- A mortgage is a long term loan where property is pledged
as security
- If you fail to pay or default on your payment, the lender can
take possession of the property.
- You are usually required to make a down payment and this is
usually a percentage of the price of the house.
- Traditionally this was 20%
- But it can go for as low as 0%
- But if you go below 20%, you get
- less favorable terms
- more fees.
- You have to escrow your taxes and insurance.
- and you usually have to pay private mortgage insurance.
- This depends on your financial institution
- As with installment loans, the amount financed or amount of the mortgage is the difference between the selling price and the down payment.
- You are often required to pay points
- A point is a one time charge equal to 1% of the loan amount
- Mortgage lenders range between 0 and 4 points.
- You also have to pay fees and closing costs.
- Home inspection fees
- Surveyor fees
- Application fees
- Other processing fees (duplicating, ...)
- Title Insurance
- Credit report fee
- Again, these fees vary by financial institution.
- Sometimes these fees can be rolled into the loan
- Normally the period is between 15 and 30 years
- See page 439 for a mortgage chart.
- This uses period and interest rate and returns payment per $1000
- So a 30 year loan, at 7% interest requires a payment of $6.65 per $1000
- Example, number 2, page 444
P: $85,000
Down: 5%
points: 1
Period: 30
Rate: 8%
Down Payment = $85,000 × .05 = $4,250
Amount Financed = $85,000 - $4,250 = $80,750
Points (1) = 1% * 80,750 = $807.50
Monthly Payment, look up 8% for 30 years: $7.34
Fund the number of thousands = 80.75
Multiply the two: $7.34 × 80.75 = 592.71
Total cost of the mortgage: monthly payment × months
592.71 × 30 × 12 = $213,373.80
Total Interest = Total cost - Amount Financed
= $213,373.80 - $80,750 = $132,623.80
- Note, You still have to pay Home owner's insurance, and property taxes.
- The formula used to compute the monthly payment is given by
r
-
n
PMT = PV -------------------
1-(1+r/n)-nt
r is the rate
n is the number of payments per year
t is the number of years remaining
PV is the present value.
- Example: number 8, page 444
P: $180,000
Down: 10%
Down Payment: $180,000 × .1 = $18,000
Amount Financed: $180,000 - $18,000 = $162,000
Points: 3
Points Payment: $162,000 × .03 = $4,860
Rate: 6.3%
Months: 30
Payment
The interest rate of 6.3% is not in the chart, so we must calculate it.
.063/12
pmt = 162,000 × --------------------- = $1002.74
1 - (1+.063/12)-12*30
At the 10th payment
1 - (1+.063/12)-12*20
PV = 1002.74 × ----------------------- = $ 136,641.85
.063/12
At the 20th payment
1 - (1+.063/12)-12*10
PV = 1002.74 × ----------------------- = $89,106.30
.063/12