Lecture Practical business math procedures (11/e) - Chapter 15: The cost of home ownership

Lecture Practical business math procedures (11/e) - Chapter 15: The cost of home ownership. In this chapter students will be able to: List the types of mortgages available, utilize an amortization chart to compute monthly mortgage payments, calculate the total cost of interest over the life of a mortgage,...

THE COST OF HOME

OWNERSHIP

Chapter Fifteen

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

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

Amortization Chart (Table 15.1) (Partial)

(Mortgage principal and interest per

$1,000)

Terms

10 10.86 11.11 11.36 11.62 11.88 12.14 12.40 12.67

12 9.51 9.76 10.02 10.29 10.56 10.83 11.11 11.39

15 8.18 8.44 8.72 8.99 9.28 9.56 9.85 10.15

17 7.56 7.84 8.12 8.40 8.69 8.99 9.29 9.59

20 6.88 7.17 7.46 7.76 8.06 8.37 8.68 9.00

22 6.51 6.82 7.13 7.44 7.75 8.07 8.39 8.72

25 6.15 6.45 6.76 7.07 7.39 7.72 8.06 8.40

30 5.68 6.00 6.33 6.66 7.00 7.34 7.69 8.05

35 5.38 5.71 6.05 6.39 6.75 7.11 7.47 7.84

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?

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

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)

Effect of Interest Rates on Monthly

Payments (Table 15.2)

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?

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)

Hidden Cost in Purchasing a Home

Closing

C o s t s

-Escrow

A m o u n t

-Repairs and

M a i n t e n a

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

Step 2 Calculate the amount used to reduce the principal:

Principal reduction = Monthly payment Interest (Step 1)

$88.00 = $1,288.00 $1,200.00

Step 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

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

Partial Amortization Schedule

(Table 15.3)