Chapter 15 The Cost of Home Ownership Copyright © 2011 by the McGraw-Hill Companies, Inc. All...
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Transcript of Chapter 15 The Cost of Home Ownership Copyright © 2011 by the McGraw-Hill Companies, Inc. All...
Chapter 15
The Cost of Home The Cost of Home OwnershipOwnership
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
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#15Learning Unit ObjectivesTypes of Mortgages and the Monthly Mortgage Payment
LU15.1LU15.1
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#15Learning Unit ObjectivesAmortization Schedule -- Breaking Down the Monthly PaymentLU15.2LU15.2
15-4
Table 15.1 - Amortization Chart (PARTIAL)
(Mortgage principal and interest per $1,000)
Termsin years 5.50% 6.00% 6.50% 7.00% 7.50% 8.00% 8.50% 9.00%
10 10.86 11.11 11.36 11.62 11.88 12.14 12.40 12.6712 9.51 9.76 10.02 10.29 10.56 10.83 11.11 11.3915 8.18 8.44 8.72 8.99 9.28 9.56 9.85 10.1517 7.56 7.84 8.12 8.40 8.69 8.99 9.29 9.5920 6.88 7.17 7.46 7.76 8.06 8.37 8.68 9.0022 6.51 6.82 7.13 7.44 7.75 8.07 8.39 8.7225 6.15 6.45 6.76 7.07 7.39 7.72 8.06 8.4030 5.68 6.00 6.33 6.66 7.00 7.34 7.69 8.0535 5.38 5.71 6.05 6.39 6.75 7.11 7.47 7.84
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 andtotal cost of interest?
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
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
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
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 Year 30 Year Difference
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
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.
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
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
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
15-14
Problem 15-9:
$215,000 x 0.2 = $43,000
$215,000 - $43,000 = $172,000
$172,000/$1,000 = 172 x $5.37 = $923.64
15-15
Problem 15-10:
$50,000,000 $50,000,000
X .20 (down payment) - 10,000,000
$ 10,000,000 (down) $40,000,000 mortgage
payment
$40,000,000
$1,000 = $40,000 x $6.66 = $266,400 monthly payment
15-16
Problem 15-11:
$140,000 - $28,000 = $112,000/$1,000 = 112 x $5.68 = $636.16 x 360 = $229,017.60 - $112,000 = $117,017.60 total interest
15-17
Problem 15-13:Payment Portion to - Balance of loan
Number Interest Principal outstanding Monthly payment is:
1 $1,375.00 $47.00 $119,953.00 $120,000
($1,422 -$1,375) ($120,000 - $47.00) $1,000 =120 x $11.85 = $1,422
2 $1,374.46 $47.54 $119,905.46 $120,000 x .1375 x 1/12
($1,422 -$1,374.46) ($119,953.00 - $47.54) = $1,375.00
3 $1,373.92 $48.08 $119,857.38 $119,953.00 x .1375 x 1/12 = $1,374.46
$119,905.46 x .1375 x 1/12 = $1,373.92
15-18
Problem 15-14:
a. 40 x $10.17 = $406.80 x 300 = $122,040 - $40,000 = $82,040
b. 40 x $10.91 = $436.40 x 300 = $130,920 - $40,000 = $90,920
c. 40 x $11.66 = $466.40 x 300 = $139,920 - $40,000 = $99,920
d. 40 x $12.81 = $512.40 x 300 = $153,720 - $40,000 = $113,720
e. $113,720 - $82,040 = $31,680 difference
f. 40 x $12.65 = $506 x 360 = $182,160 - $40,000 = $142,160
40 x $9.91= $396.40 x 360 = $142,704 - $40,000 = - 102,704
difference $ 39,456