1 / 19

Understanding the Cost of Home Ownership

Learn how to compute monthly mortgage payments, prepare a loan amortization schedule, and determine what you can afford to spend on a mortgage. Includes examples and formulas.

lair
Download Presentation

Understanding the Cost of Home Ownership

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. 8.7 • The Cost of Home Ownership

  2. Objectives • Compute the monthly payment and interest costs for a mortgage. • Prepare a partial loan amortization schedule. • 3. Solve problems involving what you can afford to spend for a mortgage.

  3. Computation Involved with Buying a Home • Loan Payment Formula for Fixed Installment Loans • The regular payment amount, PMT, required to repay a loan of P dollars paid n times per year over t years at an annual rate r is given by

  4. Example: Computing the Monthly Payment and Interest Costs for a Mortgage • The price of a home is $195,000. The bank requires a 10% down payment and two points at the time of closing. The cost of the home is financed with a 30-year fixed rate mortgage at 7.5%. • Find the required down payment. • Find the amount of the mortgage. • How much must be paid for the two points at closing? • Find the monthly payment (excluding escrowed taxes and insurance). • Find the total interest paid over 30 years.

  5. Example: Computing the Monthly Payment and Interest Costs for a Mortgage • Solution: • The required down payment is 10% of $195,000 or • 0.10  $195,000 = $19,500. • The amount of the mortgage is the difference between the price of the home and the down payment.

  6. Example: Computing the Monthly Payment and Interest Costs for a Mortgage • To find the cost of two points on a mortgage of $175,500, find 2% of $175,500. • 0.02  $175,500 = $3510 • The down payment ($19,500) is paid to the seller and the cost of two points ($3510) is paid to the lending institution.

  7. Example: Computing the Monthly Payment and Interest Costs for a Mortgage • We need to find the monthly mortgage payment for $175,500 at 7.5% for 30 years. We use the loan payment formula for installment loans. • The monthly mortgage payment for principal and interest is approximately $1227.00.

  8. Example: Computing the Monthly Payment and Interest Costs for a Mortgage • The total cost of interest over 30 years is equal to the difference between the total of all monthly payments and the amount of the mortgage. • Total Interest = Total of all monthly payments – amount of Mortgage • All monthly payments = monthly payment months of loan = = • Total Interest = $441,720 - $175,500 = $266,220

  9. Loan Amortization Schedules • When a loan is paid off through a series of regular payments, it is said to be amortized, which literally means “killed off.” • Although each payment is the same, with each successive payment the interest portion decreases and the principal portion increases. • A document showing important information about the status of the mortgage is called a loan amortization schedule.

  10. Example: Preparing a Loan Amortization Schedule • Prepare a loan amortization schedule for the first two months of the mortgage loan shown in the following table:

  11. Example: Preparing a Loan Amortization Schedule • Payment Number 1 • Interest Payment = Prt • = $130,000  0.095  1/12 ≈ $1029.17 • Principal payment = Monthly payment  Interest payment • = $1357.50  $1029.17 = $328.33 • Balance of loan = Principal balance  Principal payment • = $130,000  $328.33 = $129,671.67 $328.33 $129,671.67 $1029.17

  12. Example: Preparing a Loan Amortization Schedule • Payment Number 2 • Interest Payment = Prt • = $129,671.67 0.095  1/12 ≈ $1026.57 • Principal payment = Monthly payment  Interest payment • = $1357.50  $1026.57 = $330.93 • Balance of loan = Principal balance  Principal payment • = $129,671.67 $330.93 = $129,340.74 $328.33 $129,671.67 $1029.17 $330.93 $129,340.74 $1026.57

  13. Example: Preparing a Loan Amortization Schedule

  14. What Can You Afford • Here’s the bottom line from most financial advisers: • • Spend no more than 28% of your gross monthly income for your mortgage payment. • • Spend no more than 36% of your gross monthly income for your total monthly debt, including mortgage payments, car payments, credit card bills, student loans, and medical debt.

  15. Maximum Amount You Can Afford

  16. Example: What Can You Afford? • Suppose that your gross annual income is $25,000. • a. What is the maximum amount you should spend each month on a mortgage payment? • b. What is the maximum amount you should spend each month for total credit obligations? • c. If your monthly mortgage payment is 80% of the maximum amount you can afford, what is the maximum amount you should spend each month for all other debt? • Round all computations to the nearest dollar.

  17. Example: (cont) • Suppose that your gross annual income is $25,000. • What is the maximum amount you should spend each month on a mortgage payment? • First, calculate gross monthly income. • gross monthly income = $25,000/12 = $2083. • Then, calculate 28% of the gross monthly income. • 28% of $2083 = 0.28($2083) ≈ $583.

  18. Example: (cont) • Suppose that your gross annual income is $25,000. • b. What is the maximum amount you should spend each month for total credit obligations? • We already know the gross monthly income is $2083. • You should spend no more than 36% of that. • 36% of $2083 = 0.36($2083) ≈ $750.

  19. Example: (cont) • c. If your monthly mortgage payment is 80% of the maximum amount you can afford, what is the maximum amount you should spend each month for all other debt? • First, we need to know what “80% of what you can afford” is. From (a), we determined we could afford $583. • Calculate 80% of $583: 80% of $583 = 0.8($583) = $466. • In part (b), we saw that your total monthly debt should not exceed $750. • Answer: $750 - $466 = $284

More Related