2. Copyright © 2011 Pearson Education, Inc. Managing Your Money

3. Copyright © 2011 Pearson Education, Inc. Slide 4-3 Unit 4D Loan Payments, Credit Cards, and Mortgages

4. 4-D Copyright © 2011 Pearson Education, Inc. Slide 4-4 Loan Basics The principal is the amount of money owed at any particular time. An installment loan (or amortized loan) is a loan that is paid off with equal regular payments. An amortization schedule is a table of principal and interest payments over the life of a loan.

5. 4-D Copyright © 2011 Pearson Education, Inc. Slide 4-5 PMT = regular payment amount P = starting loan principal (amount borrowed) APR = annual percentage rate (decimal) n = number of payment periods per year Y = loan term in years Loan Payment Formula (Installment Loans)

6. 4-D Copyright © 2011 Pearson Education, Inc. Slide 4-6 Early in the loan term, the portion going toward interest is relatively high and the portion going toward principal is relatively low. As the term proceeds, the portion going toward interest gradually decreases and the portion going toward principal gradually increases. The portions of installment loan payments going toward principal and toward interest vary as the loan is paid down. Principal and Interest for Installment Loans

7. 4-D Copyright © 2011 Pearson Education, Inc. Slide 4-7 Loan Amortization Example $7500 Loan at 9% APR, 120 Payments of $95.01 each

8. 4-D How much can you afford to borrow? Copyright © 2011 Pearson Education, Inc. Slide 4-8 Knowing what you can afford for a monthly payment, solve for P in the Loan Payment Formula, which then becomes Then plug in the terms of the loan ( APR, n, Y ) and calculate P

9. 4-D Copyright © 2011 Pearson Education, Inc. Slide 4-9 Credit cards differ from installment loans in that you are not required to pay off your balance in any set period of time. Credit Cards A minimum monthly payment is required. The minimum monthly payment generally covers all the interest but very little principal. It takes a very long time to pay off a credit card loan if only the minimum payments are made.

10. 4-D Copyright © 2011 Pearson Education, Inc. Slide 4-10 Credit Card Debt Example: You have a credit card balance of $2700 with an annual interest rate of 23%. How much will you need to pay each month in order to pay off your balance over 1 year? Solution: You must pay how much per month to pay off the balance in 1 year?

11. 4-D Copyright © 2011 Pearson Education, Inc. Slide 4-11 Credit Card Debt Example: You have a credit card balance of $2700 with an annual interest rate of 23%. How much will you need to pay each month in order to pay off your balance over 1 year? Solution: You must pay $254.01 per month to pay off the balance in 1 year.

12. 4-D Copyright © 2011 Pearson Education, Inc. Slide 4-12 Mortgages A home mortgage is an installment loan designed specifically to finance a home. The down payment (if required) is the amount of money you must pay up front in order to be given a mortgage or other loan. Closing costs are fees you must pay in order to be given the loan.

13. 4-D Closing Costs Closing costs may include (but are not limited to): Direct Costs Tax service fees Underwriting fees Interest from date of closing to date of first loan payment Document preparation and notary fees Title insurance Recording fees Loan origination fees charged as points where each point is 1% of the loan amount epw Oct. 2014 Slide 4-13

14. 4-D Closing Costs (cont’d) Closing costs can vary greatly from lender to lender Can be a factor in the total cost of the loan, especially as an amount that has to be paid up front, before even any loan payments epw Oct. 2014 Slide 4-14

15. 4-D epw Oct. 2014 Slide 4-15 Mortgages A fixed rate mortgage is one in which the interest rate is guaranteed not to change over the life of the loan. An adjustable rate mortgage is one where the interest rate changes based on the prevailing rates.

16. 4-D Mortgage Example Property selling price = $250,000 Down payment of 10% Loan Amount? APR of 5.625% Term of 25 years Monthly Payment? 1½ Points Closing Costs (before points) of $3,000 Closing Costs (including points)? epw Oct. 2014 Slide 4-16

17. 4-D Mortgage Example (cont’d) Property selling price = $250,000 Down payment of 10% Loan Amount = $250,000 - $25,000 = $225,000 APR of 5.625% Term of 25 years Monthly Payment? 1½ Points Closing Costs (before points) of $3,000 Closing Costs (including points)? epw Oct. 2014 Slide 4-17

18. 4-D Mortgage Example (cont’d) Property selling price = $250,000 Down payment of 10% Loan Amount = $250,000 - $25,000 = $225,000 APR of 5.625% Term of 25 years Monthly Payment = $1398.54 1½ Points Closing Costs (before points) of $3,000 Closing Costs (including points)? epw Oct. 2014 Slide 4-18

19. 4-D Mortgage Example (cont’d) Property selling price = $250,000 Down payment of 10% Loan Amount = $250,000 - $25,000 = $225,000 APR of 5.625% Term of 25 years Monthly Payment = $1398.54 1½ Points = $3375 Closing Costs (before points) of $3,000 Closing Costs (including points)? epw Oct. 2014 Slide 4-19

20. 4-D Mortgage Example (cont’d) Property selling price = $250,000 Down payment of 10% Loan Amount = $250,000 - $25,000 = $225,000 APR of 5.625% Term of 25 years Monthly Payment = $1398.54 1½ Points = $3375 Closing Costs (before points) of $3,000 Closing Costs (including points) = $6375 epw Oct. 2014 Slide 4-20

21. 4-D Mortgage Example (cont’d) Loan (Mortgage) Amount = $225,000 Term of 25 years Monthly Payment = $1398.54 25 years x 12 payments/year = 300 payments epw Oct. 2014 Slide 4-21

22. 4-D Mortgage Example (cont’d) Loan (Mortgage) Amount = $225,000 Term of 25 years Monthly Payment = $1398.54 25 years x 12 payments/year = 300 payments 300 payments x $1398.54/payment = $419,562 epw Oct. 2014 Slide 4-22

23. 4-D Mortgage Example (cont’d) Loan (Mortgage) Amount = $225,000 Term of 25 years Monthly Payment = $1398.54 25 years x 12 payments/year = 300 payments 300 payments x $1398.54/payment = $419,562 Interest Paid? epw Oct. 2014 Slide 4-23

24. 4-D Mortgage Example (cont’d) Loan (Mortgage) Amount = $225,000 Term of 25 years Monthly Payment = $1398.54 25 years x 12 payments/year = 300 payments 300 payments x $1398.54/payment = $419,562 Interest Paid = $419,562 - $225,000 = $194,562 epw Oct. 2014 Slide 4-24

25. 4-D Mortgage Example (cont’d) Loan (Mortgage) Amount = $225,000 Term of 25 years Monthly Payment = $1398.54 25 years x 12 payments/year = 300 payments 300 payments x $1398.54/payment = $419,562 Interest Paid = $419,562 - $225,000 = $194,562 Total Paid? epw Oct. 2014 Slide 4-25

26. 4-D Mortgage Example (cont’d) Loan (Mortgage) Amount = $225,000 Term of 25 years Monthly Payment = $1398.54 25 years x 12 payments/year = 300 payments 300 payments x $1398.54/payment = $419,562 Interest Paid = $419,562 - $225,000 = $194,562 Total Paid = $22,500 + $6,375 + $419,562 = $448,437 epw Oct. 2014 Slide 4-26

27. 4-D Copyright © 2011 Pearson Education, Inc. Slide 4-27 Portions of monthly payments going to principal and interest over the life of a 30-year $100,000 loan at 8% The Relationship Between Principal and Interest for a Payment