How to Structure Balloon Loans in eZMath and ZMath

by Michael Shohoney March 12, 2009 09:37

In a previous post, I discussed the different types of balloon loans.  It is time to show you how to apply that in our loan calculation software.  While going through this tutorial, please refer fo the screen shot below.

First, select the loan type you need to work with as we offer the ability to calculate a balloon in virtually every loan type we offer.  For our discussion, I will be working with a level payment (i.e. fixed rate) loan.  Once you've selected the loan type and are in the base terms screen, select Options and Variations and make sure that the radio button Yes is selected under the Balloon heading.  Then click on OK.  When you return to the Base Terms screen, the Balloon Terms pane should be displayed.  Now, let's look at how we would structure each of the balloon types discussed in the previous blog post.

The first balloon that I discussed is where the borrower would like to pay a certain amount and pay any leftover principal balance with the final payment.  To structure this type of balloon, enter the Interest Rate, the Periods/Year, the Term, the Loan Amount, the Payment Amount, the Advance Date and the Date of 1st Pmt.  Then click on Calculate.  You will be taken to the Output screen.  Note that the entered payment is made for one period less than the entered term.  The final payment is the remaining principal balance plus the final accrued interest.  Please take care to note if your entered payment amount caused negative amortization.  That is, was the entered payment amount enough to reduce the principal balance.  If not, you may want to make an adjustment to prevent that problem.

The second balloon that I discussed is where the borrower chooses an amount to remain unamortized.  To structure this type of balloon, enter the Interest Rate, the Periods/Year, the Term, the Loan Amount, the Advance Date, the Date of 1st Pmt and the Balloon Amount.  Then click on Calculate.  You will be taken to the Output screen.  Note that the entered balloon amount plus the calculated payment constitutes the final payment.  The calculated payment is made for one period less than the entered term.

 The third and final balloon I discussed was the prepay balloon.  To structure this type of balloon, enter the Interest Rate, the Periods/Year, the Term (this is the number of periods the regular payment amount is based on or what we term the Amortization Term), the Loan Amount, the Advance Date, the Date of 1st Pmt and the Actual Term (this is the actual term of the loan).  Then click on Calculate.  You will be taken to the Output screen.  Note that both the payment amount and balloon have been calculated.  The payment amount is the payment that would be calculated on a loan that had the number of payments entered in Term.  The balance remaining is then calculated at the end of the number of payments entered in Actual Term.  This balance remaining is added to the regular payment amount to come up with the final (balloon) payment.

 If you follow the steps above, you should be able to successfully structure balloon notes for virtually any of the loan types we offer in our loan calculation software packages, eZMath and ZMath.  As always, if you have any troubles with these calculations, feel free to contact us.