1. Chapter 15 The Cost of Home Ownership Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

2. 15-2 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 The Cost of Home Ownership #15 Learning Unit Objectives Types of Mortgages and the Monthly Mortgage Payment LU15.1

3. 15-3 1. Calculate and identify the interest and principal portion of each monthly payment 2. Prepare an amortization schedule The Cost of Home Ownership #15 Learning Unit Objectives Amortization Schedule -- Breaking Down the Monthly Payment LU15.2

4. 15-4 Table 15.1 - Amortization Chart (PARTIAL) (Mortgage principal and interest per $1,000)

5. 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?

6. 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 = $1,288.00 Step 1. Divide the amount of the mortgage by $1,000 $160,000 = $160 $1,000 Computing Monthly Payment by Using an Amortization Chart

7. 15-7 Computing the Monthly Payment for Principal and Interest $160,000 = 160 x $8.05 (table rate) = $1,288.00 $1,000 Total payments Mortgage Total interest $463,680 - $160,000 = $303,680 ($1,288.00 x 360) Monthly Payment

8. 15-8 Table 15.2 - Effect of Interest Rates on Monthly Payments 9% 11% Difference Monthly payment$1,288.00$1,524.80 $236.80 (160 x $8.05) (160 x $9.53) Total cost of interest$303,680$388,828 $85,248 ($1,288.00 x 360) - $160,000 ($236.80 x 360) ($1,524.80 x 360) - $160,000

9. 15-9 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$1,624.00$1,288.00$336.00 Total Interest$100,912$303,680($202,768) ($1,624.00 x 180) -$140,000 ($1,288.00 x 360) - $160,000

10. 15-10 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.

11. 15-11 Step 2. Calculate the amount used to reduce the principal: Principal reduction = Monthly payment - Interest (Step 1.) $1,288.00-$120.00 = $88.00 Step 3. Calculate the new principal: Current principal - Reduction of principal (Step 2) = New Principal $160,000 - $88.00 = $159,912.00 Step 1. Calculate the interest for a month (use current principal): Interest = Principal x Rate x Time $160,000 x.09 x 1/12 = $1,200.00 Calculating Interest, Principal, and New Balance of Monthly Payment

12. 15-12 Step 2. Principal reduction = Monthly payment - Interest (Step 1.) $1,288.00 - $1,199.34 = $88.66 Step 3. Current Principal - Reduction of principal (Step 2) = New Principal $159,912.00 - $88.66 = $159,823.34 Step 1. Interest = Principal x Rate x Time $159,912.00 x.09 x 1/12 = $1,199.34 Calculating Interest, Principal, and New Balance of Monthly Payment 2nd Month

13. 15-13 Table 15.3 - Partial Amortization Schedule Payment Principal Principal Balance of number (current) Interest reduction principal 1 $160,000 $1.200.00 $88.00 $159,912.00 ($160,000 x.09 x 1/12) ($1,288.60 – 1,200) ($160,000 - $88.00) 2 $159,912.00 $1,199.34 $88.66 $159,823.34 ($159,912 x.09 x 1/12) ($1,288 – 1,199.34) ($159,912 - $88.66) 3 $159,823.34 $1,198.68 $89.32 $159,734.02 4 $159,734.02 $1,198.01 $89.99 $159,644.03 5 $159,644.03 $1,197.33 $90.67 $159,553.36

14. 15-14 Problem 15-9: $215,000 x 0.2 = $43,000 $215,000 - $43,000 = $172,000 $172,000/$1,000 = 172 x $5.37 = $923.64

15. 15-15 Problem 15-10:$50,000,000 X.20 (down payment) - 10,000,000 $ 10,000,000 (down)$40,000,000 mortgage payment $40,000,000 $1,000 = $40,000 x $6.66 = $266,400 monthly payment

16. 15-16 Problem 15-11: $140,000 - $28,000 = $112,000/$1,000 = 112 x $5.68 = $636.16 x 360 = $229,017.60 - $112,000 = $117,017.60 total interest

17. 15-17 Problem 15-13: Payment Portion to - Balance of loan Number Interest Principal outstanding Monthly payment is: 1 $1,375.00 $47.00 $119,953.00 $120,000 ($1,422 -$1,375) ($120,000 - $47.00) $1,000 =120 x $11.85 = $1,422 2 $1,374.46 $47.54 $119,905.46 $120,000 x.1375 x 1/12 ($1,422 -$1,374.46) ($119,953.00 - $47.54) = $1,375.00 3 $1,373.92$48.08 $119,857.38 $119,953.00 x.1375 x 1/12 = $1,374.46 $119,905.46 x.1375 x 1/12 = $1,373.92

18. 15-18 Problem 15-14: a. 40 x $10.17 = $406.80 x 300 = $122,040 - $40,000 = $82,040 b. 40 x $10.91 = $436.40 x 300 = $130,920 - $40,000 = $90,920 c. 40 x $11.66 = $466.40 x 300 = $139,920 - $40,000 = $99,920 d. 40 x $12.81 = $512.40 x 300 = $153,720 - $40,000 = $113,720 e. $113,720 - $82,040 = $31,680 difference f. 40 x $12.65 = $506 x 360 = $182,160 - $40,000 = $142,160 40 x $9.91= $396.40 x 360 = $142,704 - $40,000 = - 102,704 difference $ 39,456