THE COST OF HOME
OWNERSHIP
McGraw-Hill/Irwin
Chapter Fifteen
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
LEARNING UNIT OBJECTIVES
LU 15-1: Types of Mortgages and the Monthly Mortgage Payment
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.
LU 15-2: Amortization Schedule -- Breaking Down the Monthly Payment
1.
Calculate and identify the interest and principal portion of
each monthly payment.
2.
Prepare an amortization schedule.
15-2
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
15-3
AMORTIZATION CHART
(TABLE 15.1) (PARTIAL)
(Mortgage principal and interest per $1,000)
Terms
in years
10
12
15
17
20
22
25
30
35
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
15-4
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?
15-5
COMPUTING MONTHLY PAYMENT BY USING
AN AMORTIZATION CHART
Step 1. Divide the amount of the mortgage by $1,000.
$160,000 = $160
$1,000
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
15-6
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
Mortgage
$463,680
-($1,288.00 x 360)
$160,000 =
Total interest
$303,680
15-7
EFFECT OF INTEREST RATES ON
MONTHLY PAYMENTS (TABLE 15.2)
15-8
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)
15-9
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.
15-10
CALCULATING INTEREST, PRINCIPAL, AND
NEW BALANCE OF MONTHLY PAYMENT
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
Step 2. Calculate the amount used to reduce the principal:
Principal reduction = Monthly payment -- Interest (Step 1)
$88.00
=
$1,288.00
--
$1,200.00
Step 3. Calculate the new principal:
Current principal -- Reduction of principal (Step 2) = New principal
$160,000
--
$88.00
= $159,912.00
15-11
CALCULATING INTEREST, PRINCIPAL, AND
NEW BALANCE OF MONTHLY PAYMENT
2nd Month
Step 1. Interest = Principal x Rate x Time
$159,912.00 x .09 x 1/12 = $1,199.34 interest
Step 2. Principal reduction = Monthly payment -- Interest (Step 1)
$1,288.00 - $1,199.34 = $88.66 principal reduction
Step 3. Current principal -- Reduction of principal (Step 2) = New principal
$159,912.00
--
$88.66
=
$159,823.34 new principal
15-12
PARTIAL AMORTIZATION SCHEDULE
(TABLE 15.3)
15-13