Borrowing to Buy a Home

6.1

Down Payments and Closing Costs

• Terms to know:– Down Payment– Mortgage Loan– Principal– Closing Costs– Points

Down Payments and Closing Costs (Cont.)

• Formula’s to know– Calculate the amount of loan you will need…

Mortgage Loan = Purchase Price – Down Payment

– Amount of money you need to borrow…

Cash Needed to Buy a Home= Down Payment + Closing Costs

Down Payments and Closing Costs (Example)

• Joe is buying a house for $74,000. • 20 % down payment• Estimates closing costs as: – Legal fees $950, Title insurance $140– Property survey $250, Inspection $175– Loan processing fee $84, Recording fee $740

• How much will the mortgage loan be?• How much cash is needed?

Down Payments and Closing Costs (Solution)

• How much will the mortgage loan be?(Mortgage Loan = Purchase Price – Down Payment)

Down Payment = 20% X $74,000 = $14,800

Mortgage Loan = $74,000 - $14,800 = $59,200

Down Payments and Closing Costs (Solution Part 2)

• How much cash is needed?(Cash Needed = Down Payment + Closing Costs)

Total closing costs = $950 + $140 + $250 + $175 + $84 + $740 = $2,339

Cash needed = $14,800 + $2,339 = $17,139

Check For Understanding(Solution A)

• How much will the mortgage loan be?(Mortgage Loan = Purchase Price – Down Payment)

Down Payment = 25% X $86,000= $21,500

Mortgage Loan = $86,000 – $21,500= $64,500

Check For Understanding(Solution B)

• How much cash is needed?(Cash Needed = Down Payment + Closing Costs)

Down Payment = 5% X $64,000= $3,200Total closing costs = $64,000 x 3.5%= $2,240

Cash needed = $3,200 + $2,240= $5,440

Mortgage Loan Interest Costs

• Terms to know:– Two most common types of loans• Fixed rate mortgage• Variable rate mortgage

– Amortized

Mortgage Loan Interest Costs (Example)

• Anika wants to buy a home for $83,000.• She will pay $13,000 down payment• Loan is $70,000 for 25 years @ 8% • What are Anika’s monthly payments?• What is the total amount of interest she will

pay over the term of the mortgage?

Mortgage Loan Interest Costs (Solution)

• What are Anika’s monthly payments?

1.You will use the Amortization Table in your packet…

2.Match the amount with the number of years under the % of the loan…

3.$540.27 is the monthly payment

Mortgage Loan Interest Costs (Solution)

• What is the total amount of interest she will pay over the term of the mortgage?1. Figure out number of months…

25 years x 12 months/year = 300 months2. Number of months x monthly payments

300 x $540.27 = $162,081 (total payments)3. Total payment – amount of mortgage = Interest paid

$162,081 - $70,000 = $92,081

Mortgage Loan Interest Costs (Solution C Part 1)

• Find the monthly payments…

• Look at the Amortization Table under $80,000 and 20 years @ 7%

• Monthly payment = $620.24

Mortgage Loan Interest Costs (Solution C Part 2)

• Find the total amount to be paid in interest over the 20-year loan payment…1. Figure out number of months…

20 years x 12 months/year = 240 months2. Number of months x monthly payments

240 x $620.24 = $148,857.60 (total payments)3. Total payment – amount of mortgage = Interest paid

$148,857.60 - $80,000 = $68,857.60

Mortgage Loan Interest Costs (Solution D Part 1)

• What is the monthly payment?

• Look at the Amortization Table under $40,000 and 25 years @ 6%

• Monthly payment = $257.72

Mortgage Loan Interest Costs (Solution D Part 2)

• What is the total interest they will pay on the loan over the 25 years?1. Figure out number of months…

25 years x 12 months/year = 300 months2. Number of months x monthly payments

300 x $257.72 = $77,316 (total payments)3. Total payment – amount of mortgage = Interest paid

$77,316 - $40,000= $37,316

Refinancing a Mortgage

• Terms/Things to know:

– Interest rates go down…businesses and property owners refinance or look for lower rates.

– Refinancing• Pay fees and closing costs

Refinancing a Mortgage (Example)

• Amy had a fixed rate mortgage at 9.65% with an unpaid balance of $40,000 and a monthly payment of $511.09.

• Amy’s new mortgage @ 7.98% for the $40,000. The monthly payment is $340.73.– Paid closing costs of $935– Paid Prepayment penalty of $500

• How much did Amy save in the first year by getting the new mortgage?

Refinancing a Mortgage (Solution)

• How much did Amy save in the first year by getting the new mortgage?

1.Old monthly payment x # of months in a year = 1 years payment under old mortgage.

12 x $511.09 = $6,133.082. New monthly payment x # of months in a year

= 1 years payment under new mortgage.12 x $340.73 = $4,088.76

Refinancing a Mortgage (Solution- Continued)

• How much did Amy save in the first year by getting the new mortgage?

3. Old mortgage payment for 1 year – new mortgage payment for 1 year = difference in yearly payment

$6,133.08 - $4,088.76 = $2,044.324. Calculate the total costs for new loan

$935 + $500 = $1,435

Refinancing a Mortgage (Solution- Continued)

• How much did Amy save in the first year by getting the new mortgage?

5.Difference in yearly payments – total costs of new loan = amount saved in first year

$2,044.32 - $1,435 = $609.32

Exercises due

– Web Quest– http://www.yorkville.k12.il.us/webquests/HomeBuying/HomeBuying.html