2. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved 15.1 Mortgage Payments Find the monthly mortgage payment Find the total interest on a mortgage and the PITI (Principal, Interest, Taxes, and Insurance)

3. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Key Terms A home is a type of “real” property. Real estate or real property is land plus any permanent improvements to the land. Improvements include:  Water or sewage systems  Homes or commercial buildings  Any other type of structure

4. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Mortgage: a loan in which real property is used to secure the debt. Collateral: the property that is held as security on a mortgage. Equity: the difference between the expected selling price and the balance owed on the property. Key Terms

5. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Market value: the expected selling price of a property. First mortgage: the primary mortgage on a property. Conventional mortgage: a mortgage that is not insured by a government program. Key Terms

6. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Conventional mortgages Two types include:  Fixed-rate mortgage: the rate of interest on the loan remains the same for the life of the mortgage.  Adjustable-rate mortgage: the rate of interest may fluctuate during the life of the loan depending on the prime lending rate of most banks.

7. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Mortgage payments 15-year and 30-year loans are the most common. Payments can be made monthly or on a biweekly plan, resulting in 26 payments. The biweekly plan builds equity more quickly than the monthly plan. An equity line of credit, or second mortgage, allows a homeowner to borrow against the equity in the home. It is in addition to the first mortgage.

8. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved 15.1.1 Find the Monthly Mortgage Payment The repayment of a loan in equal installments that are applied to principal and interest over a period of time is called the amortization of a loan. To calculate the monthly mortgage payment, it is customary to use a table. (See Figure 15.1 in your text)

9. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Use a per-$1,000 monthly payment table Monthly mortgage payment is equal to: Amount financed x table value $1,000

10. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Look at this example A homebuyer is purchasing a house for $87,000. The bank has approved her loan application for a 30-year fixed-rate loan at 7% annual interest. If she makes a 20% down payment, what is the monthly payment? Calculate the down payment: $87,000 x 0.20 It is $17,400 The balance to be financed would be $69,600. Divide $69,600 by $1,000 = 69.6

11. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Example (continued) Using Table 15-1, find the factor for financing a loan for 30 years at 7%. The factor is 6.65 Multiply this factor (6.65) by number of thousands (69.6). The result is $462.84 The monthly payment of $462.84 includes the principal and the interest.

12. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Try this example Joan Williams has been approved for a 30- year fixed-rate loan at 6.5%. The home that she is purchasing costs $140,000; she is going to put 20% down. Calculate her monthly payment including principal and interest using Table 15-1. $707.84

13. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Find the Monthly Mortgage Payment Using a Formula Identify the monthly rate (R) as a decimal equivalent, the number of months (N), and the loan principal (P). Substitute the values from Step 1 into the formula. (next slide)

14. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Find the Monthly Mortgage Payment Using a Formula Evaluate the formula.

15. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Try this example Find the mortgage payment for a 30-yr. fixed-rate loan of $69,600 at 7% annual interest. R =.07/12 =.0058333333; N = 360; P = 69,600; The monthly payment of $463.05 includes the principal and interest.

16. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved 15.1.2 Find the Total Interest on a Mortgage and the PITI Find the total number of payments: multiply the number of payments by the amount of the payment. Subtract the amount financed from the total of the payments.

17. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Look at this example In the example on Slide 11, the monthly payment of the principal and interest is $462.84. The buyer has a 30-year fixed mortgage. Total interest = number of payments x amount of payment – amount financed. TI = 30 x 12 x $462.84 - $69,600 TI = $166,622.40 - $69,600 The total interest on this loan is $97,022.40

18. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Try this example Joan Williams’ monthly mortgage payment is $707.84. Find the total interest on her 30- year mortgage. The amount financed is $112,000. Find the total interest on the mortgage. $142,822.40

19. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Key Terms Other costs involved in securing a mortgage include: points, attorney fees, and sales commissions among others. These are called closing costs, and are paid when the loan is made. Points: a one-time payment to the lender that is a percent of the total loan. Escrow: an account for holding the part of a monthly payment that is used to pay taxes and insurance.

20. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved PITI The adjusted monthly payment that includes the principal, interest, taxes and insurance is abbreviated “PITI.” The monthly mortgage payment that the borrower will make will include all four elements.

21. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Look at this example Our home buyer (from Slides 11 and 14) has a monthly payment of principal and interest of $462.84. If her annual insurance premium is $923 and the property taxes are $950, find the adjusted monthly payment that includes PITI. $923 + $950 = $1,873 ÷ 12 = $156.08 Add the above amount to the monthly principal and interest payment of $462.84. The adjusted monthly payment = $618.92

22. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Try this example The other homebuyer has a monthly payment of principal and interest of $707.84. If her annual insurance premium is $1,200 and her property taxes are $1,500, what would the adjusted monthly payment be? $932.84

23. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved 15.2 Amortization Schedules and Qualifying Ratios To prepare an amortization schedule of a mortgage: Step 1: For the first month, Find the interest portion of the first monthly payment = original principal x monthly interest rate. Find the principal portion of the monthly payment = monthly payment – interest portion of the first monthly payment. Find the end of month principal = original principal –principal portion of the first monthly payment.

24. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved For each remaining month in turn: Step 2 (for each remaining month) Find the interest portion of the monthly payment = previous end-of-month principal x monthly interest rate. Find the principal portion of the monthly payment = monthly payment – interest portion of the monthly payment. Find the end-of-month principal = previous end-of month principal – principal portion of the monthly payment.

25. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Look at this example From the first home buyer example, Interest = original principal x monthly rate Interest = $69,600 x 0.07/12 Interest = $406.00 Principal portion of the monthly payment = $462.84 - $406 = $56.84 End-of-month principal = $69,600 - $56.84 = $69,543.16

26. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Example (continued) Second month Interest portion = $69,543.16 x 0.07 / 12 Interest portion = $405.67 Principal portion of monthly payment = $462.84 - $405.67 = $57.17 End of month principal = $69,543.16 - $57.17 = $69,485.99 Follow the same steps for subsequent months.

27. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Try this example Joan Williams, the other homebuyer, has a monthly mortgage payment of $707.84; an original loan amount of $112,000 and a 6.5% interest rate. Calculate the first two months of an amortization schedule. First end-of-month principal =$111,898.82 Second end-of-month principal =$111,797.09

28. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved 15.1.2 Calculate Qualifying Ratios Select the formula for the desired qualifying ratio: Loan-to-value ratio = Amount mortgaged Appraised value of property Housing ratio = Total mortgage payment (PITI) Gross monthly income Debt to income ratio = Total fixed monthly expenses Gross monthly income

29. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved Try this example If Sheri has total gross monthly earnings of $5,893, and the total PITI for the loan is $1,482, calculate the housing ratio. Is the ratio acceptable compared to desired? Housing ratio = Total mortgage payment (PITI) Gross monthly income Housing ratio = $1,482 =.25 or 25% $5,893 The HR should not exceed 28%, so it is acceptable.