aim: money matters: home ownership course: math literacy aim: how does money matter? home...

Aim: Money Matters: Home Ownership Course: Math Literacy

Aim: How does money matter? Home ownership – the big Kahuna!

Do Now:


House Buying Terminology

mortgage – the amount that is borrowed to buy real estate. The amount of a mortgage is the difference between the selling price and the down payment.

mortgage = selling price – down payment

down payment – normally between 10% and 30%

closing costs – other expenses associated with purchase of home and are due at when sale of house is finalized (the closing)

loan origination fee – also called points; equal to one percent of mortgage.


Model Problem

The purchase price of a home is $98,000. A down payment of 20% is made. The bank charges $450 in fees plus 2½ points. find the total of the down payment and the closing costs.

down payment = 20% of 98,000 = 19,600

mortgage = selling price – down payment = 98,000 – 19,600 = 78,000

points = 2½ % of 78,400 = 1960

Total = 19,000 + 450 + 1960 = $22,010


More Terminology

adjustable rate mortgages (ARM) – rate is adjusted periodically to more closely reflect current rates

fixed or conventional mortgages – rate is fixed for the life of loan. Terms of 15, 20, 25, or 30 years are most common.

mortgage payment – the monthly payment

foreclosure – bank takes possession of house due to non-payment of mortgage with right to sell to another buyer

escrow account – part of monthly mortgage payment may go into this account to pay real estate taxes.


Buying a House

You purchase a house with a $100,000 loan to be paid off over 30 years in equal monthly installments. The interest rate for the loan is 6%.

a) What is your monthly payment?

b) How much will you eventually pay by the time the loan is ended in 30 years?

c) How much is interest?Amortization – the process of paying off a debt by systematically making partial payments until the principal and interest are repaid.

1 1nt

rPnmrn

Amortization Formula

P – the value of mortgage


Buying a House


a) What is your monthly payment?

b) How much will you eventually pay by the time the loan is ended in 30 years?

c) How much is interest?

1 1nt

rPnmrn


12 30

0.0610000012

0.061 112

m

g

r = 0.06P = 100,000

t = 30n = 12$599.55


Buying a House


b) How much will you eventually pay by the time the loan is ended in 30 years?$599.55 12 30 $215,838.19

c) How much is interest?

$215,838.19 100,000 $115,838.19


Amortization – Principal/Interest Breakdown

How much principal and interest are paid on the first payment on a loan of $134,000 at 6.5% for 30 years?

1) Find the monthly payment:

1 1nt

rPnmrn


12 30

0.06513400012 846.97

0.0651 112

m

g

2) Use simple interest formula for 1st month:I = Prt I = 134,000(0.065)(1/12) 725.83

846.97 725.83 121.14

monthly payment – interest = principal paid

amortization schedules list the breakdown for each month


Model Problem

How much interest is saved on a $175,000 30-year fixed rate 7.5% mortgage if the time of the mortgage is reduced to 15 years.

1) Find the monthly payment @ 30 years:

1 1nt

rPnmrn


12 30

0.07517500012 1223.625

0.0751 112

m

g

r = 0.075P = 175,000

t = 30n = 12

$1223.625 12 30 $440,505.14

2) Total payments @ 30 years:

3) How much is interest?$440,505.14 175,000 $265,505.14


Model Problem

How much interest is saved on a $175,000 30-year fixed rate 7.5% mortgage if the time of the mortgage is reduced to 15 years.


12 15

0.07517500012 1622.272

0.0751 112

m

g

r = 0.075P = 175,000

t = 15n = 12

$1622.272 12 15 $292,008.89 2) Total payments @ 15 years:

3) How much is interest?$292,008.89 175,000 $117,008.89

$265,505.14117,008.89

$148,496.25interest saved


Can You Afford It?

You wish to purchase a house for $225,000 with a down payment of $10,000 with a 30-year fixed rate mortgage at 6.48%. Your family income is $59,000. Lenders have guidelines that suggest families can afford to spend about 28% of monthly income on housing to include property taxes and insurance. Can you afford this house?

1) Find the affordable monthly payment:0.28(59,000) / 12 $1376.67


Early PayoffA homeowner has a monthly mortgage payment of $645.32 on a 30-year loan at an annual interest rate of 7.2%. After making payments for 5 years, the homeowner decides to sell the house. What is the payoff of the mortgage?

1 1ntr

nP m rn

Present Value of an Annuity Formula

n·t is the remainingnumber of payments

12 250.0721 112645.32 0.072

12

P

g

89,679.01

30 – 5 years = 25 yearsof payments left


Can You Afford It?You wish to purchase a house for $225,000 with a down payment of $10,000 with a 30-year fixed rate mortgage at 6.48%. Your family income is $59,000. Lenders have guidelines that suggest families can afford to spend about 28% of monthly income on housing to include property taxes and insurance. Can you afford this house?

2) Find monthly payment based on details of loan.

12 30

0.064821500012 1356.12

0.06481 112

m

g

r = 0.0648P = 215,000

t = 30n = 12

$1376.67what you can afford

With taxes and insurance – not

affordable


Equity

Equity – the Amount of principal of a loan that has been repaid

In 1980 a house was purchase for $100,000 with a 30-year mortgage at 8%. After 22 years and 5 months, how much equity did the owner have?


12 30

0.0810000012 $733.76

0.081 112

m

gr = 0.08P = 100,000

t = 30n = 12


Equity

In 1980 a house was purchase for $100,000 with a 30-year mortgage at 8%. After 22 years and 5 months, how much equity did the owner have?

910.081 112733.76 $49,940.030.08

12

P

2) Find payoff for 7 years and 7 months of left:360 total payments – 22 x 12 + 5 payments made = 91 payments left

Equity = original loan amount – amount to be paid1 1ntr

nP m rn

Present Value of an Annuity Formula

n·t is the remainingnumber of payments

$100,000 49,940.03$50,059.97

aim: money matters: home ownership course: math literacy aim: how does money matter? home...

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