Chapter 15 - The cost of home ownership. After you have mastered the material in this chapter, you will be able to: 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.
Chapter 15 The Cost of Home Ownership McGrawHill/Irwin ©2011 The McGrawHill Companies, All Rights Reserved #15 The Cost of Home Ownership Learning Unit Objectives Types of Mortgages and the Monthly LU15.1 Mortgage Payment 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 152 #15 The Cost of Home Ownership Learning Unit Objectives Amortization Schedule Breaking LU15.2 Down the Monthly Payment Calculate and identify the interest and principal portion of each monthly payment Prepare an amortization schedule 153 Table 15.1 Amortization Chart (PARTIAL) (Mortgage principal and interest per $1,000) Terms in years 10 12 15 17 20 22 25 30 35 154 5.50% 10.86 9.51 8.18 7.56 6.88 6.51 6.15 5.68 5.38 6.00% 11.11 9.76 8.44 7.84 7.17 6.82 6.45 6.00 5.71 6.50% 11.36 10.02 8.72 8.12 7.46 7.13 6.76 6.33 6.05 7.00% 11.62 10.29 8.99 8.40 7.76 7.44 7.07 6.66 6.39 7.50% 11.88 10.56 9.28 8.69 8.06 7.75 7.39 7.00 6.75 8.00% 12.14 10.83 9.56 8.99 8.37 8.07 7.72 7.34 7.11 8.50% 12.40 11.11 9.85 9.29 8.68 8.39 8.06 7.69 7.47 9.00% 12.67 11.39 10.15 9.59 9.00 8.72 8.40 8.05 7.84 Computing the Monthly Payment for Principal and Interest 155 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? Computing Monthly Payment by Using an Amortization Chart Step 3. Multiply Step 1 by the factor in Step 2 $160 x $8.05 = $1,288.00 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 1. Divide the amount of the mortgage by $1,000 $160,000 = $160 $1,000 156 Computing the Monthly Payment for Principal and Interest $160,000 = 160 x $8.05 (table rate) = $1,288.00 $1,000 Monthly Payment Total payments Mortgage Total interest $463,680 $160,000 = $303,680 ($1,288.00 x 360) 157 Table 15.2 Effect of Interest Rates on Monthly Payments Monthly payment 9% 11% Difference $1,288.00 $1,524.80 $236.80 (160 x $8.05) Total cost of interest $303,680 (160 x $9.53) $388,828 ($1,288.00 x 360) $160,000 ($1,524.80 x 360) $160,000 158 $85,248 ($236.80 x 360) The Effect of Loan Types on Monthly Payments Suppose Gary chose a 15year mortgage vs. a 30year mortgage. What would be the effect? 15 Year 30 Year Difference Monthly Payment $1,624.00 $1,288.00 $336.00 Total Interest $100,912 $303,680 ($1,624.00 x 180) $140,000 ($202,768) ($1,288.00 x 360) $160,000 159 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 onetime 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 1510 Calculating Interest, Principal, and New Balance of Monthly Payment Step 3. Calculate the new principal: Current principal Reduction of principal (Step 2) = New Principal $160,000 $88.00 = $159,912.00 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 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 1511 Calculating Interest, Principal, and New Balance of Monthly Payment 2nd Month Step 3. Current Principal Reduction of principal (Step 2) = New Principal $159,912.00 $88.66 = $159,823.34 Step 2. Principal reduction = Monthly payment Interest (Step 1.) $1,288.00 $1,199.34 = $88.66 Step 1. Interest = Principal x Rate x Time $159,912.00 x .09 x 1/12 = $1,199.34 1512 Table 15.3 Partial Amortization Schedule Payment Principal number (current) Principal Balance of Interest reduction principal $1.200.00 $160,000 $88.00 $159,912.00 ($160,000 x .09 x 1/12) ($1,288.60 – 1,200) ($160,000 $88.00) $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) 1513 $159,823.34 $1,198.68 $89.32 $159,734.02 $159,734.02 $1,198.01 $89.99 $159,644.03 $159,644.03 $1,197.33 $90.67 $159,553.36 ... ( $159 ,912 x .09 x 1/12) ($1,288 – 1,199.34) ( $159 ,912 $88.66) 15 13 $159 ,823.34 $1,198.68 $89.32 $159 ,734.02 $159 ,734.02 $1,198.01 $89.99 $159 ,644.03 $159 ,644.03... Prepare an amortization schedule 15 3 Table 15. 1 Amortization Chart (PARTIAL) (Mortgage principal and interest per $1,000) Terms in years 10 12 15 17 20 22 25 30 35 15 4 5.50% 10.86 9.51 8.18 7.56 6.88 6.51 6 .15 5.68... $88.00 $159 ,912.00 ($160,000 x .09 x 1/12) ($1,288.60 – 1,200) ($160,000 $88.00) $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)