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 7% 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

Answer: $98.36

Explanation:

Based on the information that has already been given in the question, the following can be analysed:

For Loan 1:

Interest Rate = 7%

Nper = 30

Present value = $100000

With the above information, we can use the Excel calculator to solve further. To get the monthly payment for the first loan will be:

= pmt(rate, nper, pv,fv)

= pmt(7%/12,30×12,-100000,0)

= pmt(0.07/12,360,-100000,0)

= $665.30

For Loan 2:

Interest Rate = 7%

Nper = 30

Present value = $100000

Future value = $120000

With the above information, we can use the Excel calculator to solve further. To get the monthly payment for the first loan will be:

= pmt(rate, nper, pv,fv)

= pmt(7%/12,30×12,-100000,120000)

= pmt(0.07/12,360,-100000,120000)

= $566.94

The difference in the monthly payments will be:

= $665.3 - $566.94

= $98.36