Appendix 13

Mortgages and Loans 

BALLOON PAYMENT LOANS 

            Most churches take on debt at some point.  If it is a standard mortgage, it is clear how much is due each month and the board can plan payments in the budget.  Sometimes a loan does not require current payments however.  Sometimes loans are extended on the basis that a balloon payment will be made in the future.  In such cases misunderstandings or disagreements can arise over the rate of saving which needs to occur to satisfy the loan in the future. 

            Suppose, for example, that a church borrows $10,000 from each of ten members with both interest and principal to be paid in a lump sum in the future.  In particular, suppose that half of the loans are to be repaid with 5% annual interest in five years; the other half are to be repaid with 8% annual interest in ten years.  No payments to the lenders are to be made until then.  The following table sets forth one schedule under which reserves for these two notes could be accumulated. 

 

Community Church

Mortgage Repayment Fund  

	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012
Note 1
annual interest	2,500	2,625	2,756	2,894	3,039
principal due					50,000
Note 2
annual interest	4,000	4,320	4,666	5,039	5,442	5,877	6,347	6,855	7,404	7,996
principal due										50,000
princip + int paid out					63,814					107,946
annual savings	10,000	13,000	16,000	18,000	18,000	19,000	19,000	19,760	20,000	19,000
reserve fund balance	10,000	23,000	39,000	57,000	11,186	30,186	49,186	68,946	88,946	0
interest paid into res.	6,500	6,945	7,422	7,933	8,481	5,877	6,347	6,855	7,404	7,996
princ. paid into res. res.	3,500	6,055	8,578	10,067	9,519	13,123	12,653	12,905	12,596	11,004

             Notice that the principal and interest amounts are fixed by the terms of the notes.  The "cash due" is simply the total interest and principal which must be on hand at each due date.   

            The rate of savings is highly variable however.  It depends on how much the congregation is able to add in the annual budget.  It may also be influenced by a few generous gifts, the timing of which is uncertain. 

            By setting forth the reserve requirement schedule in this format however, it is relatively easy to focus on annual requirements several years into the future.  These requirements can be modified, of course, as conditions change.  Each year the finance committee can review the current status of the reserve savings, change the applicable interest rate if necessary, and determine a reasonable target to budget for the upcoming year.