1. 7e Contemporary Mathematics FOR BUSINESS AND CONSUMERS Brechner PowerPoint Presentation by Domenic Tavella, MBA Mortgages ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1

2. 7e PERFORMANCE OBJECTIVES Section I Mortgages—Fixed-Rate and Adjustable-Rate 14-1:Calculating the monthly payment and total interest paid on a fixed-rate mortgage 14-2:Preparing a partial amortization schedule of a mortgage 14-3:Calculating the monthly PITI of a mortgage loan 14-4:Understanding closing costs and calculating the amount due at closing 14-5:Calculating the interest rate of an adjustable-rate mortgage (ARM) 2 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

3. 7e PERFORMANCE OBJECTIVES Section II Second Mortgages—Home Equity Loans and Lines of Credit 14-6: Calculating the potential amount of credit available to a borrower 14-7: Calculating the housing expense ratio and the total obligations ratio of a borrower 3 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. continued

4. 7e Mortgages 4 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. real estate Land, including any permanent improvements such as homes, apartment buildings, factories, hotels, shopping centers, or any other “real” structures.mortgage A loan in which real property is used as security for a debt. Federal Housing Administration (FHA) A government agency within the U.S. Department of Housing and Urban Development (HUD) that sets construction standards and insures residential mortgage loans made by approved lenders.

5. 7e Mortgages 5 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. continued VA mortgage, or GI Loan Long-term, low-down-payment home loans made by private lenders to eligible veterans, the payment of which is guaranteed by the Veterans Administration in the event of a default. conventional loans Real estate loans made by private lenders that are not FHA-insured or VA-guaranteed. private mortgage insurance (PMI) A special form of insurance primarily on mortgages for single-family homes, allowing the buyer to borrow more, by putting down a smaller down payment.

6. 7e Mortgages 6 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. continued adjustable-rate mortgage (ARM) A mortgage loan in which the interest rate changes periodically, usually in relation to a predetermined economic index. mortgage discount points Extra charge added to the cost of a mortgage, allowing lenders to increase their yield without showing an increase in the mortgage interest rate.

7. 7e Mortgages 7 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. continued closing A meeting at which the buyer and seller of real estate conclude all matters pertaining to the transaction. At the closing, the funds are transferred to the seller, and the ownership or title is transferred to the buyer.

8. 7e 8 EXHIBIT 14-1 Historical Mortgage Rates and Monthly Payments ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

9. 7e STEPS 9 STEP 1 Find the number of $1,000s financed. Number of $1,000s financed = STEP 2 Using Table 14-1, locate the table factor, monthly payment per $1,000 financed, at the intersection of the number-of- years column and the interest-rate row. STEP 3 Calculate the monthly payment. Monthly payment = Number of $1,000s financed × Table factor STEP 4 Find the total interest of the loan. Total interest = (Monthly payment × Number of payments) – Amount financed TO FIND THE MONTHLY MORTGAGE PAYMENT BY USING AN AMORTIZATION TABLE AND TO FIND TOTAL INTEREST ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Amount financed 1,000

10. 7e 10 TABLE 14-1 Monthly Payments to Amortize Principal and Interest per $1,000 Financed ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

11. 7e Monthly Mortgage Payment and Total Interest Example 11 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. What is the monthly payment (PI) and total interest on an $85,500 mortgage at 7% for 25 years? Table factor for 7%, 25 years is 7.07 Monthly payment = 85.5 × 7.07 = $604.49 Total interest = (604.49 × 300) – 85,500 Total interest = 181,347 – 85,500 = $95,847

12. 7e STEPS 12 STEP 1 Use Table 14-1 to calculate the amount of the monthly payment. STEP 2 Calculate the amount of interest for the current month using I = PRT, where P is the current outstanding balance of the loan, R is the annual interest rate, and T is 1/12. STEP 3 Find the portion of the payment used to reduce principal. Portion of payment reducing principal = Monthly payment – Interest STEP 4 Calculate the outstanding balance of the mortgage loan. Outstanding balance = Previous balance – Portion of payment reducing principal STEP 5 Repeat Steps 2, 3, and 4 for each succeeding month and enter the values on a schedule with columns labeled as follows. TO CREATE AN AMORTIZATION SCHEDULE FOR A LOAN ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Payment Number Monthly Payment Monthly Interest Portion Used to Reduce Principal Loan Balance

13. 7e Amortization Table Example 13 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Prepare an amortization schedule of the first four payments of a $75,000 mortgage at 9% for 15 years. Use Table 14–1 to calculate the amount of the monthly payment. Table factor for 9%, 15 years is 10.15 Portion of payment reducing principal = 761.25 – 562.50 = 198.75 Outstanding balance = 75,000 – 198.75 = 74,801.25

14. 7e Amortization Table Example 14 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. continued Portion of payment reducing principal = 761.25 – 561.01 = 200.24 Outstanding balance = 74,801.25 – 200.24 = 74,601.01 Portion of payment reducing principal = 761.25 – 559.51 = 201.74 Outstanding balance = 74,601.01 – 201.74 = 74,399.27

15. 7e Amortization Table Example 15 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. continued Portion of payment reducing principal = 761.25 – 557.99 = 203.26 Outstanding balance = 74,399.27 – 203.26 = 74,196.01 Amortization Schedule $75,000, 8%, 30 years Payment Monthly Payment Monthly Interest Portion Used to Reduce Principal Loan Balance 0761.25$75,000.00 1761.25562.50198.7574,801.25 2761.25561.01200.2474,601.01 3761.25559.51201.7474,399.27 4761.25557.99203.26$74,196.01

16. 7e Calculating the Monthly PITI of a Mortgage Loan 16 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PITI An abbreviation for the total amount of a mortgage payment; includes principal, interest, property taxes, and hazard insurance. escrow account Bank account used by mortgage lenders for the safekeeping of the funds accumulating to pay next year’s property taxes and hazard insurance.

17. 7e STEPS 17 STEP 1 Calculate the principal and interest portion, PI, of the payment as before, using the amortization table, Table 14-1. STEP 2 Calculate the monthly tax and insurance portion, TI. Monthly TI = STEP 3 Calculate the total monthly PITI. Monthly PITI = Monthly PI + Monthly TI TO CALCULATE THE PITI OF A MORTGAGE ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Estimated property tax + Hazard Insurance 12

18. 7e Calculating the Monthly PITI of a Mortgage Loan Example 18 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chuck purchased a home with a mortgage of $125,600 at 9¼% for 20 years. The property taxes are $3,250 per year, and the hazard insurance premium is $765. What is the monthly PITI payment of his loan? Table factor for 9¼%, 20 years is 9.16 Monthly payment (PI) = 125.6 x 9.16 = $1,150.50 Monthly PITI = 1,150.50 + 334.58 = $1,485.08

19. 7e Mortgage Closing Costs 19 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. title, or deed The official document representing the right of ownership of real property. closing costs Expenses incurred in conjunction with the sale of real estate, including loan origination fees, credit reports, appraisal fees, title search, title insurance, inspections, attorney’s fees, recording fees, and broker’s commission. settlement or closing statement A document that provides a detailed accounting of payments, credits, and closing costs of a real estate transaction.

20. 7e 20 EXHIBIT 14-2 Mortgage Shopping Worksheet ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

21. 7e 21 EXHIBIT 14-2 Mortgage Shopping Worksheet ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. continued

22. 7e 22 EXHIBIT 14-2 Mortgage Shopping Worksheet ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. continued

23. 7e Mortgage Closing Costs Example 23 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Kathy is purchasing a townhouse for $120,000. The down payment is 20%, and the balance will be financed with a 15-year fixed-rate mortgage at 9% and 3 discount points (each point is 1% of the amount financed). Kathy has put down a deposit of $10,000, which will be credited to her down payment at the time of the closing. In addition, she must pay the following expenses: loan application fee, $100; condominium transfer fee, $190; title insurance premium, ¾% of amount financed; hazard insurance premium, $429; prepaid taxes, $310; and attorney’s fees, $500. Calculate the amount due from Kathy at the closing. If the seller is responsible for the broker’s commission, which is 5½% of the purchase price, $670 in other closing costs, and the existing mortgage balance of $65,000, what proceeds will he receive on the sale of the property?

24. 7e Mortgage Closing Costs Example 24 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. continued Down payment = 120,000 x 20% = $24,000 Amount financed = 120,000 – 24,000 = $96,000 Closing costs, Buyer: Discount points (96,000 x 3%)$ 2,880 Down payment (24,000 – 10,000)14,000 Application fee100 Condominium transfer fee190 Title insurance (96,000 x ¾%)720 Hazard insurance429 Prepaid taxes310 Attorney’s fees 500 Due at closing: $19,129 Proceeds, Seller: Purchase price$120,000 Less: Broker’s commission 120,000 x 5.5% 6,600 Closing costs 670 Mortgage payoff 65,000 Proceeds to seller: $47,730

25. 7e Adjustable Mortgages 25 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. adjustment period The amount of time between one rate change and the next on an adjustable-rate mortgage; generally 1, 2, or 3 years. index rate The economic index to which the interest rate on an adjustable- rate mortgage is tied. Lender’s margin, or spread The percentage points added to an index rate to get the interest rate of an adjustable-rate mortgage. calculated or initial ARM interest rate The interest rate of an adjustable-rate mortgage to which all future adjustments and caps apply.

26. 7e Adjustable Mortgages 26 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. continued teaser rate A discounted interest rate for the first adjustment period of an adjustable rate mortgage that is below the current market rate of interest. interest-rate caps Limit on the amount the interest rate can increase on an ARM. periodic rate caps Limit on the amount the interest rate of an ARM can increase per adjustment period. overall rate caps Limit on the amount the interest rate of an ARM can increase over the life of the loan.

27. 7e Calculating ARM Rates 27 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Calculated ARM interest rate Index rate + Lender’s margin Maximum rate per adjustment period Previous rate + Periodic rate cap Maximum overall ARM rate Initial rate + Overall rate cap

28. 7e Calculating ARM Rates Example 28 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Derrick has an adjustable-rate mortgage. The margin on the loan is 3.4%, and the rate cap is 7% over the life of the loan. The current index rate is 3.2%. What is the initial interest rate of the ARM? What is the maximum overall rate of the loan? Calculated ARM rate = Index rate + Margin Calculated ARM rate = 3.2 + 3.4 = 6.6% Max overall rate of ARM = Initial rate + Overall cap Max overall rate of ARM = 6.6 + 7.0 = 13.6%

29. 7e Second Mortgages—Home Equity Loans and Lines of Credit 29 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. home equity loan A lump-sum second mortgage loan based on the available equity in a home. home equity line of credit A revolving credit second mortgage loan made on the available equity in a home. credit limit A pre-approved limit on the amount of a home equity line of credit.

30. 7e 30 EXHIBIT 14-3 Home Equity Lending ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

31. 7e STEPS 31 STEP 1 Calculate the percentage of appraised value. Percentage of appraised value = Appraised value × Lender’s percentage STEP 2 Find the potential amount of credit available. Potential credit = Percentage of appraised value – First mortgage balance TO CALCULATE THE POTENTIAL AMOUNT OF CREDIT AVAILABLE TO A BORROWER ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

32. 7e Credit Available to a Borrower Example 32 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Robert’s home is appraised for $92,900. The balance on his first mortgage is $32,440. If his bank will loan up to 80% of the appraised value, what is the potential amount of credit available to him on home equity line of credit? Percentage of appraised value = Appraised value × Lender’s percent Percentage of appraised value = 92,900 × 80% = $74,320 Potential credit = Percentage of appraised value – 1st mortgage balance Potential credit = 74,320 – 32,440 = $41,880

33. 7e Qualifying Ratios 33 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. qualifying ratios Ratios used by lenders to determine whether borrowers have the economic ability to repay loans. housing expense ratio The ratio of a borrower’s monthly housing expense (PITI) to monthly gross income. total obligations ratio The ratio of a borrower’s total monthly financial obligations to monthly gross income.

34. 7e Calculating the Housing Expense Ratio and the Total Obligations Ratio of a Borrower 34 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

35. 7e Calculating Housing Expense Ratio and Total Obligations Ratios of a Borrower Example 35 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Leigh’s gross income is $3,100 per month. She has applied for a mortgage with a monthly PITI of $669. She has other financial obligations totaling $375 per month. What is her housing expense ratio? What is her total obligations ratio? What type of mortgage would he qualify for? Leigh qualifies for both FHA and conventional mortgages.

36. 7e CHAPTER REVIEW PROBLEM 1 36 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. What is the monthly payment (PI) and total interest on an $235,500 mortgage at 6% for 30 years? Table factor for 6%, 30 years is 6.00 Monthly payment = 235.5 × 6.00 = $1,413.00 Total interest = (1,413 × 360) – 235,500 Total interest = 508,680 – 235,500 = $273,180