MORTGAGE Terms mortgage
_______________________________________________ ______________________________________________________ ______________________________________________________ amortization______________________________________________ ______________________________________________________ ______________________________________________________ fixed – rate mortgage________________________________________ ______________________________________________________ ______________________________________________________ ARM __________________________________________________ ______________________________________________________ ______________________________________________________ negative amortization________________________________________ ______________________________________________________ ______________________________________________________ interest only loan __________________________________________ ______________________________________________________ ______________________________________________________ escrow _________________________________________________ ______________________________________________________ ______________________________________________________ points _________________________________________________ ______________________________________________________ ______________________________________________________
Rules of Thumb (numeric figures are approximate) … The mortgage should be no more that 3 times your annual income. … The “golden” down payment is 20%. Higher is even better. … Monthly payment should be no more than 28% {Rule of 28} of your monthly gross income. Also, your total monthly debt should be no more than 36% of your monthly gross income (car, school loans, etc). … Monthly ownership costs are about 1% of the mortgage (taxes, payment, etc) … Payback amount on a 30-year mortgage is about 250%. payback amount = 2.5(mortgage) approximately 150% of the mortgage is interest!
Mortgage 2 1. You want to buy a home for $400,000 and can place 20% down. Suppose the closing costs come to 3 points. How much must you pay upfront? What is your mortgage? Approximately how much should you make annually to afford this loan? About how much interest will you pay on this 30-year loan?
2. If you make $103,210 between you and your spouse, what is the maximum value you should take as a mortgage? Assuming you could put 25% down, what is the most expensive house you can expect to afford? About how much interest will you pay over the next 30 years?
Since you pay part of the mortgage off as you go, the entire amount of the mortgage does not collect interest each month. With a lump sum, $100,000 at 5% would yield $5,000 in interest on the year. But, you wouldn’t be paying interest on the full $100,000 for the year. Your yearly interest payment will be somewhat less that $5000. Since the EAR would be lower than the APR, why not display the EAR instead of the APR? The Truthin- Lending Disclosure Statement shows the buyer the APR - makes a difference in a mortgage calculation if you use the EAR instead of the APR. Loan Payment Formula
r P n pmt nt r 1 1 n pmt is the payment amount P is the principal (mortgage) r is the APR (in decimal form) n is the number of yearly payments (usually 12) t is the term of the loan (in years)
3. Suppose you buy a home worth $700,000. You’ve saved enough to pay 20% down and will finance the rest at 6.75% for 30 years. What is the monthly payment? How much interest do you pay on the loan?
Mortgage 3 4. Suppose you buy a home for $800,000. You pay 20% down. All closing costs come to 1.5 points. What are the total costs to pay off this home with a 30-year loan at 6.75%? {excluding taxes, insurance, etc}
5. Your dream home costs $1,000,000. After selling your current house, you have $450,000 to invest and have saved up an additional $80,000. The loan is 30 years at 6.25%. Keeping the monthly payment at 28% if your monthly income, can you afford this house if your family currently makes $108,000 annually? Explain. In either case, calculate the minimum you need to make so that you can afford the house?
Mortgage 4 6. The price of a small cabin is $100,000. The bank requires a 5% down payment. The buyer is offered two mortgage options: 20-year fixed at 8% or 30-year fixed at 8%. Calculate the amount of interest paid for each option and compare the two numbers to find the cheapest option.
7. Your credit card has a balance of $8565 (household average in 2008, Federal Reserve Board) and an APR of 13.29% (March 2008 average). You decide to pay it off over the next two years. If there are no further charges to the card, a. how much must you pay each month?
b. how much total interest will you have paid?
8. After graduating college, you need to service your $19,237 student loan (current average). Suppose you wish for the monthly payment to be at most 4% of your income, how much should you make in order to pay off the loan at 4.9% on a 15year term?
Mortgage 5 9. Suppose you want to take out a $400,000 mortgage at 6.5%. Consider the following options. In each case determine the monthly payment and total interest paid over the life of the loan. Discuss advantages and disadvantage as a class. a. 15-year FRM
b. 30-year FRM
c. 50-year FRM
d. 10-20 interest only loan
{Use back side for discussion notes}