How to Calculate Balloon Mortgage Payments

A balloon mortgage is a loan in which the true length of the loan (how many years you actually have to pay off the loan) is shorter than the amortization period (a number which determines how your interest accrues). At the end of the loan term, you will still owe a significant portion of the principal balance (the so-called balloon), which you must either pay in one lump sum, or refinance with a new mortgage.

Home buyers may choose balloon mortgages if they anticipate a dramatic growth in income that will allow them to pay off the balance in a lump sum, or if they plan to refinance or sell the home. The majority of home owners with balloon mortgages opt to refinance their loans if they still live in the house, since the final balloon payment is almost always at least 60% of the original loan.

You can use either the calculator on the left or the equations below to compute your monthly payments and final balloon payment. You can also use the Balloon Mortgage Amortization Schedule calculator, which outputs a printable amortization and payment table for balloon mortgages.

Computing the Monthly Payments.

To calculate your monthly payments, you must know the annual interest rate R (expressed as a decimal rather than percent), the number of years in the amortization period Y, and the principal P. The monthly payments M are computed with the formula

M = (PR/12)(1 + R/12)^12Y/[(1 + R/12)^12Y - 1].

If the length of the lending period is N years, you will pay this amount each month for 12N - 1 months.

Example:
Erik takes out a balloon mortgage loan with a 10-year lending period and 20-year amortization period. He borrows $100,000 at an annual rate of 6.54%.

In this situation, R = 0.0654, P = 100000, and Y = 20. His monthly payments are thus $747.93 for 119 months.

Computing the Balloon Payment

The final balloon payment is equal to the principal balance still owed after 12N - 1 months, plus the normal interest charged for the last month. The formula for the balloon payment B is

B = [12M/R - (12M/R - P)(1+R/12)^12N-1](1 + R/12)

Example:
In Erik's balloon mortgage, N = 10, M = 747.93, P = 100000, and R = 0.0654. Using the formula above, his balloon payment for the 120^th month is $66,499.07. This is a large portion of the original loan amount, so he will likely have to take out a new loan for $66,500, or sell his home to pay off the balance.

© Had2Know 2010