1. McGraw-Hill/Irwin ©2011 The McGraw-Hill Companies, All Rights Reserved Chapter 15 The Cost of Home Ownership

2. 15-2 1. 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 The Cost of Home Ownership #15 Learning Unit Objectives Types of Mortgages and the Monthly Mortgage Payment LU15.1

3. 15-3 1. Calculate and identify the interest and principal portion of each monthly payment 2. Prepare an amortization schedule The Cost of Home Ownership #15 Learning Unit Objectives Amortization Schedule -- Breaking Down the Monthly Payment LU15.2

4. 15-4 Table 15.1 - Amortization Chart (PARTIAL) (Mortgage principal and interest per $1,000)

5. 15-5 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?

6. 15-6 Step 2. Look up the rate (9%) and the term (30 years) in the amortization chart. At the intersection is the table factor. ($8.05) Step 3. Multiply Step 1 by the factor in Step 2 $160 x $8.05 = $1,288.00 Step 1. Divide the amount of the mortgage by $1,000 $160,000 = $160 $1,000 Computing Monthly Payment by Using an Amortization Chart

7. 15-7 Computing the Monthly Payment for Principal and Interest $160,000 = 160 x $8.05 (table rate) = $1,288.00 $1,000 Total payments Mortgage Total interest $463,680 - $160,000 = $303,680 ($1,288.00 x 360) Monthly Payment

8. 15-8 Table 15.2 - Effect of Interest Rates on Monthly Payments 9% 11% Difference Monthly payment$1,288.00$1,524.80 $236.80 (160 x $8.05) (160 x $9.53) Total cost of interest$303,680$388,828 $85,248 ($1,288.00 x 360) - $160,000 ($236.80 x 360) ($1,524.80 x 360) - $160,000

9. 15-9 The Effect of Loan Types on Monthly Payments Suppose Gary chose a 15-year mortgage vs. a 30-year mortgage. What would be the effect? 15 Year30 YearDifference Monthly Payment$1,624.00$1,288.00$336.00 Total Interest$100,912$303,680($202,768) ($1,624.00 x 180) -$140,000 ($1,288.00 x 360) - $160,000

10. 15-10 Hidden Cost in Purchasing a Home Closing Costs - Cost associated with the passing of property from the seller to buyer. Include: lawyer’s fees, title search, points, etc. A point is a one-time charge that is a percent of the mortgage. Escrow Amount - 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 Repairs and Maintenance - The cost of keeping the property up. Includes: paint, wallpaper, landscaping, etc.

11. 15-11 Step 2. Calculate the amount used to reduce the principal: Principal reduction = Monthly payment - Interest (Step 1.) $1,288.00-$120.00 = $88.00 Step 3. Calculate the new principal: Current principal - Reduction of principal (Step 2) = New Principal $160,000 - $88.00 = $159,912.00 Step 1. Calculate the interest for a month (use current principal): Interest = Principal x Rate x Time $160,000 x.09 x 1/12 = $1,200.00 Calculating Interest, Principal, and New Balance of Monthly Payment

12. 15-12 Step 2. Principal reduction = Monthly payment - Interest (Step 1.) $1,288.00 - $1,199.34 = $88.66 Step 3. Current Principal - Reduction of principal (Step 2) = New Principal $159,912.00 - $88.66 = $159,823.34 Step 1. Interest = Principal x Rate x Time $159,912.00 x.09 x 1/12 = $1,199.34 Calculating Interest, Principal, and New Balance of Monthly Payment 2nd Month

13. 15-13 Table 15.3 - Partial Amortization Schedule Payment Principal Principal Balance of number (current) Interest reduction principal 1 $160,000 $1.200.00 $88.00 $159,912.00 ($160,000 x.09 x 1/12) ($1,288.60 – 1,200) ($160,000 - $88.00) 2 $159,912.00 $1,199.34 $88.66 $159,823.34 ($159,912 x.09 x 1/12) ($1,288 – 1,199.34) ($159,912 - $88.66) 3 $159,823.34 $1,198.68 $89.32 $159,734.02 4 $159,734.02 $1,198.01 $89.99 $159,644.03 5 $159,644.03 $1,197.33 $90.67 $159,553.36