MA40MC
Personal Finance Lesson 3 Mortgage Payments
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LESSON 3
Mortgage Payments
Learning Outcomes
o Be able to define the terms involved in mortgages
o Be able to determine monthly mortgage payments
1. Using the glossary included in this package, define the following terms:
a. principal
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b. interest
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http://www.rbcroyalbank.com/products/mortgages/mortgage-glossary.html
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Personal Finance Lesson 3 Mortgage Payments
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c. mortgage payment
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d. amortization period
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e. term
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http://www.rbcroyalbank.com/products/mortgages/mortgage-glossary.html
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Personal Finance Lesson 3 Mortgage Payments
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f. equity
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g. closed mortgage
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h. open mortgage
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Personal Finance Lesson 3 Mortgage Payments
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i. convertible mortgage
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j. fixed rate mortgage
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k. variable rate mortgage
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http://www.rbcroyalbank.com/products/mortgages/mortgage-glossary.html
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Personal Finance Lesson 3 Mortgage Payments
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2.
a. The lower the interest rate, the less interest a consumer will pay on
his/her mortgage. Therefore, the cost of the mortgage will
____________________.
(increase, decrease)
The higher the interest rate, the greater the interest a consumer will pay
on his/her mortgage. Therefore, the cost of the mortgage will
____________________.
(increase, decrease)
b. Generally, the shorter the term, the higher the interest rate. Therefore,
the cost of the mortgage will ____________________.
(increase, decrease)
In general, the greater the term the higher the interest rate. Therefore, the
cost of the mortgage will ____________________.
(increase, decrease)
c. The shorter the amortization period, the less interest a consumer will
pay on his/her mortgage. Therefore, the cost of the mortgage will
____________________.
(increase, decrease)
The greater the amortization period, the greater the interest a consumer
will pay on his/her mortgage. Therefore, the cost of the mortgage will
____________________.
(increase, decrease)
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Personal Finance Lesson 3 Mortgage Payments
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d. The greater the payment frequency, the less interest a consumer will
pay on his/her mortgage. Therefore, the cost of the mortgage will
____________________
(increase, decrease)
The lower the payment frequency, the more interest a consumer will pay in
his/her mortgage. Therefore, the cost of the mortgage will
____________________
(increase, decrease)
e. The greater the prepayments, the less interest a consumer will pay on
his/her mortgage. Therefore, the cost of the mortgage will
____________________
(increase, decrease)
The lower the prepayments, the more interest a consumer will pay on
his/her mortgage. Therefore, the cost of the mortgage will
____________________
(increase, decrease)
f. Explain two ways you could reduce the amount of interest you pay on a
mortgage.
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http://www.rbcroyalbank.com/products/mortgages/mortgage-glossary.html
MA40MC
Personal Finance Lesson 3 Mortgage Payments
3.
BALANCE OWING (MORTGAGE) = PURCHASE PRICE – DOWN PAYMENT
Calculate the balance owing (mortgage) for the following:
a.
purchase price: $90,000
down payment: $20,000
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b.
purchase price: $75,000
down payment: $10,000
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c.
purchase price: $75,000
down payment: $30,000
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Personal Finance Lesson 3 Mortgage Payments
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4. Using Chart 1-10, calculate the monthly payments for each of the following
fixed rate mortgages. The first one is done for you.
a. $50,000 mortgage, at 7.25% amortized over 15 years.
Answer: Look up the interest rate and the length of mortgage in Chart 1-10. You
will see that they intersect at $9.07. That value is for $1000 worth of mortgage. In
this example, the mortgage is $50,000, fifty times as much.
So . . . $9.07 X $50,000 ÷ 1000 = $453.50
b. $35,000 mortgage, at 6.5% amortized over 15 years.
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c. $70,000 mortgage, at 8% amortized over 10 years.
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Personal Finance Lesson 3 Mortgage Payments
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d. $15,000 mortgage, at 6.25% amortized over 20 years.
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e. $100,000 mortgage, at 7.75% amortized over 25 years.
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http://www.rbcroyalbank.com/products/mortgages/mortgage-glossary.html
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Personal Finance Lesson 3 Mortgage Payments
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5. Determine the following monthly mortgage payments. The first one is done for
you.
a.
purchase price:
down payment:
interest rate:
amortization:
$90,000
$20,000
7.25%
10 years
i} balance owing (mortgage) = purchase price – down payment
= $90,000 - $20,000
= $70,000
ii} Use Chart 1-10 to look up interest rate and amortization to find the monthly
payment for a $1000 mortgage. It is $11.68. This mortgage is for $70,000.
monthly mortgage payment = $11.68 X $70,000 ÷ $1000
monthly mortgage payment = $817.60
b.
purchase price:
down payment:
interest rate:
amortization:
$90,000
$20,000
7.25%
25 years
i} balance owing (mortgage) = purchase price – down payment
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ii} Use Chart 1-10 to look up interest rate and amortization to find the monthly
payment for a $1000 mortgage. It is $
.
monthly mortgage payment = $
X$
÷ $1000
monthly mortgage payment = $
.
http://www.rbcroyalbank.com/products/mortgages/mortgage-glossary.html
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Personal Finance Lesson 3 Mortgage Payments
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c.
purchase price:
down payment:
interest rate:
amortization:
$75,000
$10,000
7.75%
20 years
i} _________________________________________________________________
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ii} _________________________________________________________________
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d.
purchase price:
down payment:
interest rate:
amortization:
$75,000
$30,000
7.75%
20 years
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http://www.rbcroyalbank.com/products/mortgages/mortgage-glossary.html
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Personal Finance Lesson 3 Mortgage Payments
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Lesson Three
MORTGAGE GLOSSARY
Amortization Period
Number of years it takes to repay the entire amount of the mortgage.
Anniversary Period
Your anniversary period is the 12 month period that starts each year on your mortgage interest adjustment date or, if you
have renewed or amended your mortgage, the effective date of your renewal or amendment.
Appraisal
A process undertaken by an independent appraiser hired by the bank to determine the value of the property and whether it
meets lending criteria. This value may or may not match the purchase price of the home.
Closed Mortgage
A mortgage which cannot be prepaid, renegotiated or refinanced prior to the expiry of the term, except with compensation
or breakage costs.
Closing Costs
Costs which are payable when the sale is closed. Standard closing costs include adjustments for prepayments of taxes,
utilities and condominium common expenses, if any, made by the vendor; property land transfer taxes; property insurance;
and legal/notarial fees.
Conditional Offer
An offer to purchase subject to specified conditions. These conditions could include the arranging of satisfactory mortgage
financing, a satisfactory inspection or the selling of a present home. A time limit in which the specified conditions must be
met should be stipulated in the offer to purchase.
Conventional Mortgage
A first mortgage — the principal amount of which cannot exceed 80% of the lesser of the appraised value of the property
or the purchase price for the property.
Contractor
An individual responsible for having all the work described in the contract carried out. The contractor is responsible for
having the appropriate insurances, for paying the suppliers and workers, and for supervising the quality of all work
performed.
Convertible Mortgage
A fixed-rate mortgage which offers the same security as a closed mortgage, but which can be converted to a longer, closed
mortgage at any time without penalty.
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Personal Finance Lesson 3 Mortgage Payments
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Easement
The right acquired for access to or over another person's property for a specific purpose, such as for a driveway or public
utilities. This is referred to as "servitude" in the Province of Quebec.
Equity
The interest the owner holds in a property over and above all claims to the property. It is usually the difference between
any outstanding mortgages and the market value of the property.
Fire and Property Insurance
Before closing date, the purchaser must have fire and property insurance arranged and in effect. Evidence of the insurance
is required by the mortgage lender prior to advancing mortgage funds.
Fixed-rate Mortgage
The interest rate on a fixed-rate mortgage is set for a pre-determined term - usually between 6 months and 25 years - and
cannot be renegotiated, except upon payment of breakage costs. Interest is calculated semi-annually, not in advance.
Foreclosure
A legal procedure whereby the lender obtains ownership of the property following default by the borrower by terminating
all of the borrower's rights in the property covered by the mortgage.
Inspection
The examination of the house for structural and other defects by an expert selected by the buyer.
Interest
The rate of return the lender receives for permitting the borrower to use the mortgage money for a specified term. The
interest rate is usually expressed as an annual percentage rate, calculated semi-annually, not in advance.
Mortgage Default Insurance
This insurance is mandatory for borrowers with a down payment of less than 20%.
Mortgage Life Insurance
Insurance under which the benefits are used to pay off the balance due on a mortgage upon the death of the insured
borrower. The intent is to protect survivors from losing their homes.
Mortgage Payment
The total amount paid, per month by a borrower, which includes principal and interest. Sometimes a mortgage payment
can include taxes and insurance.
Mortgagee
A lender who advances a mortgage to a borrower, where repayment of the loan is secured by a charge on real property.
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Personal Finance Lesson 3 Mortgage Payments
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Mortgagor
A borrower who gives title to, or a charge on, real property to a mortgagee to secure repayment of a mortgage loan.
Offer to Purchase
A written contract setting forth the terms under which the buyer agrees to purchase a property. Upon acceptance by the
seller, it forms a contract which determines the rights and obligations of the buyer and seller concerning the purchase and
sale. It includes the legal and/or municipal description (this may consist of lot numbers as well as street address), purchase
price, closing date, mortgage and terms of repayment, and lists specific items included or excluded from the sale.
Open Mortgage
A mortgage which can be prepaid at any time prior to maturity, without breakage costs.
Prepayment Option
The right to pay specified amounts of the principal balance prior to the maturity date of the mortgage. Breakage costs may
be payable when a prepayment option is exercised under a closed mortgage.
Principal
The amount of the loan owed to the lender at any specified time, not including interest.
Term
The length of time during which the specific mortgage agreement is effective. When the term expires, the balance of the
principal is either repaid in full or the mortgage is renegotiated at then-current market rates and conditions.
Title
Right of ownership of property, and including evidence of such ownership.
Total Debt Service Ratio
The percentage of the borrower's gross income that will be used for monthly payments of principal, interest, taxes, heating
and other outstanding loans and debts.
Variable Rate Mortgage
An interest rate on a mortgage that fluctuates according to changes in the prime lending rate. A variable rate mortgage has
payments which are fixed for the term, even though interest rates may fluctuate during that time. If interest rates go down,
more of the payment is applied to reduce the principal; if rates go up, more of the payment is applied to payment of
interest. Variable rate mortgages may be open or closed.
http://www.rbcroyalbank.com/products/mortgages/mortgage-glossary.html