THE COST OF HOME OWNERSHIP

Chapter Fifteen

Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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LU 15-1: Types of Mortgages and the Monthly Mortgage Payment

LEARNING UNIT OBJECTIVES

LU 15-2: Amortization Schedule -- Breaking Down the Monthly Payment

1. Calculate and identify the interest and principal portion of each monthly payment.

2. Prepare an amortization schedule.

1. List the types of mortgages available.2. Utilize an amortization chart to compute

monthly mortgage payments.3. Calculate the total cost of interest over the life

of a mortgage.

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Finance charge (FC) –

the interest charge.

FC = Total of all -- Amount

monthly payments financed

Installment loan –

a loan paid off in a series of equal periodic payments.

Payments include interest and principal.

Amount financed (AF) –

the amount actually borrowed.

AF = Cash Price -- Down Payment

Deferred payment price (DPP) –

the total of all monthly payments plus the down payment.

DPP = Total of all + Down

monthly payments payment

COST OF INSTALLMENT BUYING

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AMORTIZATION CHART(TABLE 15.1) (PARTIAL)

Termsin years 5.50% 6.00% 6.50% 7.00% 7.50% 8.00% 8.50% 9.00%10 10.86 11.11 11.36 11.62 11.88 12.14 12.40 12.6712 9.51 9.76 10.02 10.29 10.56 10.83 11.11 11.3915 8.18 8.44 8.72 8.99 9.28 9.56 9.85 10.1517 7.56 7.84 8.12 8.40 8.69 8.99 9.29 9.5920 6.88 7.17 7.46 7.76 8.06 8.37 8.68 9.0022 6.51 6.82 7.13 7.44 7.75 8.07 8.39 8.7225 6.15 6.45 6.76 7.07 7.39 7.72 8.06 8.4030 5.68 6.00 6.33 6.66 7.00 7.34 7.69 8.0535 5.38 5.71 6.05 6.39 6.75 7.11 7.47 7.84

(Mortgage principal and interest per $1,000)

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COMPUTING THE MONTHLY PAYMENT FOR PRINCIPAL AND INTEREST

Gary bought a home for $200,000. He made a 20% down payment. The 9% mortgage is for 30 years (30 x 12 = 360 payments). What are Gary’s monthly payment and total cost of interest?

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Step 2. Look up the rate (9%) and the term (30 years) in the amortization chart. At the intersection is the table factor.

$8.05

Step 3. Multiply Step 1 by the factor in Step 2.

$160 x $8.05 = $1,288.00

Step 1. Divide the amount of the mortgage by $1,000.

$160,000 = $160 $1,000

COMPUTING MONTHLY PAYMENT BY USING AN AMORTIZATION CHART

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COMPUTING THE MONTHLY PAYMENT

FOR PRINCIPAL AND INTEREST$160,000 = 160 x $8.05 (table rate) = $1,288.00 monthly payment $1,000

Total payments Mortgage Total interest

$463,680 -- $160,000 = $303,680 ($1,288.00 x 360)

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EFFECT OF INTEREST RATES ON MONTHLY PAYMENTS (TABLE 15.2)

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THE EFFECT OF LOAN TYPES ON MONTHLY PAYMENTS

Suppose Gary chose a 15-year mortgage versus a 30-year mortgage. What would be the effect?

Monthly Total cost Payment Calculations of interest

15-year $1,624.00 ($1,624.00 x 180) -- $140,000 = $100,912

30-year $1,288.00 ($1,288.00 x 360) -- $160,000 = $303,680

Differences: $336.00 ($202,768)

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HIDDEN COST IN PURCHASING A HOME

Closing Costs -

Escrow Amount -

Repairs and Maintenance -

Cost associated with the passing of property from the seller to buyer. Include: lawyer’s fees, title search, points, etc. A point is a one-time charge that is a percent of the mortgage.

A special interest bearing account in which the buyer is required to deposit 1/12 of the insurance cost and 1/12 of the real estate taxes each month.

The cost of keeping the property up. Includes: paint, wallpaper, landscaping, etc.

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Step 2. Calculate the amount used to reduce the principal:

Principal reduction = Monthly payment -- Interest (Step 1)

$88.00 = $1,288.00 -- $1,200.00Step 3. Calculate the new principal:

Current principal -- Reduction of principal (Step 2) = New principal

$160,000 -- $88.00 = $159,912.00

Step 1. Calculate the interest for a month (use current principal):

Interest = Principal x Rate x Time

$160,000 x .09 x 1/12 = $1,200.00

CALCULATING INTEREST, PRINCIPAL, AND NEW BALANCE OF MONTHLY

PAYMENT

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Step 2. Principal reduction = Monthly payment -- Interest (Step 1)

$1,288.00 - $1,199.34 = $88.66 principal reduction

Step 3. Current principal -- Reduction of principal (Step 2) = New principal

$159,912.00 -- $88.66 = $159,823.34 new principal

Step 1. Interest = Principal x Rate x Time

$159,912.00 x .09 x 1/12 = $1,199.34 interest

CALCULATING INTEREST, PRINCIPAL, AND

NEW BALANCE OF MONTHLY PAYMENT

2nd Month

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PARTIAL AMORTIZATION SCHEDULE(TABLE 15.3)