The last payment of a home mortgage is a balloon payment of $21,000 which the owner is scheduled to pay in 20 years.How much extra should he start including in each monthly payment to eliminate the
Balloon payment? His mortgage is at 10.6%, compounded monthly.Round to the nearest cent.
A)$25.57
B)$51.52
C)$62.37
D)$23.01
E)$49.82

Question

Quizplus · Accepted Answer

The correct answer is A because the extra payment needed to eliminate the balloon payment is $25.57. This can be calculated using the formula for the present value of an annuity, which is:PV = PMT * [1 - (1 + r)^-n] / rwhere:PV is the present value of the annuityPMT is the monthly paymentr is the monthly interest raten is the number of monthsIn this case, the present value of the annuity is $21,000, the monthly interest rate is 10.6% / 12 = 0.008833, and the number of months is 20 * 12 = 240. Plugging these values into the formula, we get:$21,000 = PMT * [1 - (1 + 0.008833)^-240] / 0.008833$21,000 = PMT * 159.684PMT = $21,000 / 159.684PMT = $25.57Therefore, the extra payment needed to eliminate the balloon payment is $25.57.

The Last Payment of a Home Mortgage Is a Balloon