Mortgages

• A long term loan on a place of residence is called a Mortgage
• There are many types of mortgage loans
  • A conventional loan works like the installment loans we were dealing with in the last section.
  • An adjustable-rate loan allows the rate to change as economic conditions change.
    • The rate of the loan, and thus the payments go up when interest rates go up.
    • The rate and payments go down when interest goes down.
    • A balloon payment has low payments in the beginning (typically just interest, no principal), but 3 to 8 years in, the full payments kick in.
    • Other types of loans exist too.
• When applying for a loan you typically need to have a down payment.
  • This must be your money, free and clear
  • You typically need to show how you earned this money.
  • The amount of the down payment depends on many things.
    • Your credit history
    • The bank
    • The type of loan
  • Generally, 20% means you are considered "responsible" and escape some other conditions.
• Banks charge a number of fees
  • These are charged in addition to interest.
  • Filing fees
  • Copying fees
  • Title Search Fees
  • Inspection Fees
  • Points
  • others
• Points
  • Points are a fee the bank charges for various reasons
  • It is based on the amount of the loan.
  • 1 point is 1% of the value of the loan
  • Charged for
    • Some banks reduce interest rates based on points.
    • Origination fee, this is simply a charge by the bank
• Normally you have to have all points, and other fees at the time you sign the loan. This is called the closing costs.
• Do number 15, page 702
• If you put less than 20% down, you frequently have to escrow your real estate taxes and your insurance payment
  • You find the total of the annual tax bill and the annual insurance bill.
  • Divide this by 12
  • This amount, is added to your mortgage payment and set to the bank each month.
  • The bank will then pay your tax and insurance bills when they come due.
• The amount of money you can borrow is related to your adjusted monthly income
  • From your gross monthly income subtract taxes and any fixed monthly payment with more than 10 months remaining
  • Some banks also subtract something related to the credit cards you have.
  • Multiply this amount by 28%.
  • The result is the maximum mortgage payment the bank will allow.
• Do number 17 part a
• Calculating monthly payments
  • Table 11.4 gives us the monthly payment per $1000 of a mortgage
  • This is principal plus interest.
  • So a 30 year mortgage at 7% interest must pay 6.65 for every $1000 for every month.
  • The monthly payment is number of $1000 x rate from table.
• Finish number 17
• The cost of the house is
  • payment X months + down payment + points
• The interest charged is
  • payment x months + points - amount financed
• An amortization table is of particular interest.