Consider an 8% loan of $300,000 for twenty years, with monthly payments and a balloon payment of $100,000 at the end of twenty years. The monthly payment on this loan is closest to:
A) $10,714.72
B) $11,381.39
C) $16,072.09
D) $16,738.75

Question

Quizplus · Accepted Answer

The monthly payment on a loan like this can be calculated using the formula for an amortizing loan, but with adjustments for the balloon payment. The loan amount minus the present value of the balloon payment is used to calculate the monthly payments. The present value of the $100,000 balloon payment, using the 8% annual rate converted to a monthly rate (0.08/12), over 240 months (20 years), is subtracted from the initial loan amount to find the amount to be amortized over the loan period. The formula for the monthly payment (PMT) on an amortized loan is PMT = P[r(1+r)^n]/[(1+r)^n - 1], where P is the principal amount (adjusted for the balloon payment), r is the monthly interest rate, and n is the total number of payments. The calculation results in a monthly payment closest to $11,381.39, taking into account the reduced principal due to the future balloon payment.

Consider an 8% Loan of $300,000 for Twenty Years, with Monthly