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How to calculate a promissory note with a balloon payment

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Angela Carter

Real Estate Investor from Savannah, Georgia

Jul 22 '09, 02:00 AM


I have a property that I intend to carry the mortgage for. My exit strategy is to sell this note to a note buyer, so I am trying to write this in a way that they will appreciate.

Here are the numbers. Please tell me if you know how to calculate it?

100,000 purchase price
20,000 down payment
80,000 loan amount
10% interest rate amortized over
30 years
30,000 balloon payment in five years

What is the payment amount for this (not including taxes and insurance)?

Thank you!!!


Edited Jun 26 2010, 09:04


Jon Holdman Moderator

SFR Investor from Wheat Ridge, Colorado

Jul 22 '09, 02:26 AM


Payment on $80K at 10% for 30 years is $702.06. You can calculate that with a financial calculator or in Excel. In Excel, the formula is: -PMT(10%/12,30*12,80000)

After five years, the balance on the loan will be $77,259.46. You calculate that with the FV function:
=-FV(10%/12,5*12,-702.06,80000)

Not quite sure what your intention is after the $30K payment. Typically a balloon payment would mean the entire loan must be paid at that time. So a "five year balloon" would mean the loan is to be paid off after five years.

So, maybe you mean the payments continue at the same $702.06 payment after the $30K payment. If so, the question is how many payments remain. You would calculate that with the NPER (number of periods) function:
=NPER(10%/12,-702.06,47259.46)

The answer is 99 payments plus a partial payment would still need to be make.

If instead you meant you want the loan to only have $30K remaining balance after five years, then you need to use a shorter amortization than 30 years. In that case you would calculate the payment using the PMT function and a future value of $30K after five years. That payment is $1,312.35, which equates to a 85.5 month amortization period.


Edited Jun 26 2010, 09:04


Jon Holdman, Flying Phoenix LLC


Angela Carter

Real Estate Investor from Savannah, Georgia

Jul 22 '09, 02:33 AM


Jon,

Thank you so much for the math lesson. Learned a lot about Excels functions.

I guess a better way to ask the question would be:

80,000 loan amount
10% int amortized over 30 years
with a balloon in 5 years.
Whatever that balloon balance might be at that point.

Thanks again, for the help!


Edited Jun 26 2010, 09:04


Jon Holdman Moderator

SFR Investor from Wheat Ridge, Colorado

Jul 22 '09, 02:46 AM


So, then its easy. Its just the $702.06 payment. The balloon payment doesn't change the monthly payment. The payment is determined only by the rate, loan amount and the amortization period. The balance after five years is $77,259.46.


Edited Jun 26 2010, 09:04


Jon Holdman, Flying Phoenix LLC


Angela Carter

Real Estate Investor from Savannah, Georgia

Jul 22 '09, 02:50 AM


Thanks again.

So 702.06 per month for 60 months and the last payment of 77,259.46 as a balloon. Does this sound attractive for a note buyer?


Edited Jun 26 2010, 09:04


Loc R. Donor

Note Investor from Pasadena, California

Jul 22 '09, 06:40 AM


Angela,

The appeal of this particular note would depend on the payor's credit score and his/her actual potential to come up with that balloon payment.


Edited Jun 26 2010, 09:04


Angela Carter

Real Estate Investor from Savannah, Georgia

Jul 22 '09, 06:45 AM


Would it make a difference if the borrower told the note buyer that they would be refinancing to pay off the loan by time the balloon is due?


Edited Jun 26 2010, 09:04


Loc R. Donor

Note Investor from Pasadena, California

Jul 23 '09, 12:31 AM


No. If the payor refis, the investor still gets his/her balloon.


Edited Jun 26 2010, 09:05


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