You are thinking of purchasing a house. The house costs $400,000. You have $50,000 in cash that you can use as a down payment on the house, but you need to borrow the rest of the purchase price, i.e. $350,000. The bank is offering a 30-year mortgage that requires annual payments and has an interest rate of 7% per year.

Question

a. What will your annual payment be if you sign up for this mortgage?

b. Assume you can only afford to pay $25,000 per year. The bank is still agrees to allow you to pay this amount each year and borrow $350,000. At the end of the mortgage, you must take a balloon payment (i.e. a lump sum payment) that is you must repay the remaining balance on the mortgage. How much will this balloon payment be?