1. M IDTERM R EVIEW M ORTGAGES

2. P OSSIBILITIES Regular Mortgage Mortgage with Points Mortgage with Ballon Mortgage with Ballon and Points

3. R EGULAR M ORTGAGE Number of period must be calculated which is usually the number of years multiplied by the compounding frequency. For most mortgages. For most mortgages we multiple years by 12 months. The stated interest rate is usually an APR, so in order to use Excel functions, the APR must be divided by the compounding frequency which in this case is 12 months. The amount borrowed gives us the present value. The loan is usually amortized so the future value is zero.

4. M ORTGAGE WITH B ALLOON 1.Calculate the payments using the regular, fully amortized mortgage. 2.Change the number of periods so it corresponds to when the balloon payment must occur. 3.The balloon is calculated as the future value with the new number of periods.

5. M ORTGAGE WITH P OINTS 1.Calculate the payments using the regular, fully amortized mortgage 2.Change the present value so that it reflects the amount received from the lender rather than the amount that is owed 3.Calculate the new interest rate 4.Convert the new rate into and APR and EAR

6. M ORTGAGE WITH P OINTS AND B ALLOON 1.Calculate the payments using the regular, fully amortized mortgage. 2.Change the number of periods so it corresponds to when the balloon payment must occur. 3.The balloon is calculated as the future value with the new number of periods. 4.Change the present value so that it reflects the amount received from the lender rather than the amount that is owed. 5.Calculate the new interest rate. 6.Convert the new rate into and APR and EAR.

7. B ALLOON P AYMENT M ORTGAGE You need a 30-year, fixed-rate mortgage to buy a new home for $240,000. Your mortgage bank will lend you the money at an APR of 5.25 percent for this 360- month loan. However, you can afford monthly payments of only $975, so you offer to pay off any remaining loan balance at the end of the loan in the form of a single balloon payment. How large will this balloon payment have to be for you to keep your monthly payments at $975?

8. S OLVE FOR FV WHICH IS THE B ALLOON S INCE A LL O THER I NFORMATION I S G IVEN

9. N EGATIVE A MORTIZATION M ORTGAGE This loan has a negative amortization which means that the borrower isn’t even paying all of the interest each month. The extra interest is simply added to the principle which increases from $240,000 to $305.385.86 over the life of the loan. Interest only payments would be $1,050 per month. This shows that the borrower’s payment of $975 doesn’t pay all of the interest. Fully amortized payments total $1,325.29 per month. The $975 payment is well below the amortized payment.

10. M ORTGAGE W ITH P OINTS You are buying a house and will borrow $200,000 on a 30- year fixed rate mortgage with monthly payments to finance the purchase. Your loan officer has offered you a mortgage with an APR of 4 percent. Alternatively, she tells you that you can “buy down” the interest rate to 3.75 percent if you pay points up front on the loan. A point on a loan is 1 percent (one percentage point) of the loan value. How many points, at most, would you be willing to pay to buy down the interest rate?

11. A LTERNATIVES 1.Discount the borrowed amount 2.Calculate the borrowed amount so that the borrower received the amount needed to buy the home.

12. T HE F IRST S TEP I S TO C ALCULATE P AYMENTS B ASED ON L OAN A MOUNT OF $200,000

13. A MOUNT A CTUALLY R ECEIVED FROM L ENDER WHEN THE B ORROW P AYS P OINTS Points are percentage that the loan amount is discounted. The amount received from the lender is: For 1 point, the borrower receives $198,000 For 2 points, the borrower receives $196,000 For 3 points, the borrower receives $194,000

14. C ALCULATION OF THE APR FOR 1 P OINT IS: 3.83%

15. C ALCULATION OF THE APR FOR 2 P OINT IS: 3.92%

16. C ALCULATION OF THE APR FOR 4 P OINT IS: 4.0%

17. C ALCULATE THE A MOUNT OF THE L OAN Points are percentage that the loan amount is discounted. The amount of the loan is given by In order to receive $200,000 to buy the home For 1 point, the borrower’s loan amount is $202,000 For 2 points, the borrower receives $204,081.63 For 3 points, the borrower receives $206,185.57 This requires calculating three different payments and then recalculating the rates.

18. E FFECTIVE R ATE FOR 1 P OINT : 3.83%

19. E FFECTIVE R ATE FOR 2 P OINT : 3.92%

20. E FFECTIVE R ATE FOR 3 P OINTS : 4.00%