The Cost of Home Ownership Chapter 15 The Cost of Home Ownership McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

The Cost of Home Ownership #15 The Cost of Home Ownership Learning Unit Objectives LU15.1 Types of Mortgages and the Monthly Mortgage Payment 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 #15 The Cost of Home Ownership Learning Unit Objectives LU15.2 Amortization Schedule -- Breaking Down the Monthly Payment Calculate and identify the interest and principal portion of each monthly payment Prepare an amortization schedule

Types of Mortgages Available 15-5 Types of Mortgages Available 30-year fixed rate mortgage 15-year fixed rate mortgage Graduated-payment mortgage (GPM) Biweekly mortgage Adjustable rate mortgage (ARM) Home equity loan

15-6 Table 15.1 - Amortization Chart (Mortgage principal and interest per $1,000)

Computing the Monthly Payment for Principal and Interest 15-7 Computing the Monthly Payment for Principal and Interest Sara Wilson bought a home for $160,000. She made a $20,000 down payment. The mortgage is for 30 years and has a rate of 8%. What are the monthly payment and total cost of interest?

Computing Monthly Payment by Using an Amortization Chart Step 3. Multiply Step 1 by the factor in Step 2 $140 x $7.34 = $1,027.60 Step 2. Look up the rate (8%) and the term (30 years) in the amortization chart. At the intersection is the table factor. ($7.34) Step 1. Divide the amount of the mortgage by $1,000 $140,000 = $140 $1,000

Computing the Monthly Payment for Principal and Interest 15-9 Computing the Monthly Payment for Principal and Interest $140,000 = 140 x $7.34 (table rate) = $1,027.60 $1,000 Monthly Payment Total payments Mortgage Total interest $369,936 - $140,000 = $229,936 ($1,027.60 x 360)

Hidden Cost in Purchasing a Home 15-10 Hidden Cost in Purchasing a Home Closing Costs - 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. Escrow Amount - 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 Repairs and Maintenance - The cost of keeping the property up. Includes: paint, wallpaper, landscaping, etc.

Table 15.2 - Effect of Interest Rates on Monthly Payments 15-11 Table 15.2 - Effect of Interest Rates on Monthly Payments 8% 11% Difference Monthly payment $1,027.60 $1,334.20 $306.60 (140 x $7.34) (140 x $9.53) Total cost of interest $229,936 $340,312 $110,376 ($1,027.60 x 360) - $140,000 ($306.60 x 360) ($1,334.20 x 360) - $140,000

The Effect of Loan Types on Monthly Payments 15-12 The Effect of Loan Types on Monthly Payments Suppose Gary chose a 15-year mortgage vs. a 30-year mortgage. What would be the effect? 15 Year 30 Year Difference Monthly Payment $1,338.40 $1,027.60 $310.80 Total Interest $100,912 $229,936 ($129,024) ($1,338.40 x 180) -$140,000 ($1,027.60 x 360) - $140,000

Calculating Interest, Principal, and New Balance of Monthly Payment Step 3. Calculate the new principal: Current principal - Reduction of principal (Step 2) = New Principal $140,000 - $94.27 = $139,905.73 Step 2. Calculate the amount used to reduce the principal: Principal reduction = Monthly payment - Interest (Step 1.) $1,027.60-$933.33 = $94.27 Step 1. Calculate the interest for a month (use current principal): Interest = Principal x Rate x Time $140,000 x.08 x 1/12 = $933.33

Calculating Interest, Principal, and New Balance of Monthly Payment Step 3. Current Principal - Reduction of principal (Step 2) = New Principal $139,905.73 - $94.90 = $139,810.83 2nd Month Step 2. Principal reduction = Monthly payment - Interest (Step 1.) $1,027.60 - $932.70 = $94.90 Step 1. Interest = Principal x Rate x Time $139,905.73 x.08 x 1/12 = $932.70

Table 15.3 - Partial Amortization Schedule 15-15 Table 15.3 - Partial Amortization Schedule Payment Principal Principal Balance of number (current) Interest reduction principal 1 $140,000 $933.33 $94.27 $139,905.73 ($140,000 x .08 x 1/12) ($1,027.60 - 933.33) ($140,000 - $94.27) 2 $139,905.73 $932.70 $94.90 $139,810.83 ($139,905.73 x .08 x 1/12) ($1,027.60 - 932.70) ($139,905.73 - $94.90) 3 $139,810.83 $932.07 $95.53 $139,715.31 4 $139,715.31 $931.44 $96.16 $139,619.15 5 $139,619.15 $930.79 $96.81 $139,522.34