THE COST OF HOME OWNERSHIP Chapter Fifteen Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

15-2 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.

15-3 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

15-4 AMORTIZATION CHART (TABLE 15.1) (PARTIAL) (Mortgage principal and interest per $1,000)

15-5 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?

15-6 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, Step 1. Divide the amount of the mortgage by $1,000. $160,000 = $160 $1,000 COMPUTING MONTHLY PAYMENT BY USING AN AMORTIZATION CHART

15-7 COMPUTING THE MONTHLY PAYMENT FOR PRINCIPAL AND INTEREST $160,000 = 160 x $8.05 (table rate) = $1, monthly payment $1,000 Total payments Mortgage Total interest $463, $160,000 = $303,680 ($1, x 360)

15-8 EFFECT OF INTEREST RATES ON MONTHLY PAYMENTS (TABLE 15.2)

15-9 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? MonthlyTotal cost Payment Calculationsof interest 15-year $1, ($1, x 180) -- $140,000 = $100, year $1, ($1, x 360) -- $160,000 = $303,680 Differences: $ ($202,768)

15-10 HIDDEN COST IN PURCHASING A HOME Closing Costs - Escrow Amount - Repairs and Maintenance - 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.

15-11 Step 2. Calculate the amount used to reduce the principal: Principal reduction = Monthly payment -- Interest (Step 1) $88.00 = $1, $1, Step 3. Calculate the new principal: Current principal -- Reduction of principal (Step 2) = New principal $160, $88.00 = $159, 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, CALCULATING INTEREST, PRINCIPAL, AND NEW BALANCE OF MONTHLY PAYMENT

15-12 Step 2. Principal reduction = Monthly payment -- Interest (Step 1) $1, $1, = $88.66 principal reduction Step 3. Current principal -- Reduction of principal (Step 2) = New principal $159, $88.66 = $159, new principal Step 1. Interest = Principal x Rate x Time $159, x.09 x 1/12 = $1, interest CALCULATING INTEREST, PRINCIPAL, AND NEW BALANCE OF MONTHLY PAYMENT 2nd Month

15-13 PARTIAL AMORTIZATION SCHEDULE (TABLE 15.3)