Calculator Legend
Mortgage amount: the actual amount you are borrowing. If you are including closing costs in the mortgage rather than paying them upfront, include them in the total mortgage amount. Do not include interest. The calculator only allows mortgage amounts up to $1,000,000.
Interest rate: the interest rate quoted on the mortgage. The calculator lets you specify between 1% and 18% (though you will almost certainly not get either such a low or such a high interest rate). The calculator assumes you are applying for a mortgage with a fixed interest rate, and not an adjustable-rate mortgage.
Term: the amount of time you will be making payments. The term assumes you don't make extra payments (beyond the prepayments) to pay down the loan earlier. Generally, the longer the term of the mortgage, the lower the monthly payments. But the longer the term, the more time interest will have to rack up. The calculator lets you select from 1 to 10 years (Balloon mortgage terms are rarely if ever longer than 10 years.)
Prepayments: amounts you pay against the principal in addition to monthly payments. The prepayments reduce the principal of the mortgage. A lower principal means the total interest payments will be lower. Prepayments are optional with most lenders. Of course, if you select a mortgage with a required prepayment, the prepayment is no longer optional once you've signed the mortgage. The calculator lets you select a yearly or one-time prepayment. If you want a yearly prepayment, enter the yearly prepayment amount rather than the total of all prepayments. Then enter the year the prepayment starts. If you select a one-time prepayment, use the "start prepayment in year" field to select when you will make the one-time prepayment.
Balloon Mortgages Explained
A mortgage is a loan from a bank, credit union, or mortgage company that uses the property you are buying as collateral. The costs of the mortgage include the principal (amount originally loaned); closing costs; and interest. Closing costs are the costs of actually transacting the mortgage. You have the option of paying closing costs upfront, or including them in the mortgage principal.
Note: the calculator does not ask about closing costs. If you are adding closing costs to the mortgage, include them in the "mortgage amount."
Traditional Mortgages vs. Balloon Mortgages
With traditional mortgages, the principal (amount loaned) is spread out in roughly equal payments over the loan term. With a "balloon" mortgage, monthly payments only cover part of the principal. At the end of the term, you have to pay the rest of the mortgage. The single large payment is called a "balloon payment."
With a traditional mortgage, the term usually lasts 15-30 years. With a balloon mortgage, the term only lasts up to 10 years. Then the balloon payment is due.
Balloon Mortgage Prepayments
You may select a balloon mortgage that requires you to make one or more prepayments. The prepayments reduce the principal of the mortgage. A lower principal means the total interest payments will be lower. You can either make a single prepayment, or make prepayments on a regularly scheduled basis (often every year). You do not have to make the prepayment upfront. You can schedule your first or only prepayment for later.
With a
traditional mortgage, you can usually make prepayments as often as you want. But some mortgages carry a "prepayment penalty." Lenders charge the prepayment penalty to make up for the interest you save by prepaying. Obviously, it makes sense to avoid a mortgage with a prepayment penalty.
Making the Balloon Payment
How does anyone make the massive balloon payment at the end of the mortgage? Very often, they take out a new mortgage at that time. Taking out a new mortgage means new closing costs.
With some balloon mortgages, you have the option of converting the balloon payment into a new mortgage automatically. That avoids additional closing costs.
If you don't pay off the balloon payment immediately, you will have to take out a mortgage at the current interest rate. Since interest rates are relatively low now, it is likely that the current interest rate when the balloon payment is due will be higher.