2. The Cost of Home Ownership
Chapter 15
The Cost of Home Ownership

3. The Cost of Home Ownership
#15
The Cost of Home Ownership
Learning Unit Objectives
Types of Mortgages and the Monthly Mortgage Payment
LU15.1
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

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

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
Interest-only mortgages

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

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?

8. 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

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, $140,000 = $229,936
($1, x 360)

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

11. 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, $1, $310.80
Total Interest $100,912 $229,936 ($129,024)
($1, x 180) -$140,000
($1, x 360) - $140,000

12. 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.

13. 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, $ = $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

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

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