Teach Me About Amortization And Balloons....
It's amazing to me how much stuff is still like Greek. For example, what exactly is a 5 year balloon? etc.
If you have an amortization of 15 years with a 5 year balloon, what exactly does that mean?
Is there somewhere that explains how to figure these things out and understand them?
Thanks,
Christian "The Solutions Kid" Beebe
[addsig]
it means...the payments are based on a 15 year amroz....but the entire loan is due in 5 years.....hence the ballon payment.
Example:
100K loan at a 10% interest rate
amoriz over 30 years.
given this info the payment would be say 700 a month (not really i just don't feel like doing the math)
A 5 year ballon (or bullet as it is refered to sometimes) means although you are making this 700 a month payment, I'm not waiting 30 years to get all of my money...I want it all due in 5 years.
So whatever the balance of this amorz. loan is after 59 payments (5 x 12 minus 1) on the 60th payment, you owe me $96K some odd dollars.
[ Edited by nebulousd on Date 11/24/2003 ][ Edited by nebulousd on Date 11/24/2003 ]
Ahhhhh, gotcha. Thanks Neb, makes sense.
So the basis is the the payments are based off of a long term amount (ie 15,30 years) but you call the loan due technically in 5 years or whenever you want. So you could have a 30 year amortization with 12% but have a 3 year balloon.
Okay, so answer this...if I have a buyer that I am getting financing for and we agree on terms such as:
Buyer price $57,000
Interest Rate 12%
Amortization 15 year with 5 year balloon
Principal Interest per mo: $684
When that balloon comes up, what will be the payment...is it the full $57,000 since you are only paying principal interest right? So the investor is getting $684 month plus a lump sum of $57,000 in five years right?
Okay, so how do you figure interest only payments, etc?
Chris
_________________
It took me 27 years to realize that every time I was picked on, called names, tormented, and lauged at, it was all because I was one-of-kind and unique. Through all my torment, I never noticed that no one ever picked on the "normal" kids...no one.[ Edited by SolutionsKid on Date 11/24/2003 ]
There are many amortization calculators on the web as well as this site. You can use that to calculate interest only, principal and interest payemnts based on various amortization schedules and interest rates[ Edited by murtishi on Date 11/24/2003 ]
[ Edited by nebulousd on Date 11/25/2003 ]
TCI does it for you. My TCI and under tools....have a field day.
Quote:When that balloon comes up, what will be the payment...is it the full $57,000 since you are only paying principal interest right? So the investor is getting $684 month plus a lump sum of $57,000 in five years right?If you start with a loan amount of $57000 amortized at 12% over 15 years, then a monthly payment of $684.10 will completely pay off this loan at the end of 15 years. Because a portion of each monthly payment reduces the loan balance, the five year balloon amount will only be the remaining loan balance due for the 60th payment ($47887.06) plus one month of accrued interest ($478.87).
Quote:Okay, so how do you figure interest only payments, etc?the general formula for monthly interest only payments isPayment = (Loan Amount) x (annual interest rate) / 12
Hope this helps.
Chis:
Try not to mix apples and oranges.
A loan at 12% INTEREST ONLY on a principal amount of $100,000 is $12,000/yr or a monthly payment of $1000. Regardless of the term of the loan (when it is due) the principal amount will not be reduced. The payoff will be $100,000.
An AMORTIZED loan applies each monthly payment first to interest and the remainder of the payment reduces the principal balance of the loan. The interest is applied to an ever decreasing princiapl balance-so with time more money is applied to principal. Ultimately the entire debt is repaid. In the following example, it would take 30 years to repay the debt. The example:Say that it is a 30 year amortizing loan at 12%, payments made monthly. The monthly payments for principal and interest would be $1028.61 at the end of 30 years( 360 months ) payments the principal balance would be zero.
A 100,000 loan AMORTIZED at 12% over 30 years with monthly payment and a BALLON payment at the end of 5 years (at the end of 60 months).would require payments of
60 monthly payment of $1028.61
+ the unamortized principal balance
of $97,663.22.
A better way to express payments is:
59mo @ $1028.61
1mo @ $1028.61+$97663.22
(Last payment=$98,691.83)
Christian,
Another source for financial calculation capability is a Microsoft Excel Spreadsheet. It has financial functions. I suggest this since you may already have Excel on your computer.
Regards,
Ed
I understand how the balloon works; I am wondering why a person would enter into a balloon agreement. You aren't paying anything down any faster. The only benefit I could see is that when you take out a new loan for the balloon payment, your LTV ratio could be smaller and you could possibly get around PMI.
Assuming most people do take out a new loan to pay off the balloon payment, how is this different than just planning to refi at the end of 5 years?
Excuse my loan ignorance, I am rather new to this world. =)
Quote:The only benefit I could see is that when you take out a new loan for the balloon payment, your LTV ratio could be smaller and you could possibly get around PMI.
Assuming most people do take out a new loan to pay off the balloon payment, how is this different than just planning to refi at the end of 5 years?The LTV ratio banks use is based upon the loan amount not the monthly payment amount -- so a balloon loan does not necessarily avoid PMI. Perhaps you were thinking about debt to income ratios.
Often a lower interest rate can be obtained with a balloon loan, and often the borrowers do just refinance to pay off the balloon.
While there are lenders who will originate a residential balloon loan as a first mortgage note, balloon loans are more common when the seller is taking back the financing, perhaps in a second mortgage note. Seller carried financing gives the investor opportunities to acquire property with 100% financing. Sellers often want their money now, and are not willing to get it in 360 installments. They are more agreeable to installment payments when their note will be paid in full in three to five years.
This is especially appealing when the investor's exit strategy will cash out the mortgage notes long before the balloon becomes due.
When you get into the world of commercial financing, you will find that many commercial offerings will have 15 year amortizations with a five year balloon. Depending upon your credit strength and your payment history, the lender could extend the balloon for another five years, or decide to call your note due. The balloon allows a lender to manage his loan risk a little better.
Use the new Advanced Mortgage Tool I put in last week.
http://www.thecreativeinvestor.com/modules.php?name=Tools&op=AdMortCalc