Question

"A borrower is interested in comparing the monthly payments on two otherwise equivalent 30 year FRMs. Both loans are for $100,000 and have a 3.35% interest rate. Loan 1 is fully amortizing, where as Loan 2 has negative amortization with a $120,000 balloon payment due at the end of the life of the loan. How much higher is the monthly payment on loan 1 versus loan 2? (Hint: calculate both payments and take the difference. Only the future values of the loans are different. Round your answer to two decimal places.)"

Answer 1

We can use financial calculator for calculation of monthly payments using below key strokes.

for monthly payments, loan period will be in months and interest rate will also be monthly.

Loan 1

N = no. of months = 30*12 = 360; I/Y = monthly interest rate = 3.35%/12 = 0.2792%; PV = loan amount = $100,000; FV = future value = 0 > CPT = compute > PMT = monthly payments = $440.74

Loan 2

N = no. of months = 30*12 = 360; I/Y = monthly interest rate = 3.35%/12 = 0.2792%; PV = loan amount = $100,000; FV = future value = -$120,000 > CPT = compute > PMT = monthly payments = $246.89

PV will be entered as positive value as it is a cash inflow i.e. loan received and FV will be entered as negative value as it is a cash outflow i.e. loan paid.

Difference in monthly payments = Loan 1 monthly payments - Loan 2 monthly payments = $440.74 - $246.89 = $193.85

the monthly payment on loan 1 versus loan 2 is higher by $193.85.