McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 1-1 Chapter 15 The Cost of Home Ownership

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 1-2 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 Learning Unit Objectives Types of Mortgages and the Monthly Mortgage Payment LU15.1

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 1-3 Calculate and identify the interest and principal portion of each monthly payment Prepare an amortization schedule The Cost of Home Ownership #15 Learning Unit Objectives Amortization Schedule -- Breaking Down the Monthly Payment LU15.2

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 1-4 Types of Mortgages Available year fixed rate mortgage 15-year fixed rate mortgage Graduated-payment mortgage (GPM) Biweekly mortgage Adjustable rate mortgage (ARM) Home equity loan

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 1-5 Table Amortization Chart (Mortgage principal and interest per $1,000) 15-5

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 1-6 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? 15-6

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 1-7 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 3. Multiply Step 1 by the factor in Step 2 $140 x $7.34 = $1, Step 1. Divide the amount of the mortgage by $1,000 $140,000 = $140 $1,000 Computing Monthly Payment by Using an Amortization Chart

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 1-8 Computing the Monthly Payment for Principal and Interest $140,000 = 140 x $7.34 (table rate) = $1, $1,000 Total payments Mortgage Total interest $369,936 - $140,000 = $229,936 ($1, x 360) Monthly Payment 15-8

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 1-9 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. 15-9

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Table Effect of Interest Rates on Monthly Payments % 11% Difference Monthly payment$1,027.60$1, $ (140 x $7.34) (140 x $9.53) Total cost of interest$229,936$340,312 $110,376 ($1, x 360) - $140,000 ($ x 360) ($1, x 360) - $140,000

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved 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 Year30 YearDifference Monthly Payment$1,338.40$1,027.60$ Total Interest$100,912$229,936($129,024) ($1, x 180) -$140,000 ($1, x 360) - $140,

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Step 2. Calculate the amount used to reduce the principal: Principal reduction = Monthly payment - Interest (Step 1.) $1, $ = $94.27 Step 3. Calculate the new principal: Current principal - Reduction of principal (Step 2) = New Principal $140,000 - $94.27 = $139, Step 1. Calculate the interest for a month (use current principal): Interest = Principal x Rate x Time $140,000 x.08 x 1/12 = $ Calculating Interest, Principal, and New Balance of Monthly Payment

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Step 2. Principal reduction = Monthly payment - Interest (Step 1.) $1, $ = $94.90 Step 3. Current Principal - Reduction of principal (Step 2) = New Principal $139, $94.90 = $139, Step 1. Interest = Principal x Rate x Time $139, x.08 x 1/12 = $ Calculating Interest, Principal, and New Balance of Monthly Payment 2nd Month

McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Table Partial Amortization Schedule Payment Principal Principal Balance of number (current) Interest reduction principal 1 $140,000 $ $94.27 $139, ($140,000 x.08 x 1/12) ($1, ) ($140,000 - $94.27) 2 $139, $ $94.90 $139, ($139, x.08 x 1/12) ($1, ) ($139, $94.90) 3 $139, $ $95.53 $139, $139, $ $96.16 $139, $139, $ $96.81 $139,522.34