Calculating Balloon Mortgage Payments
This calculator can be used to estimate the “balloon” payment due at the conclusion of a balloon mortgage. The calculator requires a total of three inputs, including:
- The home loan value, or the money borrowed, which may also be referred to as the mortgage value or amount
- The annual rate of interest charged on the loan, which may not be the same value as the APR on the loan since the APR also takes into consideration fees associated with the loan
- The balloon term, which is the total number of years over which the loan will be paid before the balloon payment is due
The calculator then provides the user with five outputs:
- The monthly payment associated with the loan
- The total of all payments made on the loan, which is found by taking the monthly payment times the term of the loan times 12 months
- The total amount of interest paid on the loan at the termination of the loan
- The amount of the loan’s principal that has been repaid at the end of loan’s termination
- The balloon payment, which is the amount of money owed the lender at the loan’s termination
Balloon mortgages and their payment arrangements
Generally, there are two types of balloon mortgages offered by lenders:
- Interest-Only: this type of balloon mortgage typically offers the borrower the least expensive monthly payment option. With an interest-only loan of any type, the borrower does not repay any of the loan’s principal. Instead, the borrower only pays the financing costs each month. At the end of the loan’s term, the borrower would need to repay the lender the full amount of the money initially borrowed.
- Principal Payments: this second type of balloon mortgage establishes a repayment schedule based on a duration of 30 years, just like a conventional mortgage. By spreading out the repayment of the loan’s principal over a longer time span, the lender can keep the monthly payments lower. However, with a balloon mortgage, the loan terminates before this 30-year timeframe. For this reason, a balloon payment is due the lender.
Pros and cons of a balloon mortgage
Lenders are exposed to several risks when writing a loan. One of these risks has to do with interest rates in the future. If rates rise after writing a loan, the lender forgoes additional profits they would make by writing a loan at a higher rate of interest. To protect themselves from the uncertainty of rising interest rates, banks will charge a premium on loans with longer terms. That is why interest rates on 15-year mortgages will almost always be lower than 30-year mortgages.
A balloon mortgage offers borrowers the advantage of a spreading out the principal repayment over 30 years as well as a 15-year mortgage’s lower rate of interest. The borrower realizes the benefit of both types of loans. The downside of these loans is the balloon payment itself since the remaining principal will have to be refinanced at the end of the loan’s term. So why would anyone choose this type of mortgage?
Not everyone buys a home they consider their “forever home.” This is especially true for people that have not hit their peak earning years or someone that has accepted a temporary position with their employer. If a buyer purchases a home and they intend to move in less than ten years, then a balloon mortgage may be their best option since they would sell the home before the balloon payment is due.