1. McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved CHAPTER4CHAPTER4 CHAPTER4CHAPTER4 Fixed Rate Mortgage Loans: Part 1

2. 4-2 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Mortgage Interest Rates What will borrowers pay for the use of funds? What are lenders willing to accept for the use of funds? Housing Demand Factors: Income & Demographics Mortgage Funds Supply Factors: Alternative Investments

3. 4-3 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Components of the Mortgage Interest Rate Default Risk Interest Rate Risk Anticipated Inflation and Unanticipated Inflation Prepayment Risk Liquidity Risk Legislative Risk

4. 4-4 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Mortgage Payment Patterns Constant Payment Mortgage (CPM) Loan Amortization Changes Monthly Payment Remains the Same

5. 4-5 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Mortgage Payment Patterns Example 4-1 Calculating the Payment for a CPM $100,00 Mortgage 7% Interest 30 Years Monthly Payments

6. 4-6 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Mortgage Payment Patterns = $100,000 = 30 x 12 = 360 = $0 = 7/12 =.58333 (or change P/Y to 12 and enter 7) = $665.30 n i CPT FV PMT PV

7. 4-7 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Mortgage Payment Patterns Interest paid in the first month (.07/12) x $100,000 = $583.33 Principal paid in the first month $665.30 - $583.33 = $81.96 Every month, interest portion declines Every month, principal portion increases.

8. 4-8 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Calculation of CPM MonthBeg. BalancePaymentRateInterestPrincipalEnd Balance 1$100,000.00$665.307.00%583.3381.9799,918.03 2 $665.307.00%582.8682.4499,835.59 3 $665.307.00%582.3782.9399,752.66 4 $665.307.00%581.8983.4199,669.25 5 $665.307.00%581.4083.9099,585.36 6 $665.307.00%580.9184.3999,500.97 7 $665.307.00%580.4284.8899,416.09 8 $665.307.00%579.9385.3799,330.72 9 $665.307.00%579.4385.8799,244.85 1099,244.85$665.307.00%578.9386.3799,158.48 1199,158.48$665.307.00%578.4286.8899,071.60 1299,071.60$665.307.00%577.9287.3898,984.22

9. 4-9 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Computing a Loan Balance Essentially removing the interest that was built into the payment. Two mathematical methods Compute the present value of the remaining payments. Compute the future value of the amortized loan amount.

10. 4-10 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Computing a Loan Balance There are 3 methods to do this with a financial calculator From Example 4-1, what is the future expected loan balance in 8 years?

11. 4-11 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Computing a Loan Balance Present Value Method = -$665.30 = 22 x 12 = 264 (number of payments left) = $0 = 7 = $89,491 n i CPT FV PMT PV

12. 4-12 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Computing a Loan Balance Future Value Method = $100,000 = 8 x 12 = 96 (number of payments made) = -$665.30 = 7 = -$89,491 n i CPT FV PMT PV

13. 4-13 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Computing a Loan Balance Amortization Function Method Step 1: Compute Payment = $665.30 Step 2: Press = P1 = 1 = P2 = 96 Balance = $89,491 ENTER AMORT ENTER