1. Chapter 15 Mortgage Calculations and Decisions
REAL ESTATE
FIN 331

2. SEVEN vital features of a mortgage
Principal amount (PV)
Term to maturity (N)
Interest rate (I/Y or I%)
Monthly payment (PMT)
Amortization schedule (BA-II+ > Amort,
TI-83/83: bal, SPrn, SInt)
Points (based on Loan Amount)
Financing Costs (Fees)

3. basic mortgage computations
Using the Texas Instrument BA II Plus financial calculator
Mortgage calculations require 4 of the six basic functions
Number of payments (N)
Interest rate per year (I/Y) (P/Y must be set to 12 for a standard mortgage)
Loan amount (PV: present value equals about the loan)
Monthly payment (PMT)
Value of the mortgage at maturity (FV)
Compute (CPT)

4. basic mortgage computations BA-II Plus
B. Example: $200, % for 30 years, 1.5 points, $2000 closing costs.
Points to Lender: .015 * 200,000 = $3,000
Loan Origination Fees: $
Total Costs: $5,000 ($ $2000)
Net Loan proceeds to Borrower: 195,000
C. Computing Monthly P&I
1. N=360, I/Y = 4.5%, PV = 200,000
2. CPT PMT: $

5. basic mortgage computations
D. Preparing the Amortization Schedule
Using the AMORTization function (a second function of the PV key)
Set the P1 and P2 values to 1: P1 = 1 [], P2 = 1
Press the down key []
Read the BALance
Read the PRiNcipal
Read the INTerest
press the compute key (CPT): P1 and P2 values will increment to the next payment
repeat steps starting with “3”

6. basic mortgage computations TI-83/84
Using the Texas Instrument TI-83 / 84 [financial] calculator
APPS – [ENTER]
1:Finance [ENTER]
1: TVM Solver [ENTER]
N = 360 [ENTER]
I% = 4.50 [ENTER]
PV = [ENTER] (cursor to PMT line)
[ALPHA] – [ENTER]
PMT =

7. basic mortgage computations TI-83/84
Preparing an Amortization Schedule
APPS – Finance [ENTER]
Cursor down to 9: bal( [ENTER]
Bal(1) [ENTER]:
Cursor down to 0: SPrn( [ENTER]
SPrn(1,1) [ENTER]:
Cursor down to 0: SInt( [ENTER]
SInt(1,1) [ENTER]:

8. basic mortgage computations TI-83/84
The amortization schedule is incremented based on the values entered inside the parens:
Bal(2), SPrn(2,2), SInt(2,2), etc. etc.
If you want to do a range of payments, say 1 through 12:
Bal(12), SPrn(1,12), Sint(1,12) (note the “bal” value is for the last payment in the range.

9. Effective Borrowing Costs
Loan Origination Fees: up-front expenses incurred by borrower but not paid to lender:
Mortgage insurance premium
Taxes on the loan
Lender’s title insurance
Appraisal
Survey

10. Effective Borrowing Costs
B. Effect of Loan Fees:
Borrower net less at loan closing than lender’s actual net disbursement to borrower
Result?
EBC > lender’s yield
C. Compute EBC to Borrower
N=360, PV = 195,000, PMT = 1,013.37
CPT I/Y = % (vs 4.5% quoted rate)
D. Compute Lender’s Yield (IRR)
N=360, PV = 197,000, PMT = -1,013.37
CPT I/Y = %

12. Lender’s Yield, EBC Example 2
15 year mortgage, $160,000 $2000 in points, $2000 loan origination expense.
N= 180, I/Y = 4.5, PV = 160,000: CPT PMT
Compute monthly PMT: $-1,223.99
Compute Lenders Yield: PV = 158,000
CPT I/Y = %
3. Compute Effective Borrowing Costs
PV = 156,000, CPT I/Y = %

13. Truth in Lending Act (FILA)
Federal Truth in Lending Act requires disclosure of annual percentage rate (APR) on virtually all home mortgage loans
APR: Yield to maturity, after adjusting for:
All loan finance charges
All compensation to originating brokers
All other charges controlled by lender
Premiums for any required insurance
What inadequacy might you see in the APR as a measure of true borrowing cost?

14. Effects of Loan Prepayment
Suppose the previous loan is prepaid in 7 years. What are the effects on Lenders Yield and the EBC for Borrower?
Loan Balance after 84 payments (7 * 12)
AMORT: P1=84, P2=84: Bal = 98,524.09
Lender’s Yield: N = 84, PV = 158,000, FV = (paying off loan balance. CPT I/Y = 4.75%
EBC: PV = 156,000, CPT I/Y = 5.01%
Bottom line: Prepayment actually increases Lender’s Yield and also EBC of loan.

15. TI-83 Procedure APPS: 1: Finance, press ENTER key
1: TVM Solver, press ENTER key
Set Values: N = 180, I% = 4.5%, PV =
Cursor to PMT, press ALPHA key, the ENTER key: PMT =
Compute Lender’s Yield: PV = , cursor to I%, press ALPHA key, the ENTER key: I% = 4.69%
Compute EBC: PV = , cursor to I%, press ALPHA key, the ENTER key: I%=4.88

16. TI-83 Procedure B. Effects of Prepayment: Lender’s Yield
APPS, cursor up to 9bal(, press ENTER, enter 84), press ENTER, bal(84)
APPS, ENTER, ENTER: Set N = 84, PV = , FV = , cursor to I%, ALPHA ENTER, I% = 4.75
C. Effect of Prepayment: EBC
1. PV = , cursor to i%, ALPHA, ENTER, I%= 5.01

17. Effects of Additional Principal
What happens when we add $100 to the monthly payment?
PMT = , solve N =
Lender’s Yield: I% = 4.71% (vs. 4.75%)
EBC: PV = , I% = 4.92% (vs. 5.01%)

18. Effects of Balloon Payments
15 year, 4.5% mortgage, with a $40,000 balloon payment (a partially amortized mortgage) with $1600 in points and $800 in losing fees.
N=180, I/Y= 4.50, PV = 160,000: FV = -40,000 PMT = $1,067.99
Lenders Yield: 4.63%
EBC = 4.70%
Total Pmt.: $232, →S Int = $72,238.55
“Standard” Mortgage: S Int = $60,318.07

19. Adjustable Rate Mortgage
Worst Case: 1-year ARM, 30-year term
$100,000 3%: PMT = $421.60
Bal(12) = $97,912.24
Reset interest rate after first year to 4%:
N = 348, I/Y = 4.00, PV = , PMT = $475.83
4. Bal(12) = $96,085.52
5. Reset interest rate after second year to 5%:
N = 336, I/Y = 5.00, PV = , PMT = $531.90
B. If life-time cap = 5% - what can PMT rise to if rates go up 1% every year? $707.89

20. Some Cost Saving Strategies
If you don’t plan to stay very long
Find a mortgage deal with the smallest points (preferably none) and fees – which may result is a slightly higher rate.
If you plan to stay for a long period of time, consider larger down payment or consider paying points to lower the contract interest rate.

21. homework assignment
Key terms: Annual Percentage Rate (APR), Discount points, Amortization
Study Questions: 1, 2, 6, 7, 10, 16
Calculate the original loan size of a fixed-payment mortgage if the monthly payment is $1,146.78, the annual interest is 8.0%, and the original loan term is 15 years.
For a loan of $100,000, at 7 percent annual interest for 30 years, find the balance at the end of 4 years and 15 years assuming monthly payments.

22. homework assignment
6. Give some examples of up-front financing costs associated with residential mortgages. What rule can one apply to determine if a settlement (closing) cost should be included in the calculation of the effective borrowing costs?
7. A homeowner is attempting to decide between a 15-year mortgage loan at 5.5 percent and a 30-year loan at 5.90 percent. Assume the up-front costs of the two alternatives are equal. What would you advise? What would you advise if the borrower also has a large amount of credit card debt outstanding at a rate of 15 percent?

23. homework assignment 10. Assume the following: Loan Amount: $100,000
Interest rate: 10 percent annually
Term: 15 years, monthly payments
a. What is the monthly payment?
b. What will be the loan balance at the end of nine years?
c. What is the effective borrowing cost on the loan if the lender charges 3 points at origination and the loan goes to maturity?
d. What is the effective borrowing cost on the loan if the lender charges 3 points at origination and the loan is prepaid at the end of year 9?

24. homework assignment
16. Assume that you have purchased a home and can qualify for a $200,000 loan. You have narrowed your mortgage search to the following two options:
Mortgage A
Loan term: 30 years
Annual interest rate: 6 percent
Monthly payments
Up-front financing costs: $5,000
Discount points: 3

25. homework assignment
Mortgage B Loan term: 15-years Annual interest rate: 5.5 percent Monthly payments Up-front financing costs: $7,000 Discount points: 3 Based on the effective borrowing cost, which loan would you choose?