- A mortgage is a loan to buy a house, condo, ...
- The property is pledged as security against the loan
- If you default (fail to pay the monthly payments) the
lender can foreclose (take the property away from you)
- We will deal with conventional loans
- The payment, interest rate and other factors do not change over the period of the loan.
- Other types of loans exist
- adjustable-rate loans, normally tied to something like the prime interest rate
- Balloon payments - only pay interest for the first n years.
- Other loans exist as well.
- You are normally required to make a down payment
- Somewhere between 5% and 20% (or higher if you have it)
- You are frequently required to pay "points" or prepaid interest.
- This is cash paid up front.
- A point is 1% of the amount borrowed.
- There are frequently other (many other) fees associated with a mortgage.
- We will use table 11.4 page 696, which gives the "Monthly Principal and Interest Payment per $1000 of Mortgage."
- Example: Albert wishes to buy a house for $120,000. His credit union requires a 15% down payment. The mortgage rate is 10%. Find the payment on a 25 year loan.
First compute the amount financed:
Find the down payment: 120,000 * .15 = 18,000
Amount Financed = 120,000 -18,000 = 102,000
Find the number of $1000
102,000 / 1000 = 102
Find the payment per $1000 from chart
9.09
Find the monthly payment
9.09 x 102 = 927.18
- Example: Sue wishes to purchase a house for 140,000. The bank requires 10% down. Sue wants a 30 year mortgage at 6.5% interest. She must pay 4 points at closing. What are the points? What is the monthly payment?
Find the amount financed
Down Payment = 140,000 x .1 = 14,000
Amount Financed = 140,000 - 14,000 = 126,000
Find the cost of points
126,000 x 0.04 = 5,040
Find the monthly payment
Find # of $1000 = 126,000 / 1000 = 126
Find the Payment per $1000 (look up) 6.32
Find the monthly payment 6.32 x 126 = 796.32
- The Smiths purchase a house for $250,000, with a mortgage rate of
7.5% for 15 years. If they pay 20% down, how much interest will they pay if
they make all payments?
Find the amount financed
Down: 250,000 x .20 = 50,000
Amount Financed: 250,000 - 50,000 = 200,000
Find the monthly payment
# of $1000 = 200,000 / 1000 = 200
Look up 7.5, 15 on the table: 9.27
200 x 9.27 = 1,854
Find the total amount paid
1,854 x 12 x 15 = 333,720
Find interest
333,720 - 200,000 = 133,720
- Rework this problem for 30 years
Monthly interest
Look up on table 7.5, 30 : 6.99
Monthly Payment 200 x 699 = 1,398
Find the total amount paid
1,398 x 12 x 30 = 503,280
Find the interest
503,280 - 200,000 = 303,280
- How much of the first payment of the last loan will go to principal, how much to interest?
The First Month:
How much do you owe? 200,000
What is the interest rate? 7.5%
What is the time? 1/12
What is the interest? 200,000 x 0.075 x 1/2 = 1,250
What was the payment? 1,389
What part of the payment went to principal? 1,389-1,250 = 139.00
The Second Month
How much did you owe? 200,000 - 139 = 199,861
What is the interest rate? 7.5%
What is the time? 1/12
What is the interest? 199,861 x 0.075 x 1/2 = 1,249.13
What was the payment? 1,389
What part of the payment went to principal? 1,389-1,249.13 = 139.87