See all three posts in this series

This week I’ll continue with the scenario from Part 1.

To recap, I’ve bought a note for $20,000. The terms of the note are as follows: 360-month amortization (48 months have passed), 7% interest, $78,500 original balance, ($74,947.52 current balance), $522.26 monthly payment.

Some new information for Part 2: Though the note amortizes over 360 months, it has a 5-year balloon.

**THE SCENARIO:**

a) How many months are there from now until the balloon comes due?

b) How much will be owed when the balloon comes due?

c) If the balloon is paid as written, what will be my return on my amount invested?

Instead of taking a payoff when the balloon is due, the borrower talks me into carrying a new note for the balloon amount.

d) By the time I originate the new note, how much money will I have into the deal?

e) If the new note is at 6% interest, amortizing fully over 30 years, what is the payment on that new note? What is the sum total of all payments on the new note?

f) If the new note is at 6% interest, amortizing fully over 5 years, what is the payment on that new note? What is the sum total of all payments on the new note?

(Don’t worry, we’re not done yet. Part 3 will go into more detail about these two different potential notes.)

**THE SOLUTION:**

a) 48 months have passed, and the balloon is due 60 months after the note began, so 60 – 48 = 12 months until the balloon comes due.

b) There are a couple of ways to do this, but I’ll use the one with easier numbers. N is 60 (the amount of time from the note origination to the time the balloon is due), I/YR is 7%, PV is $78,500 (the original amount owed), and PMT is -$522.26. Solving for FV, I find that the balloon amount is $73,893.30.

c) N is 12 (the amount of time I’ve had my money invested, PV is -$20,000 (the amount I invested), PMT is $522.26 (the monthly amount I collected), and FV is $73,893.30 (the amount of the balloon payment I receive). Solving for I/YR, I find that my return on investment is 156.85%. It’s below my usual threshold, but I’ll accept it this once. (Just kidding!)

d) I invested $20,000, and collected a total of $522.26 x 12 = $6,267.12 in payments. The total amount I still have into the deal at that point is $20,000 – $6,267.12 = $13,732.88.

e) N is 360, I/YR is 6%, PV is $73,893.30, and FV is 0. Solving for PMT, I discover that the monthly payment is $443.03, and the total amount of money I collect over the 30 year term is $443.03 x 360 = $159,489.96.

f) N is 60, I/YR is 6%, PV is $73,893.30, and FV is 0. Solving for PMT, I discover that the monthly payment is $1,428.56, and the total amount of money I collect over the 30 year term is $1,428.56 x 60 = $85,713.87.