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

2. 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

3. 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

4. McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 1-4 Types of Mortgages Available 15-4 30-year fixed rate mortgage 15-year fixed rate mortgage Graduated-payment mortgage (GPM) Biweekly mortgage Adjustable rate mortgage (ARM) Home equity loan

5. McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 1-5 Table 15.1 - Amortization Chart (Mortgage principal and interest per $1,000) 15-5

6. 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

7. 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 = $1,027.60 Step 1. Divide the amount of the mortgage by $1,000 $140,000 = $140 $1,000 Computing Monthly Payment by Using an Amortization Chart

8. 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) = $1,027.60 $1,000 Total payments Mortgage Total interest $369,936 - $140,000 = $229,936 ($1,027.60 x 360) Monthly Payment 15-8

9. 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

10. McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 1-10 Table 15.2 - Effect of Interest Rates on Monthly Payments 15-10 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

11. McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 1-11 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 Year30 YearDifference 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 15-11

12. McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 1-12 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 3. Calculate the new principal: Current principal - Reduction of principal (Step 2) = New Principal $140,000 - $94.27 = $139,905.73 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

13. McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 1-13 Step 2. Principal reduction = Monthly payment - Interest (Step 1.) $1,027.60 - $932.70 = $94.90 Step 3. Current Principal - Reduction of principal (Step 2) = New Principal $139,905.73 - $94.90 = $139,810.83 Step 1. Interest = Principal x Rate x Time $139,905.73 x.08 x 1/12 = $932.70 Calculating Interest, Principal, and New Balance of Monthly Payment 2nd Month

14. McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 1-14 Table 15.3 - Partial Amortization Schedule 15-14 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