Question

You want to buy a house that costs $180,000. You have $18,000 for a down payment, but your credit is such that mortage companies will not lend you the required $160,000. However, the realtor persuades the seller to take a $160,000 mortage (called a seller take-back mortage) at a rate of 7%, provided the loan is paid off in full in 3 years. You expected to inherit $180,000 in 3 years; but right now all you have is $18,000, and you can afford to make payments of no more than $16,000 per year given your salary. ( The loan would call for monthly payments, but assume end of year annual payments to simplify things)

a. If the loan amortized over 3 years, how large would each annual payment be? round answer to nearest cent

$

b. If the loan were amortized over 3o years, what would each payment be? Round answer to nearest cent

$

c. To satisfy the seller, the 30 years mortage loan would be written as a balloon note, which means that at the end of the third year, you would have to make the regular payment plus the remaining balance on the loan.

C1. What would the loan balance be at the end of year 3? Round answer to nearest cent

$

C2. What would be the ballon payment be? Round answer to nearest cent

$

Answer 1

1.

Using financial calculator, I/Y=7%, N=3, PV=160000, FV=0 CPT PMT=60968.27

Using excel, =PMT(7%,3,16000,0)=60968.27

2.

Usin financial calculator, I/Y=7%, N=30, PV=160000, FV=0, CPT PMT=12893.82

Using excel, =PMT(7%,30,160000,0)=12893.82

3.

Loan balance at the end of year 3:

Using financial calculator, I/Y=7%, N=3, PV=160000, PMT=-12893.82 CPT FV=154554.22

Using excel, =FV(7%,3,-12893.82,160000)=154554.22

4.

Balloon payment will be regular payment+loan balance at the end of year 3=12893.82+154554.22=167448.04