Balloon Payment Mortgage Example
A balloon payment mortgage is a type of loan in which you make regular monthly payments for a certain period of time, but at the end of the loan term, you are required to make a large lump sum payment. This can be a risky option for borrowers, as it may be difficult to come up with the funds for the balloon payment at the end of the loan term.
Let's take a look at an example to better understand how a balloon payment mortgage works:
Example Scenario
- Loan Amount: $200,000
- Interest Rate: 4%
- Loan Term: 30 years
Monthly Payments
With a balloon payment mortgage, you would make regular monthly payments for a certain period of time. Let's say your monthly payments for the first five years are $955. If we calculate the total payments made over the five years, it would be:
$955 x 12 months x 5 years = $57,300
Balloon Payment
After the initial five-year period, you still have a remaining balance on the loan. In this case, you would have a balance of $187,139. If you were to make the regular monthly payments for the entire 30-year term, you would still owe this amount at the end of the loan term.
Balloon Payment Calculation
To calculate the balloon payment, you would need to determine the remaining balance and the terms of the loan. In this example, you would need to make a lump sum payment of $187,139 at the end of the 30-year term. This can be a significant amount to come up with all at once.
Risks
One of the main risks of a balloon payment mortgage is that borrowers may not be able to afford the large lump sum payment at the end of the loan term. If you are unable to make the balloon payment, you may be forced to refinance the loan or sell the property.
In conclusion, a balloon payment mortgage can be a risky option for borrowers, as it requires a large lump sum payment at the end of the loan term. It is important to carefully consider the terms of the loan and your financial situation before choosing this type of mortgage.