THE COST OF HOME OWNERSHIP Chapter Eighteen Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

LU 18-1: Types of Mortgages and the Monthly Mortgage Payment LEARNING UNIT OBJECTIVES LU 18-2: 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 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.

TYPES OF MORTGAGES AVAILABLE 18-3

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 (by formula)? 18-4 PMT = PV(i) 1 – 1 (1 + i) N = $160,000(.0075) 1 – 1 ( ) 360 = $1,200 1 – = $1, = $1,287.40

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 (by financial calculator)? N 9/12 = I/Y 160,000 PV 0 FV CPT PMT -1,287.40

WHAT IS THE TOTAL COST OF INTEREST? 18-6 Total cost of interest = Total of all monthly payments – Amount of mortgage $303,464 = $463,464 - $160,000 ($1, x 360)

EFFECT OF INTEREST RATES ON MONTHLY PAYMENTS (TABLE 18.1) 18-7

HIDDEN COST IN PURCHASING A HOME Closing Costs - Escrow Amount - Repairs and Maintenance - Cost associated with the passing of property from the seller to buyer. Include: credit reports, recording costs, lawyer’s fees, title search, points, etc. A point is a one-time charge that is a percent of the mortgage. Two points means 2% of the mortgage. 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. The cost of keeping the property up. Includes: paint, wallpaper, landscaping, plumbing, electrical expenses, etc PMI Insurance (Private Mortgage Insurance) – required if you do not have 20% down payment. As soon as you reach 20% equity, you must petition to have PMI removed.

Step 2. Calculate the amount used to reduce the principal: Principal reduction = Monthly payment -- Interest (Step 1) $87.40 = $1, $1,200 Step 3. Calculate the new principal: Current principal -- Reduction of principal (Step 2) = New principal $160, $87.40 = $159, Step 1. Calculate the interest for a month (use current principal): Interest = Principal x Rate x Time $1,200 = $160,000 x.09 x 1/12 CALCULATING INTEREST, PRINCIPAL, AND NEW BALANCE OF MONTHLY PAYMENT 18-9

Step 2. Principal reduction = Monthly payment -- Interest (Step 1) $1, $1, = $88.06 principal reduction Step 3. Current principal -- Reduction of principal (Step 2) = New principal $159, $88.06 = $159, new principal Step 1. Interest = Principal x Rate x Time $159, x.09 x 1/12 = $1, interest CALCULATING INTEREST, PRINCIPAL, AND NEW BALANCE OF MONTHLY PAYMENT 2nd Month 18-10

CALCULATING TOTAL INTEREST USING A FINANCIAL CALCULATOR N 9/12 = I/Y 160,000 PV 0 FV CPT PMT -1, Calculate the monthly payment. Don’t clear the register. You may also use the financial calculator to compute the total interest of a mortgage or loan. Step 1. Press 2 ND [AMORT] 2 ND [CLR WORK]; P1 = 1 appears Step 2. Use the down arrow to get to the P2 register. Press 360 ENTER Step 3. Use the down arrow to see the BAL, PRN, and INT. INT shows total interest for the mortgage: - 303,462.63

PARTIAL AMORTIZATION SCHEDULE (TABLE 18.2) 18-12