Contemporary Mathematics for Business and Consumers Third Edition By: Robert A. Brechner COPYRIGHT © 2003 by South-Western, a division of Thomson Learning. TM is a trademark used herein under license. ALL RIGHTS RESERVED. No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means–graphic, electronic, or mechanical, including photocopying, recording, taping, Web distribution or information storage and retrieval systems–without the written permission of the publisher. For permission to use material from this text or product, contact us by Tel (800) 730 -2214 Fax (800) 730 -2215 http: //www. thomsonrights. com
Chapter 14 Mortgages Copyright © 2003 by South-Western
Chapter 14, Mortgages Section I Mortgages – Fixed Rate Adjustment 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.
Chapter 14, Mortgages (Cont. ) Section I Mortgages - Fixed Rate and Adjustable-Rate (Cont. ) 14 -5 Calculating the interest rate of an adjustablerate mortgage (ARM). 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.
Section I, Mortgages- Fixed Rate and Adjustable. Rate 14 -1 Calculating the payment and Total Interest Paid on a Fixed-Rate Mortgage Steps to Find the Monthly Mortgage Payment by Using an Amortization Table, and Total Interest: Step 1. Find the number of $1000 s financed by Number of $1000 financed = Amount financed 1000 Step 2. Using table 14 -1, locate the table factor, monthly payment per $1000 financed, at the intersection of the number of years column and the interest rate row. Step 3. Calculate the monthly payment by Monthly payment = Number of $1000 s financed x Table factor
Everybody’s Business “Remember that the table values represent monthly payment “per $1000” of the monthly payment, you must first determine the number of $1000 s being financed, then multiply that figure by the table factor.
14 -2 Preparing a Partial Amortization Schedule of a Mortgage Steps to Create an Amortization Schedule for a Loan : Step 1. Use table 14 -1 to calculate the monthly 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 rate, at T is 1/12. Step 3. Find the portion of the payment used to reduce principal by Portion of payment reducing principal = Monthly payment - Interest Step 4. Calculate the outstanding balance of the mortgage loan by Outstanding balance = Previous balance – Portion of pmt. Reducing principal
14 -2 Preparing a Partial Amortization Schedule of a Mortgage Steps to Create an Amortization Schedule for a Loan : Step 5. Repeat Steps 2, 3, and 4 for each succeeding month and enter the values on a schedule labeled as follows: Payment Monthly Number Payment Interest Portion Used Loan to Reduce Loan Balance
Everybody’s Business As a result of declining mortgage rates in recent years, a record 68% of families own their own homes today. That amounts to nearly 72 million households. Purchasing and financing a home is one of the most important financial decisions a person will ever make. Substantial research should be done and care taken in choosing the correct time to buy, the right property to buy, and the best financial offer to accept.
Everybody’s Business Typically, over the years of a mortgage, property taxes and insurance premiums rise. When this happens, the lender must increase the portion set aside in the escrow account by increasing the taxes and insurance parts of the monthly payment.
14 -3 Calculating the Monthly PITI of a Mortgage Loan Steps to Calculate the PITI of a Mortgage: 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 = Estimated property tax + Hazard insurance 12 Step 3. Calculate the total monthly PITI: Monthly PITI = Monthly Pi + Monthly TI
Section II, Second Mortgages – Home equity Loans and Line of Credit 14 -6 Calculating the Potential Amount of Credit Available to a Borrower Steps to Calculate the Potential Amount of Credit: Step 1. Calculate the percentage of appraised value by Percentage of appraised value = Appraised value x Lender’s percentage Step 2. Find the potential amount of credit available by Potential credit = Percentage of appraised value – First mortgage balance
14 -7 Calculating the Housing Expense Ratio and the Total Obligations Ratio of a Borrower Housing expense ratio = Monthly housing expense (PITI) Monthly gross income Total obligations ratio = Total monthly financial obligations Monthly gross income
Chapter 14, Mortgages – Fixed Rate and Adjustable Rate Real estate Federal Housing Administration GI loan Private mortgage insurance Mortgage discount points Level-payment plan PITI Title or deed Settlement or closing statement Index rate Teaser rate Overall cap Mortgage VA mortgage Conventional loans Adjustable-rate mortgage Closing Amortization schedule Escrow account Closing costs Adjustment period Margin Interest-cap Initial interest cap
Chapter 14 Monthly payment = Number of $1, 000 s financed x Table factor Total interest = Monthly Number of Amount x – payments financed Monthly taxes & insurance (TI) = Estimated property tax + Hazard ins. 12 Monthly PITI = Monthly PI + Monthly TI Copyright © 2003 by South-Western
Chapter 14 ARM(Calculated interest rate) = Index rate + Lender’s margin ARM(Max. rate per adjustment period) = Previous + Periodic rate cap ARM(Max. overall rate) = Initial rate + Overall cap Percent of appraised value = Appraised value x Lender’s Percentage Copyright © 2003 by South-Western
Chapter 14 Second mortgage potential credit = Percentage of appraised value - First mortgage balance Housing expense ratio = Monthly housing expense (PITI) Monthly gross income Total obligations ratio = Total monthly financial obligations Monthly gross income Copyright © 2003 by South-Western
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