payment is due in 15 years. Its interest rate is fixed at 4.25%. The other mortgage is a first national bank severna park year fixed rate mortgage at 5.25%.
After reviewing this example, enter your desired mortgage terms into the balloon mortgage calculator to help you decide which mortgage best meets your needs.
Balloon Payment: $65,885
(Month 180)
The balloon mortgage requires a $492 monthly principal and interest payment. This represents a savings of $60 per month when compared to the 30 year fixed. However, the 30/15 has a balloon payment of $65,885 due in 180 months. The borrower will have to compare the monthly savings of $60 for 180 months with much higher risk of the balloon mortgage. Major risks presented by the balloon mortgage include refinance risk, interest rate risk and and the risk of not being able to sell the home at a high enough price in time to make the balloon payment.
| 1 | $492 | $354 | $138 | $99,862 |
| 2 | $492 | $354 | $138 | $99,724 |
| 3 | $492 | $353 | $139 | $99,585 |
| 4 | $492 | $353 | $139 | $99,446 |
| 5 | $492 | $352 | $140 | $99,306 |
| 6 | $492 | $352 | $140 | $99,166 |
| 7 | $492 | $351 | $141 | $99,025 |
| 8 | $492 | $351 | $141 | $98,884 |
| 9 | $492 | $350 | $142 | $98,742 |
| 10 | $492 | $350 | $142 | $98,600 |
| 11 | $492 | $349 | $143 | $98,457 |
| 12 | $492 | $349 | $143 | $98,314 |
| Year 1 | $5,903 | $4,217 | $1,686 | |
| 13 | $492 | $348 | $144 | $98,170 |
| 14 | $492 | $348 | $144 | $98,026 |
| 15 | $492 | $347 | $145 | $97,881 |
| 16 | $492 | $347 | $145 | $97,736 |
| 17 | $492 | $346 | $146 | $97,590 |
| 18 | $492 | $346 | $146 | $97,444 |
| 19 | $492 | $345 | $147 | $97,297 |
| 20 | $492 | $345 | $147 | $97,150 |
| 21 | $492 | $344 | $148 | $97,002 |
| 22 | $492 | $344 | $148 | $96,854 |
| 23 | $492 | $343 | $149 | $96,705 |
| 24 | $492 | $342 | $149 | $96,555 |
| Year 2 | $5,903 | $4,144 | $1,759 | |
| 25 | $492 | $342 | $150 | $96,405 |
| 26 | $492 | $341 | $150 | $96,255 |
| 27 | $492 | $341 | $151 | $96,104 |
| 28 | $492 | $340 | $152 | $95,952 |
| 29 | $492 | $340 | $152 | $95,800 |
| 30 | $492 | $339 | $153 | $95,647 |
| 31 | $492 | $339 | $153 | $95,494 |
| 32 | $492 | $338 | $154 | $95,340 |
| 33 | $492 | $338 | $154 | $95,186 |
| 34 | $492 | $337 | $155 | $95,031 |
| 35 | $492 | $337 | $155 | $94,876 |
| 36 | $492 | $336 | $156 | $94,720 |
| Year 3 | $5,903 | $4,068 | $1,835 | |
| 37 | $492 | $335 | $156 | $94,564 |
| 38 | $492 | $335 | $157 | $94,407 |
| 39 | $492 | $334 | $158 | $94,249 |
| 40 | $492 | $334 | $158 | $94,091 |
| 41 | $492 | $333 | $159 | $93,932 |
| 42 | $492 | $333 | $159 | $93,773 |
| 43 | $492 | $332 | $160 | $93,613 |
| 44 | $492 | $332 | $160 | $93,453 |
| 45 | $492 | $331 | $161 | $93,292 |
| 46 | $492 | $330 | $162 | $93,130 |
| 47 | $492 | $330 | $162 | $92,968 |
| 48 | $492 | $329 | $163 | $92,805 |
| Year 4 | $5,903 | $3,989 | $1,915 | |
| 49 | $492 | $329 | $163 | $92,642 |
| 50 | $492 | $328 | $164 | $92,478 |
| 51 | $492 | $328 | $164 | $92,314 |
| 52 | $492 | $327 | $165 | $92,149 |
| 53 | $492 | $326 | $166 | $91,983 |
| 54 | $492 | $326 | $166 | $91,817 |
| 55 | $492 | $325 | $167 | $91,650 |
| 56 | $492 | $325 | $167 | $91,483 |
| 57 | $492 | $324 | $168 | $91,315 |
| 58 | $492 | $323 | $169 | $91,147 |
| 59 | $492 | $323 | $169 | $90,977 |
| 60 | $492 | $322 | $170 | $90,808 |
| Year 5 | $5,903 | $3,906 | $1,998 | |
| 61 | $492 | $322 | $170 | $90,637 |
| 62 | $492 | $321 | $171 | $90,466 |
| 63 | $492 | $320 | $172 | $90,295 |
| 64 | $492 | $320 | $172 | $90,123 |
| 65 | $492 | $319 | $173 | $89,950 |
| 66 | $492 | $319 | $173 | $89,777 |
| 67 | $492 | $318 | $174 | $89,603 |
| 68 | $492 | $317 | $175 | $89,428 |
| 69 | $492 | $317 | $175 | $89,253 |
| 70 | $492 | $316 | $176 | $89,077 |
| 71 | $492 | $315 | $176 | $88,901 |
| 72 | $492 | $315 | $177 | $88,723 |
| Year 6 | $5,903 | $3,819 | $2,084 | |
| 73 | $492 | $314 | $178 | $88,546 |
| 74 | $492 | $314 | $178 | $88,367 |
| 75 | $492 | $313 | $179 | $88,188 |
| 76 | $492 | $312 | $180 | $88,009 |
| 77 | $492 | $312 | $180 | $87,829 |
| 78 | $492 | $311 | $181 | $87,648 |
| 79 | $492 | $310 | $182 | $87,466 |
| 80 | $492 | $310 | $182 | $87,284 |
| 81 | $492 | $309 | $183 | $87,101 |
| 82 | $492 | $308 | $183 | $86,918 |
| 83 | $492 | $308 | $184 | $86,734 |
| 84 | $492 | $307 | $185 | $86,549 |
| Year 7 | $5,903 | $3,729 | $2,175 | |
| 85 | $492 | $307 | $185 | $86,363 |
| 86 | $492 | $306 | $186 | $86,177 |
| 87 | $492 | $305 | $187 | $85,991 |
| 88 | $492 | $305 | $187 | $85,803 |
| 89 | $492 | $304 | $188 | $85,615 |
| 90 | $492 | $303 | $189 | $85,427 |
| 91 | $492 | $303 | $189 | $85,237 |
| 92 | $492 | $302 | $190 | $85,047 |
| 93 | $492 | $301 | $191 | $84,856 |
| 94 | $492 | $301 | $191 | $84,665 |
| 95 | $492 | $300 | $192 | $84,473 |
| 96 | $492 | $299 | $193 | $84,280 |
| Year 8 | $5,903 | $3,634 | $2,269 | |
| 97 | $492 | $298 | $193 | $84,087 |
| 98 | $492 | $298 | $194 | $83,892 |
| 99 | $492 | $297 | $195 | $83,698 |
| 100 | $492 | $296 | $196 | $83,502 |
| 101 | $492 | $296 | $196 | $83,306 |
| 102 | $492 | $295 | $197 | $83,109 |
| 103 | $492 | $294 | $198 | $82,911 |
| 104 | $492 | $294 | $198 | $82,713 |
| 105 | $492 | $293 | $199 | $82,514 |
| 106 | $492 | $292 | $200 | $82,314 |
| 107 | $492 | $292 | $200 | $82,114 |
| 108 | $492 | $291 | $201 | $81,913 |
| Year 9 | $5,903 | $3,536 | $2,367 | |
| 109 | $492 | $290 | $202 | $81,711 |
| 110 | $492 | $289 | $203 | $81,509 |
| 111 | $492 | $289 | $203 | $81,305 |
| 112 | $492 | $288 | $204 | $81,101 |
| 113 | $492 | $287 | $205 | $80,897 |
| 114 | $492 | $287 | $205 | $80,691 |
| 115 | $492 | $286 | $206 | $80,485 |
| 116 | $492 | $285 | $207 | $80,278 |
| 117 | $492 | $284 | $208 | $80,070 |
| 118 | $492 | $284 | $208 | $79,862 |
| 119 | $492 | $283 | $209 | $79,653 |
| 120 | $492 | $282 | $210 | $79,443 |
| Year 10 | $5,903 | $3,434 | $2,470 | |
| 121 | $492 | $281 | $211 | $79,233 |
| 122 | $492 | $281 | $211 | $79,021 |
| 123 | $492 | $280 | $212 | $78,809 |
| 124 | $492 | $279 | $213 | $78,596 |
| 125 | $492 | $278 | $214 | $78,383 |
| 126 | $492 | $278 | $214 | $78,168 |
| 127 | $492 | $277 | $215 | $77,953 |
| 128 | $492 | $276 | $216 | $77,738 |
| 129 | $492 | $275 | $217 | $77,521 |
| 130 | $492 | $275 | $217 | $77,304 |
| 131 | $492 | $274 | $218 | $77,085 |
| 132 | $492 | $273 | $219 | $76,866 |
| Year 11 | $5,903 | $3,327 | $2,577 | |
| 133 | $492 | $272 | $220 | $76,647 |
| 134 | $492 | $271 | $220 | $76,426 |
| 135 | $492 | $271 | $221 | $76,205 |
| 136 | $492 | $270 | $222 | $75,983 |
| 137 | $492 | $269 | $223 | $75,760 |
| 138 | $492 | $268 | $224 | $75,537 |
| 139 | $492 | $268 | $224 | $75,312 |
| 140 | $492 | $267 | $225 | $75,087 |
| 141 | $492 | $266 | $226 | $74,861 |
| 142 | $492 | $265 | $227 | $74,634 |
| 143 | $492 | $264 | $228 | $74,406 |
| 144 | $492 | $264 | $228 | $74,178 |
| Year 12 | $5,903 | $3,215 | $2,688 | |
| 145 | $492 | $263 | $229 | $73,949 |
| 146 | $492 | $262 | $230 | $73,719 |
| 147 | $492 | $261 | $231 | $73,488 |
| 148 | $492 | $260 | $232 | $73,256 |
| 149 | $492 | $259 | $232 | $73,024 |
| 150 | $492 | $259 | $233 | $72,790 |
| 151 | $492 | $258 | $234 | $72,556 |
| 152 | $492 | $257 | $235 | $72,321 |
| 153 | $492 | $256 | $236 | $72,086 |
| 154 | $492 | $255 | $237 | $71,849 |
| 155 | $492 | $254 | $237 | $71,611 |
| 156 | $492 | $254 | $238 | $71,373 |
| Year 13 | $5,903 | $3,098 | $2,805 | |
| 157 | $492 | $253 | $239 | $71,134 |
| 158 | $492 | $252 | $240 | $70,894 |
| 159 | $492 | $251 | $241 | $70,653 |
| 160 | $492 | $250 | $242 | $70,411 |
| 161 | $492 | $249 | $243 | $70,169 |
| 162 | $492 | $249 | $243 | $69,925 |
| 163 | $492 | $248 | $244 | $69,681 |
| 164 | $492 | $247 | $245 | $69,436 |
| 165 | $492 | $246 | $246 | $69,190 |
| 166 | $492 | $245 | $247 | $68,943 |
| 167 | $492 | $244 | $248 | $68,695 |
| 168 | $492 | $243 | $249 | $68,447 |
| Year 14 | $5,903 | $2,977 | $2,926 | |
| 169 | $492 | $242 | $250 | $68,197 |
| 170 | $492 | $242 | $250 | $67,947 |
| 171 | $492 | $241 | $251 | $67,695 |
| 172 | $492 | $240 | $252 | $67,443 |
| 173 | $492 | $239 | $253 | $67,190 |
| 174 | $492 | $238 | $254 | $66,936 |
| 175 | $492 | $237 | $255 | $66,681 |
| 176 | $492 | $236 | $256 | $66,425 |
| 177 | $492 | $235 | $257 | $66,169 |
| 178 | $492 | $234 | $258 | $65,911 |
| 179 | $492 | $233 | $258 | $65,653 |
| 180 | $65,885 | $233 | $65,653 | $0 |
| Year 15 | $71,297 | $2,850 | $68,447 | |
| Grand Total | $153,942 | $53,942 | $100,000 |
- Amortization Schedule
- The amortization schedule show you how monthly principal and interest payment and principal balances change over the life of your loan.
- Balloon Term
- The Balloon term is the length of time after which the remaining principal balance on your mortgage is due. Mortgages usually have a balloon term that is the same as the amortization term. Your final payment for those mortgage may be slightly different. Mortgages where the balloon term is shorter than the amortization term are called balloon mortgages. These typically result in a very large final required payment and, thus, are much riskier mortgages.
- Interest
- The portion of your mortgage payment that is due to the interest rate being applied to the principal balance. The Total Interest for a mortgage is the sum of all interest paid over the life of a loan.
- Interest Rate
- The percentage of the principal balance of your mortgage that determines how much interest you must pay. The interest rate on your mortgage may change or remain the same depending on the type of loan you how to calculate balloon mortgage payment Amount
- The initial principal balance or your mortgage at closing.
- Principal
- The portion of your mortgage payment that is used to pay down the current balance of your mortgage. The principal balance represents how much you owe on the mortgage.
- Term
- The amortization term is one of the key factors that determine your required mortgage payment. Your required mortgage payment for fully amortizing mortgages is the amount that would result in the mortgage being closest to being paid off by the end of the amortization term. Longer how to calculate balloon mortgage payment terms result in lower required mortgage payments for fully amortizating mortgages, all other things being equal.
How Balloon Mortgages Work
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A “balloon mortgage” is a home loan that does not fully amortize over the life of the loan, leaving a large balance at the end of the shortened term.
What Is a Balloon Mortgage?
- It’s like a standard home loan
- In that you make principal and interest payments each month
- Based on a 30-year amortization (or similar)
- But differs in that the loan is due in full in just a fraction of the time
Put simply, monthly mortgage payments are based on a typical 30-year loan term, but the loan itself is due in full after just five or seven years, instead of 30.
As a result, the final payment on a balloon mortgage will be significantly larger than the regular monthly mortgage payments.
Of course, most borrowers expect to either refinance before the balloon mortgage term ends, or sell the associated property. So the final payment likely won’t even come into play in the real world.
Let’s look at an example of a balloon mortgage:
7-Year Balloon Mortgage
Interest Rate: 5.00%
Amortization: 30 Years
Loan Amount: $250,000
In the above scenario, the monthly mortgage payment would be $1,342.05 per month, which is the same exact amount as a standard 30-year fully-amortizing payment.
This monthly payment would remain in effect for the first 84 months, leaving a remaining balance of $221,204.98 left over at the end of the seven-year term.
This outstanding balance is the balloon mortgage payment that is due in full after seven years. It probably sounds like a lot of money to pay (it is!), but as mentioned earlier, most borrowers tend to either refinance or sell before it gets to that point. They usually have no other choice unless they are extremely wealthy.
The ING Easy Orange Mortgage was an example of a balloon payment first mortgage that was freely available to homeowners nationwide. It’s no longer around.
Seconds mortgages may also be balloon mortgages, a common one being the “30 due in 15.” It amortizes like a 30-year mortgage, but full repayment of the loan is due in just 15 years. Again, most borrowers either pay it off, refinance, or sell before the term ends.
Advantages of Balloon Mortgages
- The main advantage of a balloon mortgage
- Is a lower interest rate
- Because action is required on your part
- Once the term expires
- At that point you need to find a new loan (refinance), sell your home, or pay off the mortgage in full
You may be wondering why a homeowner would choose a balloon mortgage as a opposed to say an adjustable-rate mortgage or a fixed-rate mortgage.
Well, balloon mortgages ratesshould come at a discount to both fixed-rate loans and ARMs, making them a cheaper alternative.
And if you don’t plan on staying in the home or with the loan for more than a few years, it could prove to be the right choice for you.
Of course, the big trade-off is the associated risk if you get stuck holding the bag. A balloon mortgage essentially requires action on your part, so a reduced rate should be offered in exchange.
Disadvantages of Balloon Mortgages
- Uncertainty at the end of the loan term
- Which can be a very short period of time
- Some balloon mortgages only last five years
- If you don’t qualify for another home loan
- You could be in trouble and/or forced to sell your home
The clear disadvantage to a balloon mortgage is the uncertainty at the end of the loan term.
Using our example from above, after seven years, the entire loan balance is due. No ifs, ands, or buts about it. So if you don’t have $221k cash on hand, you’ll need to figure out an alternative.
This means selling or refinancing, or perhaps getting a new balloon mortgage that extends the loan term.
Imagine if your home falls in value during that time and you owe more than the final balloon payment – you’d have a major problem assuming you couldn’t execute a short sale or a short refinance.
This isn’t the case with a fixed-rate loan or an ARM.
Fixed-rate mortgages have the same payment throughout the life of the loan, while ARMs may adjust higher or lower, as determined by their caps.
Those caps will limit the amount the mortgage payment can rise, providing some level of protection and an early warning system, so to speak.
Sure you could be underwater on your loan (owe more on mortgage than home is worth), but the payments would likely stay manageable thanks to the caps.
You also won’t be on the hook for the remaining loan balance at any point unless you go into foreclosure.
Balloon Mortgages vs. Adjustable-Rate Mortgages
- They are very different loan products that may both feature lower interest rates
- A balloon mortgage requires full payment at the end of a shortened loan term
- An ARM can simply adjust higher (or lower) after the fixed-rate period ends
- But is still likely based on a 30-year loan term
A balloon mortgage differs from an adjustable-rate mortgage because full payment is required at the end of the shortened loan term.
With ARMs, the interest rate simply becomes adjustable after the initial fixed-rate period ends, but the loan isn’t due in full immediately (or any earlier than a 30-year fixed).
It continues to get paid down on a 30-year schedule, though mortgage payments can fluctuate up and down based on the variable interest rate.
In conclusion, be sure to compare all your options – you may be surprised to find that a fixed-rate loan prices better (or similarly) to an ARM or a balloon mortgage, without all that risk!
Update: When the Qualified Mortgage (QM) rule was introduced by the Consumer Financial Protection Bureau (CFPB), balloon mortgages were largely outlawed. That should give you an idea about what consumer advocates think about these types of loans.
Balloon Balance of a Loan
The balloon loan balance formula is used to calculate the amount due at the end of a balloon loan.
A balloon loan, sometimes referred to as a balloon note, is a note that has a term that is shorter than its amortization. In other words, the loan payment will be amortized, or calculated, for a certain amount of years but the loan will be paid off before all payments calculated are made, thus leaving a balance due. An example would be a note that is calculated for 30 years, but the remaining balance after 10 years must be paid in one full sum. This example is commonly referred to as a 10/30 balloon.
The loan balloon balance formula can be used for any type of balloon loan and is commonly seen with mortgages and leases.
Balloon Balance Formula and Remaining Balance Formula
The formula to calculate a balloon balance is the same formula used to calculate the remaining balance on a loan. The same formula is used because the amount due at the end of a balloon loan is effectively the same as calculating the balance of a conventional loan after the same period, all other things held constant.
Example of Loan Balloon Balance Formula
An example of the loan balloon balance formula would be a $100,000 5/15 balloon mortgage with a 6% annual rate compounded monthly. If the loan payment formula is used based on a 15 year amortization, the monthly payment would be $843.86.
It is important to remember that private mortgage insurance, property taxes, and homeowner's insurance may be included when an individual makes a payment, but for this example, we are calculating the monthly payment for the loan itself. We are also assuming that the first payment is due one month from the start of the loan, or that the interest included in the closing costs was adjusted to accomodate this assumption.
For a 5/15 balloon, the loan will be amortized for 15 years, while we are solving for the amount due after the 5th year. The variables of the formula would be $100,000 for present value (PV), $843.86 for P (payment). 005 for the rate(the monthly rate for 6% per year), and 60 for the number of periods as there will be 60 months.
After putting these variables into the formula, the equation would be
Using this formula, the remaining balance would be $76,008.88.
It must be taken into consideration that this remaining amount due would be after the 60th payment is made. For an individual that has a loan, they would need to pay the final payment as well as the balloon balance.
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