Lecture Practical business math procedures (11/e) - Chapter 15: The cost of home ownership. In this chapter students 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,...
THE COST OF HOME OWNERSHIP Chapter Fifteen McGrawHill/Irwin Copyright © 2014 by The McGrawHill Companies, Inc. All rights reserved Learning unit objectives LU 15-1: Types of Mortgages and the Monthly 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 LU 15-2: Amortization Schedule Breaking Down the Monthly Payment Calculate and identify the interest and principal portion of each monthly payment Prepare an amortization schedule 152 Cost of Installment Buying Amount financed (AF) – the amount actually borrowed AF = Cash Price Down Payment Deferred payment price (DPP) – the total of all monthly payments plus the down payment DPP = Total of all + Down monthly payments payment Finance charge (FC) – Installment loan – the interest charge a loan paid off in a series of equal periodic payments Payments include interest and principal FC = Total of all monthly payments Amount financed 153 Amortization Chart (Table 15.1) (Partial) Terms in years 10 12 15 17 20 22 25 30 35 (Mortgage principal and interest per $1,000) 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 7.84 154 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? 155 Computing Monthly Payment by Using an Amortization Chart Step Divide the amount of the mortgage by $1,000 $160,000 = $160 $1,000 Step Look up the rate (9%) and the term (30 years) in the amortization chart At the intersection is the table factor $8.05 Step Multiply Step by the factor in Step $160 x $8.05 = $1,288.00 156 Computing the Monthly Payment for Principal and Interest $160,000 = 160 x $8.05 (table rate) = $1,288.00 monthly payment $1,000 Total payments interest $463,680 ($1,288.00 x 360) Mortgage $160,000 Total = $303,680 157 Effect of Interest Rates on Monthly Payments (Table 15.2) 158 The Effect of Loan Types on Monthly Payments Suppose Gary chose a 15-year mortgage versus a 30-year mortgage What would be the effect? Monthly Payment Calculations Total cost of interest 15-year $1,624.00 ($1,624.00 x 180) $140,000 = $100,912 30-year $1,288.00 ($1,288.00 x 360) $160,000 = $303,680 Differences: $336.00 ($202,768) 159 Hidden Cost in Purchasing a Home Closing Cost associated with the passing of property from the seller to Cbuyer Include: lawyer’s fees, title search, points, etc A point is oa one-time charge that is a percent of the mortgage s t A special interest bearing account in which the buyer is Escrow s Arequired to deposit 1/12 of the insurance cost and 1/12 of the m real estate taxes each month - o u Repairs and The cost of keeping the property up Includes: n Mpaint, wallpaper, landscaping, etc t a i n t e n a n 1510 Calculating Interest, Principal, and New Balance of Monthly Payment Step 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 Step Calculate the amount used to reduce the principal: Principal reduction = Monthly payment Interest (Step 1) $88.00 = $1,288.00 $1,200.00 Step Calculate the new principal: Current principal Reduction of principal (Step 2) = New principal $160,000 $88.00 = $159,912.00 1511 Calculating Interest, Principal, and New Balance of Monthly Payment 2nd Month Step Interest = Principal x Rate x Time $159,912.00 x 09 x 1/12 = $1,199.34 interest Step Principal reduction = Monthly payment Interest (Step 1) $1,288.00 - $1,199.34 = $88.66 principal reduction Step Current principal Reduction of principal (Step 2) = New principal $159,912.00 $88.66 = $159,823.34 new principal 1512 Partial Amortization Schedule (Table 15.3) 1513 ... bearing account in which the buyer is Escrow s Arequired to deposit 1/12 of the insurance cost and 1/12 of the m real estate taxes each month - o u Repairs and The cost of keeping the property up Includes:... Purchasing a Home Closing Cost associated with the passing of property from the seller to Cbuyer Include: lawyer’s fees, title search, points, etc A point is oa one-time charge that is a percent of the. .. 1 5-1 : Types of Mortgages and the Monthly Mortgage Payment List the types of mortgages available Utilize an amortization chart to compute monthly mortgage payments Calculate the total cost of