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While most loans are fully paid off throughout the life of the loan, some loans are set up such that an additional payment is due at the end. These payments are known as balloon payments and can often be found within fixed-rate or adjustable-rate mortgages. The use of a balloon payment can allow for lower monthly payments when compared to a fully-amortizing loan (a loan that is paid off during its life), but can also result in a truly massive payment at the end of a loan. In many cases, the balloon payment must itself be refinanced and paid off as an additional loan. Calculating a balloon payment or the payments that will be made on a loan with a certain balloon payment amount is simple using Microsoft Excel.
An Application of the Balloon Loan
The balloon loan can be used as an important tool in financial management. Consider an example of a small business that plans to develop a new product. The development requires an investment and will not yield cash flows in the initial years. Using a balloon loan, in such a case, will reduce the financial burden of the business during the development phase since their initial payments are lower.
As the business moves out of the development phase and grows, it can generate sufficient cash flows to service the balloon payment at the end of the loan. It also helps in financial planning, as payments can be modified to meet the current financial conditions of the business.
Calculating Payments on a Balloon Payment Loan
Collect your information. Calculating your payments in this way will allow you to see how much you would pay per month with a given balloon payment at the end of the life of the loan. To find this information, either consult your loan agreement or estimate this information as best you can. Remember, you can always change this information to multiple different values to estimate payments on different loans.
- You’ll need the following information: your annual interest rate, the duration of your loan in years, your loan amount, and your balloon payment amount.
Solve your equation
Press enter. Your result should be displayed in the cell where you entered your equation. It will be a red, negative number. Again, this simply means that this a payment. If it is not a negative number, you’ve entered some information incorrectly or your loan is not a balloon payment loan.
- In the example, the program would return a monthly payment of $999.82.
Edit the numbers
If you are comparing multiple loans, save this payment figure elsewhere in the worksheet and enter information from your other loans. This will allow you to compare payments from different loan amounts, interest rates, durations, or balloon payments.
- You may be able to refinance the balloon payment amount at the end of your term.
- You may be able to negotiate a better interest rate with a balloon mortgage. This will allow you to save additional funds over the mortgage term for the balloon payment at the end.
- For a mortgage balloon payment loan, you may be able to save money by refinancing or selling your home before the maturity date.
- Seek refinancing for the balloon payment amount, if that is your plan, well before it comes due.