0:00:00.050,0:00:04.339 So we already have some experience[br]with traditional fixed-rate mortgages, 0:00:04.339,0:00:08.221 but I'll give a little bit of a review[br]before we talk about a little variation, 0:00:08.221,0:00:10.258 or maybe we could say[br]a big variation on it 0:00:10.258,0:00:12.848 which is a <i>balloon payment loan</i>. 0:00:12.848,0:00:14.862 So right over here, what I have depicted 0:00:14.862,0:00:19.492 are the different payments you would make[br]on a 30-year fixed mortgage. 0:00:19.492,0:00:25.124 So this is a 30-year fixed mortgage 0:00:25.125,0:00:31.975 where you have a fixed payment[br]every month of $1432.00 0:00:31.975,0:00:36.233 and the loan amount is $300,000. 0:00:36.233,0:00:42.923 So before you make your first payment[br]you owe the bank $300,000 0:00:44.053,0:00:46.475 and you keep making these payments. 0:00:46.475,0:00:50.608 And we've seen in previous videos[br]that your very first payment, 0:00:50.608,0:00:53.637 as you see in magenta here,[br]is mostly interest. 0:00:53.637,0:00:57.544 $1000 of that $1432.00 is interest. 0:00:57.544,0:01:00.983 Then the next payment, you've[br]paid down the principal a little bit, 0:01:01.013,0:01:06.023 not a lot, about 400-something dollars. 0:01:06.023,0:01:09.363 Now your next payment,[br]$999.00 of it is interest. 0:01:09.363,0:01:12.598 And the next payment,[br]$997.00 is interest. 0:01:12.598,0:01:15.872 And you keep doing that[br]for all 360 payments. 0:01:15.872,0:01:17.977 Remember, 30 years[br]times 12 months per year, 0:01:17.977,0:01:19.606 you would have 360 payments, 0:01:19.606,0:01:22.412 and as you get to the end[br]of your 30-year mortgage, 0:01:22.412,0:01:25.282 most of your payment is principal. 0:01:25.282,0:01:28.539 So on the 2 months before you pay it off, 0:01:28.539,0:01:31.912 that 358th payment,[br]only $14.00 is interest. 0:01:31.912,0:01:36.144 Then the next one,[br]9 or 10 dollars is interest. 0:01:36.144,0:01:38.518 Then, roughly $5 is interest 0:01:38.518,0:01:41.043 and then you have paid off[br]the entire loan. 0:01:41.043,0:01:45.243 So you have a fixed payment,[br]you also have a fixed interest rate. 0:01:45.244,0:01:49.615 I haven't said what the interest rate is[br]for this mortgage, 0:01:49.615,0:01:56.565 but then you pay it off over 30 years,[br]there's a 30-year amortization. 0:02:02.136,0:02:06.947 And the word <i>amortization</i> means[br]'spreading out' something. 0:02:06.947,0:02:09.271 So in this case you're[br]spreading out the payments 0:02:09.271,0:02:12.074 over 30 years. 0:02:12.074,0:02:18.424 Why am I giving this as the preface[br]to a balloon loan, 0:02:19.976,0:02:22.638 a balloon payment mortgage? 0:02:22.638,0:02:23.723 In a balloon payment, 0:02:23.723,0:02:27.183 this was a little confusing to me[br]the first time I learned about it, 0:02:27.184,0:02:31.726 the <i>term</i> is different[br]than the amortization. 0:02:31.726,0:02:39.036 So, for example, you could have[br]a 10-year-term balloon payment loan 0:02:41.546,0:02:43.779 that still amortizes over 30 years. 0:02:43.796,0:02:46.827 So what do I mean by that? 0:02:46.827,0:02:51.208 Well, in this situation,[br]your payments could be exactly the same, 0:02:51.208,0:02:53.709 but then after 10 years,[br]because it's a 10-year term, 0:02:53.709,0:02:56.908 you have the loan for 10 years,[br]after 10 years the loan is done for. 0:02:56.908,0:03:03.598 So 10 years is 120 months,[br]this is the 10 years here. 0:03:03.598,0:03:06.294 After 10 years, you amortize it. 0:03:06.295,0:03:08.521 Remember this payment schedule[br]that we set up 0:03:08.521,0:03:10.670 is based on a 30-year amortization, 0:03:10.670,0:03:14.490 just as if we were doing[br]a 30-year fixed rate mortgage. 0:03:14.490,0:03:16.976 But in the balloon payment,[br]if you had a 10-year term 0:03:16.976,0:03:19.600 with a 30-year amortization,[br]the payments are the same, 0:03:19.600,0:03:23.499 but after the 10 years,[br]at the end of the loan 0:03:23.499,0:03:25.407 you don't just make that 120th payment, 0:03:25.457,0:03:28.058 you have to pay back[br]whatever the principal is, 0:03:28.058,0:03:30.556 whatever is left on the loan. 0:03:30.556,0:03:36.536 So we see that after 10 years,[br]what's left on the loan is $236,352. 0:03:40.797,0:03:44.966 In a balloon payment, [br]the loan lasts for 10 years 0:03:44.966,0:03:47.858 even though the amortization, 0:03:47.858,0:03:50.732 the rate at which[br]you're paying down the principal, 0:03:50.732,0:03:54.102 is the same as for[br]whatever the amortization schedule is, 0:03:54.104,0:03:55.856 the 30-year amortization. 0:03:55.856,0:04:01.486 So the question is;[br]why does this thing exist? 0:04:01.486,0:04:05.113 In some ways, this is like[br]what we talked about 0:04:05.113,0:04:06.760 in the adjustable rate mortgages. 0:04:06.760,0:04:10.860 It's spreading the interest rate risk[br]between the bank and the lender. 0:04:10.881,0:04:14.331 In a 30-year fixed loan,[br]all of the interest rate risk 0:04:14.331,0:04:16.081 goes to the bank, 0:04:16.081,0:04:19.416 while in an adjustable-rate mortgage,[br]all of the interest rate risk 0:04:19.416,0:04:22.896 goes to the borrower. 0:04:22.906,0:04:26.673 Here the bank is guaranteed[br]only to take on interest rate risk 0:04:26.673,0:04:32.403 for 10 years, then after that[br]they get the balance of the loan. 0:04:32.413,0:04:36.784 What does the borrower do,[br]or why would a borrower want to do this? 0:04:36.784,0:04:38.148 They might want to do this 0:04:38.148,0:04:40.646 because maybe they get[br]a slightly lower interest rate 0:04:40.646,0:04:45.356 than with a 30-year mortgage,[br]while they get the exact same payments. 0:04:45.367,0:04:46.878 They get a lower interest rate 0:04:46.878,0:04:49.491 because the bank is taking on[br]less interest rate risk, 0:04:49.491,0:04:54.561 they have less risk if interest rates[br]were to spike up 20 years from now. 0:04:54.564,0:04:56.052 And a lot of people might say, 0:04:56.052,0:04:59.942 "Well, I don't think I'm going to[br]own this property for more than 10 years 0:04:59.952,0:05:04.615 as long as I get a 10-year fixed payment, 0:05:04.615,0:05:09.015 if I sell the property in the 9th year,[br]then I just pay off the loan." 0:05:09.025,0:05:13.168 Another possibility is that the person[br]thinks they'll end up with a lot of cash, 0:05:13.168,0:05:16.659 maybe they expect an inheritance,[br]expect to earn more money. 0:05:16.659,0:05:18.832 Another possibility,[br]if none of that happens, 0:05:18.832,0:05:20.378 if after the 10th year they say, 0:05:20.378,0:05:22.955 "I still want to continue[br]paying this house down, 0:05:22.955,0:05:24.284 I don't plan on selling it, 0:05:24.284,0:05:29.174 haven't come up with some windfall of cash[br]to pay $236,000." 0:05:29.174,0:05:35.550 Then they can just take out another loan[br]to borrow the $236,000. 0:05:35.550,0:05:37.652 And there's some risk involved there, 0:05:37.652,0:05:39.295 because you have to feel good that 0:05:39.295,0:05:41.821 at that time you'll still have [br]a good credit history, 0:05:41.831,0:05:47.021 you'll still have the level of income[br]necessary to get another mortgage. 0:05:47.026,0:05:50.856 So hopefully this gives you a sense[br]of what a balloon payment mortgae is. 0:05:50.856,0:05:56.776 It's not nearly as typical[br]as a fixed-rate 30 year 0:05:56.778,0:05:59.478 or a 15-year fixed or 10-year fixed, 0:05:59.478,0:06:03.918 or as common as an adjustable ARM[br]or a hybrid ARM, but they do exist 0:06:03.918,0:06:07.232 so it's interesting to know about them.