Mortgages and Amortization What you should know about buying a home…

Buying a Home is Big $$ Buying a home is usually the single biggest financial decision most families make. Since most people don’t save up for the entire cost of a home, most people usually obtain a mortgage in order to purchase their homes.

Defining the Terms What is a Mortgage? A loan specifically secured by the value of a real estate property. Usually for the purpose of buying a house. Can be used to purchase other items as in 2nd and 3rd Mortgages

Defining Terms cont’d Amortization Amortization period Mortgage Term the gradual elimination of a debt or liability Usually displayed in a detailed table called an amortization table Amortization period The time period over which the mortgage is calculated e.g. 25 years Mortgage Term The length of the mortgage agreement Usually ranges from 1 to 5 years but may be longer

Mortgage Term vs. Amortization Period The Johnson’s have recently purchased a new home. They take out a mortgage of $210 000 at 5% per year compounded semi-annually for 20 years. Their current rate is fixed for 4 years at which time they will renegotiate the interest rate. Which is the term? Which is the Amortization period? 4 years 20 years

More Time with Borrowed Money Means it Costs More As you have already learned the longer you take to pay off any loan the more you actually end up paying for that borrowed money. In fact many people end up paying almost double the original purchase price of their home by time they pay the mortgage off in full. So wise people aim to pay off their debts ASAP!!

Amortization Tables Are tables that show the breakdown of the principal, payments, interest paid, and unpaid loan balances over a certain time frame

Sample Amortization Table Online mortgage calculators can be found on many websites. Here are just two: http://www.ratehub.ca/mortgage-calculator-td-bank http://www.calculatorz.com/united/amortschedule.cgi When you look at an amortization table/schedule notice that at first the interest paid is higher than the principal paid. Remember principal is what you borrowed while interest is the extra you are paying to borrow the funds

Important Things to Know About Mortgages Under Canadian Law the compounding frequency on a mortgage cannot be more frequent than semi-annually Mortgage payments are usually made on a monthly or more frequently basis All mortgage companies in Canada require a down payment before giving a mortgage. The larger the down payments the smaller one’s mortgage and the better the interest rate

Calculating Mortgage Payments Since the payment period and compounding periods are different we can not use the normal PVOA formula where we divide the interest rate by the compounding frequency There is a formula for adjusting the “i” value but we will be using the TVM Solver on the graphing calculator to do the calculation instead. When using the TVM Solver we set the P/Y=12 to show the monthly payment frequency and we set the C/Y = 2 to show semi-annual compounding in order to show these differences in periods

Sample Question Jessica and Chris recently purchased their first home for $195 500. They made the minimum 5% down payment and mortgaged the rest. They agreed to a five-year term mortgage amortized over 20 years at 5.99% per year. A) Calculate the down payment DP = 0.05 x 195 500 = $ 9775

Calculate the amount of Jessica and Chris’ mortgage. Mortgage Amount = House Price – DP = 195 500 – 9775 = 185 725 Use a TVM Solver to determine the amount of their monthly payment. N = 20x12 I% = 5.99 PV = 185725 PMT = 0.00 FV = 0.00 P/Y = 12 C/Y = 2 Using Alpha Enter with the cursor beside PMT PMT= 1321.67

d) Calculate the total amount paid over 5 years. PMT x 60 They would have made 12 payments every year for 5 years. 5 x 12 = 60 payments PMT x 60 =1321.67 x 60 = $79 300.20 Calculate the total interest paid in five years Without deleting the data on the TVM solver press 2nd Mode to quit the program. Press APPS enter (or 2nd Finance) then scroll down to A:∑Int( and Press Enter. Type in 1 , 60 ) and Press Enter to calculate the answer. Why? The 1 is the 1st payment #, the 60 is the last payment # in the set you tell it to use. Total Interest = 51 037.35