CHAPTER 16 Mortgages

Find the monthly mortgage payment. 16-1 Learning Outcomes Find the monthly mortgage payment. Find the total interest on a mortgage and the PITI (Principal, Interest, Taxes, and Insurance).

Mortgage Collateral Equity Market value Key Terms… Section 16-1 Mortgage Payments Mortgage A loan in which real property is used to secure the debt. Collateral The property that is held as security on a mortgage Equity The difference between the expected selling price and the balance owed on the property. Market value The expected selling price of a property.

Conventional mortgage Key Terms… Section 16-1 Mortgage Payments First mortgage The primary mortgage on a property. Conventional mortgage A mortgage that is not insured by a government program. Fixed-rate mortgage The rate of interest on the loan remains the same for the life of the mortgage.

Adjustable-rate mortgage Key Terms… Section 16-1 Mortgage Payments Adjustable-rate mortgage The rate of interest may fluctuate during the life of the loan depending on the prime lending rate of most banks.

A home is a type of “real” property. Section 16-1 Mortgage Payments A home is a type of “real” property. Real estate or real property is land plus any permanent improvements to the land. Improvements include: Water or sewage systems. Homes or commercial buildings. Any other type of structure.

15-year and 30-year loans are the most common. Mortgages Section 16-1 Mortgage Payments 15-year and 30-year loans are the most common. Payments can be made monthly or on a biweekly plan, resulting in 26 payments. The biweekly plan builds equity more quickly than the monthly plan. An equity line of credit, or second mortgage, allows a homeowner to borrow against the equity in the home. It is in addition to the first mortgage.

16-1-1 Find the monthly mortgage payment Section 16-1 Mortgage Payments The repayment of a loan in equal installments that are applied to principal and interest over a period of time is called the amortization of a loan.

16-1-1 Find the monthly mortgage payment Section 16-1 Mortgage Payments To calculate the monthly mortgage payment, it is customary to use a table, such as table 16-1.

Monthly mortgage payment is equal to: HOW TO: Use a per $1,000 monthly payment table Section 16-1 Mortgage Payments Monthly mortgage payment is equal to:

If she makes a 20% down payment, what is the monthly payment? An Example… Section 16-1 Mortgage Payments A homebuyer is purchasing a house for $212,000. The bank has approved her loan application for a 30-year fixed-rate loan at 6% annual interest. If she makes a 20% down payment, what is the monthly payment? Calculate the down payment: $212,000(0.20) = $42,400 Amount to be financed: $212,000 – $42,400 = $169,600. Divide $169,600 by $1,000 = 169.6 (units)

With 20% down, what is the monthly payment? An Example… Section 16-1 Mortgage Payments $212,000, 30-year fixed-rate loan at 6%. With 20% down, what is the monthly payment? Calculate the down payment: $212,000(0.20) = $42,400 Amount to be financed: $212,000 – $42,400 = $169,600. Divide $169,600 by $1,000 = 169.6 (units) Using Table 16-1, find the factor for financing a loan for 30 years at 6%. Multiply the factor (6.00) by number of thousands (169.6) $1,017.60, which includes principal and interest.

An Example… Section 16-1 Mortgage Payments Joan Williams has been approved for a 30-year fixed-rate loan at 6.5%. The home she is buying costs $140,000; she is going to put 20% down. Calculate her monthly payment including principal and interest using Table 16-1. $707.84

STEP 1 STEP 2 Find the Monthly Mortgage Payment Using a Formula HOW TO: Section 16-1 Mortgage Payments STEP 1 Identify the monthly rate (R) as a decimal equivalent, the number of months (N), and the loan principal (P) and substitute the values into the formula. STEP 2 Evaluate the formula.

The monthly payment of $1,016.84 includes the principal and interest. An Example… Section 16-1 Mortgage Payments Find the mortgage payment for a 30-yr. fixed-rate loan of $169,600 at 6% annual interest. R = .06/12 = .005; N = 360; P = 169,600; The monthly payment of $1,016.84 includes the principal and interest. (note the slight change in monthly payment due to rounding when compared to using the table.)

16.1.2 Find the Total Interest on a Mortgage and the PITI 16-1-2 Section 16-1 Mortgage Payments STEP 1 Find the total number of payments—multiply the number of payments by the amount of the payment. 16.1.2 Find the Total Interest on a Mortgage and the PITI STEP 2 Subtract the amount financed from the total of payments. Total interest = number of payments x amount of payment – amount financed

An Example… Section 16-1 Mortgage Payments In a previous example, a homebuyer’s monthly payment of the principal and interest is $1,017.60. The buyer has a 30-year fixed mortgage. Total interest = number of payments x amount of payment – amount financed TI = 30(12)($1,017.60) – $169,600 TI = $366,336 – $169,600 = $196,736.00 The total interest on this loan is $196,736.00.

An Example… Section 16-1 Mortgage Payments Joan Williams has a monthly mortgage payment of $707.84. The amount financed is $112,000. Find the total interest on her 30-year mortgage. $142,822.40

Closing costs Points Escrow Key Terms… Section 16-1 Mortgage Payments Closing costs Other costs involved in securing a mortgage, paid when the loan is made—points, attorney fees, sales commissions, and others. Points A one-time payment to the lender that is a percent of the total loan. Escrow An account for holding the part of a monthly payment that is used to pay taxes and insurance.

Key Terms… Section 16-1 Mortgage Payments PITI The adjusted monthly payment that includes the Principal, Interest, Taxes and Insurance. The monthly mortgage payment the borrower will make will include all four elements.

The total PITI payment is $1,263.02. An Example… Section 16-1 Mortgage Payments As you recall, our homebuyer has a monthly payment of principal and interest of $1,017.60. If her annual insurance premium is $960 and property taxes $1,985, find the adjusted monthly payment that includes PITI. $960 + $1,985 = $2,945 ÷ 12 = $245.42 Add to the monthly principal and interest payment: $1,017.60 + $245.42 = $1,263.02 The total PITI payment is $1,263.02.

An Example… Section 16-1 Mortgage Payments Joan Williams has a monthly payment of principal and interest of $707.84. If her annual insurance premium is $1,200 and her property taxes are $1,500, what would the adjusted monthly payment be? $932.84

Prepare a partial amortization schedule of a mortgage. 16-2 Learning Outcomes Prepare a partial amortization schedule of a mortgage. Calculate qualifying ratios.

STEP 1 Prepare a partial amortization schedule of a mortgage 16-2-1 Section 16-2 Amortization Schedules and Qualifying Ratios STEP 1 For the first month: Find the interest portion of the first monthly payment = original principal x monthly interest rate Find the principal portion of the monthly payment = monthly payment – interest portion of the first monthly payment Find the first end-of-month principal = original principal – principal portion of the first monthly payment

STEP 2 Prepare a partial amortization schedule of a mortgage 16-2-1 Section 16-2 Amortization Schedules and Qualifying Ratios STEP 2 For each remaining month: Find the interest portion of the monthly payment = previous end-of-month principal x monthly interest rate Find the principal portion of the monthly payment = monthly payment – interest portion of the monthly payment Find the end-of-month principal = previous end-of month principal – principal portion of the monthly payment

Interest = original principal x monthly rate An Example… Section 16-2 Mortgage Payments Complete the first two months for a mortgage of $69,600 at 7% annual interest for 30 years. Interest = original principal x monthly rate Interest = $69,600(0.07 ÷ 12) Interest = $406.00 Principal portion of the monthly payment = $462.84 - $406 = $56.84 End-of-month principal = $69,600 - $56.84 = $69,543.16

Follow the same steps for subsequent months. An Example… Section 16-2 Mortgage Payments Complete the first two months for a mortgage of $69,600 at 7% annual interest for 30 years. Second month: Interest portion = $69,543.16(0.07/12) Interest portion = $405.67 Principal portion of monthly payment = $462.84 - $405.67 = $57.17 End of month principal = $69,543.16 - $57.17 = $69,485.99 Follow the same steps for subsequent months.

An Example… Section 16-2 Mortgage Payments Joan Williams has a monthly mortgage payment of $707.84; an original loan amount of $112,000 and a 6.5% interest rate. Calculate the first two months of an amortization schedule. First end-of-month principal =$111,898.82 Second end-of-month principal =$111,797.09

Select the formula for the desired qualifying ratio: 16-2-2 Calculate qualifying ratios Section 16-2 Amortization Schedules and Qualifying Ratios Select the formula for the desired qualifying ratio:

The HR should not exceed 28%, so it is acceptable. An Example… Section 16-2 Mortgage Payments If Sheri has total gross monthly earnings of $5,893, and the total PITI for the loan is $1,482, calculate the housing ratio. Is the ratio acceptable compared to desired? The HR should not exceed 28%, so it is acceptable.

Exercises Set A

Annual percentage rate EXERCISE SET A 2. Find the monthly payment. Number of 1,000 units = 146,800/1,000 = 146.8 Table 16-1 value for 30 years and 5.25% = $5.52 Monthly payment = 146.8($5.52) = $810.34 Mortgage Amount Annual percentage rate Years $146,800 5.25% 30

Annual percentage rate EXERCISE SET A 4. Find the monthly payment. Number of 1,000 units = 113,400/1,000 = 113.4 Table 16-1 value for 15 years and 5% = $7.91 Monthly payment = 113.4($7.91) = $896.99 Mortgage Amount Annual percentage rate Years $113,400 5% 15

Annual percentage rate EXERCISE SET A Mortgage Amount Annual percentage rate Years $146,800 5.25% 30 6. Monthly payment = 146.8($5.52) = $810.34 Find the total interest paid for the mortgage in Exercise 2. Total paid = $810.34(30)(12) = $291,722.40 Interest = $291,722.40  $146,800 = $144,922.40

Annual percentage rate EXERCISE SET A 8. Monthly payment = 113.4($7.91) = $896.99 Find the total interest paid for the mortgage in Exercise 4. Total paid = $896.99(15)(12) = $161,458.20 Interest = $161,458.20  $113,400 = $48,058.20 Mortgage Amount Annual percentage rate Years $113,400 5% 15

Amount of mortgage = 198,500(0.8) = 158,800 EXERCISE SET A 10. Louise Grantham is buying a home for $198,500 with a 20% down payment. She has a 5.75% loan for 25 years. Create an amortization schedule for the first two months of her loan. Amount of mortgage = 198,500(0.8) = 158,800 Number of +1,000 units = 158,800/1,000 = 158.8 Table 16-1 value = $6.29 Monthly payment = 158.8($6.29) = $998.85

Monthly payment = 158.8($6.29) = $998.85 Month 1 interest = EXERCISE SET A 10. Louise Grantham is buying a home for $198,500 with a 20% down payment. She has a 5.75% loan for 25 years. Create an amortization schedule for the first two months of her loan. Monthly payment = 158.8($6.29) = $998.85 Month 1 interest = Principal 1st pay = 998.85 - 760.92 = 237.93 End-of-month principal = 158,800 - 237.93 = 158,562.07 Month 2 interest =

Monthly payment = 158.8($6.29) = $998.85 EXERCISE SET A 10. Louise Grantham is buying a home for $198,500 with a 20% down payment. She has a 5.75% loan for 25 years. Create an amortization schedule for the first two months of her loan. Monthly payment = 158.8($6.29) = $998.85 Principal 2nd pay = 998.85 – 759.78 = 239.07 End-of-month principal = 158,562.07 – 239.07 = 158,323.00 Month Monthly Payment Interest Principal End-of-month principal 1 998.85 760.92 237.93 158,562.07 2 759.78 239.07 158,323.00

EXERCISE SET A 12. Find the loan-to-value ratio for a home appraised at $583,620 that the buyer will purchase for $585,000. The buyer plans to make a down payment of $175,000. Amount mortgaged = 585,000  175,000 = 410,000

EXERCISE SET A 14. Find Julia Rholes’ debt-to-income ratio if her fixed monthly expenses are $1,836 and her gross monthly income is $4,934.

EXERCISE SET A 16. Use the formula or a calculator application to find the monthly payment on a home mortgage of $219,275 at 5.265% interest for 30 years.

Practice Test

Table 16-1 value for 30 years and 6.5% = $6.32 PRACTICE TEST 2. Find the monthly payment on a mortgage of $230,000 for 30 years at 6.5%. Number of 1,000 units = 230,000/1,000 = 230 Table 16-1 value for 30 years and 6.5% = $6.32 Monthly payment = 230($6.32) = $1,453.60 Find the total amount of interest that will be paid on the mortgage in Exercise 2. Total paid = 1,607.70(30)(12) = 578,772 Interest = 578,772  230,000 = 348,772 3.

PRACTICE TEST 5. Hullett Houpt is purchasing a home for $197,000. He will finance the mortgage for 15 years and pay 4% interest on the loan. He makes a down payment that is 20% of the purchase price. Use Table 16-1 as needed. Houpt’s annual taxes are $2,364 and his annual homeowner’s insurance is $1,758. Find the down payment. 197,000(0.2) = 39,400

Find the amount of the mortgage. 197,000  39,400 = 157,600 PRACTICE TEST 6. Hullett Houpt is purchasing a home for $197,000. He will finance the mortgage for 15 years and pay 4% interest on the loan. He makes a down payment that is 20% of the purchase price. Use Table 16-1 as needed. Houpt’s annual taxes are $2,364 and his annual homeowner’s insurance is $1,758. Find the amount of the mortgage. 197,000  39,400 = 157,600 Find the total interest Hullett will pay over the 15-year period. Total mortgage paid = 1,166.24(15)(12) = 209,923.20 Interest = 209,923.20 157,600 = 52,323.20 8.

PRACTICE TEST 10. Hullett Houpt is purchasing a home for $197,000. He will finance the mortgage for 15 years and pay 4% interest on the loan. He makes a down payment that is 20% of the purchase price. Use Table 16-1 as needed. Houpt’s annual taxes are $2,364 and his annual homeowner’s insurance is $1,758. Calculate the monthly payment and the total interest Hullett would have to pay if he decided to make the loan for 30 years instead of 15 years. Number of 1,000 units =157,600/1,000 = 157.6 Table 16-1 value = 4.77 Monthly payment = 157.6(4.77) = 751.75 Total mortgage = 751.75(30)(12) = 270,630 Interest = 270,630  157,600 = 113,030

Principal portion = 1,166.24  525.33 = $640.91 PRACTICE TEST 12. Hullett Houpt is purchasing a home for $197,000. He will finance the mortgage for 15 years and pay 4% interest on the loan. He makes a down payment that is 20% of the purchase price. Use Table 16-1 as needed. Houpt’s annual taxes are $2,364 and his annual homeowner’s insurance is $1,758. Find the interest portion and principal portion for the first payment of Hullett’s 15-year loan. Principal portion = 1,166.24  525.33 = $640.91

PRACTICE TEST 14. Make an amortization schedule for the first three payments of the 30-year loan Hullett could make. Monthly payment = $751.75 Month Monthly Payment Interest Principal End-of-month principal 1 $751.75 2 3

PRACTICE TEST 16. Use the formula or a calculator application to find the monthly payment on a home mortgage of $249,500 at 5.389% interest for 30 years. Using the formula: