Section 10.5. Mortgages

• A Mortgage is a long term loan in which the property is pledged as security for payment of the amount financed.
• There are multiple types of mortgages
  • A conventional loan is a fix term and fixed interest loan.
  • In a adjustable rate or variable rate mortgage the interest rate can change, and the payments will change.
  • Other loans exist such as balloon payments.
• We will stick with conventional loans
  • Financed between 15 and 30 years
  • Fixed interest rate
  • Commonly require 5 to 20% down payment.
  • There are a large number of finance charges including
    • Closing costs.
    • points
• Points are called prepaid interest.
  • One point is 1% of the amount financed.
  • Sometimes they reduce interest rates
  • Sometimes they are just a finance charge.
• I purchased a house for $150,000, put 20% down and paid two points. What was the cost of points?

  Price: $150,000
  Down : 20%
  Down Payment:  $150,000 × .2 = $30,000
  Amount Financed: $150,000 - $30,000 = $120,000
  
  Each point is 1% of the amount finance
  Cost of 2 points:  $120,000 × 0.02 = $2,400
     

• Monthly payments are computed using another table
  • 
  • I will provide this to you on the test.
  • Note, this is principal plus interest per $1000 financed.
• If I financed my house for 30 years at 4% interest
  • I would need to pay $4.77415 per month per $1000 financed.
  • I financed $120,000 or $120,000/1,000 = 120 thousands
  • So my monthly payment should be $4.77415 × 120 = $572.90
• The total cost of my house then would be
  • The down payment: $30,000
  • The cost of payments: $572.90 × 30 × 12 = $206,244
  • The cost of points and other finance charges: $2,400
  • The total cost is $30,000 + $206,244 + $2,400 = 238,644.
  • By the way, this means I paid $238,644 - $150,000 = $88,644 in finance charges
• Build an amortization table.
• Qualifying for a loan
  • Your monthly payment might include other items
    • If you put less than 20% down, or in other cases you might have to escrow taxes and insurance.
    • You might have to pay Private Mortgage Insurance (PMI)
    • These all add into your monthly payment.
  • The bank cares about your adjusted monthly income
    • Take your gross monthly income or your income before anything is taken out.
    • Subtract any long term obligations (loans with more than 10 months remaining, child support, ...)
    • This is your adjusted monthly income
  • If your total monthly payment is more than 28% of your gross monthly income, the bank will not give you a loan.
• Do problem 22 page 616