Question

The Smiths are purchasing a home for $80,000 on which the monthly payments will be $792.24 each month up to the final payment of $56,340. Their loan has

a) Fixed interest rate
b) Adjustable interest rate
c) Balloon payment
d) Reverse mortgage structure

Answer 1

The Smiths' home purchase loan has a balloon payment structure, with relatively low monthly payments followed by a large final payment. This type of loan structure is identifiable by the single substantial lump-sum payment due at the end of the loan's term.

Step-by-step explanation:

The type of loan structure the Smiths have for their home purchase is a c) Balloon payment. The characteristic feature of a balloon payment loan is that it typically involves relatively small monthly payments for a certain period, followed by a large final lump-sum payment at the end of the loan term. In the case of the Smiths, their monthly payments are $792.24, leading up to a final substantial payment of $56,340, which aligns with the balloon payment structure. This is in contrast to a fixed-interest rate loan where the payments are uniform throughout the term, or an adjustable-rate mortgage that would fluctuate with market rates, or a reverse mortgage that is designed for older homeowners.

This is largely a mathematical problem as it involves analyzing loan structures and payment schedules often found in financial mathematics.