section 12 unit 5: Finance Calculations

What two numbers do you need to use an amortization chart?

Interest rate and term (15 years, 30 years, etc.)

What sort of information is gathered on a loan application?

Property information, loan type, and borrower's income, assets and liabilities, employment history, and credit information

Homeowners association fees a. housing only b. total debt only c. both

c. both

Mortgage payment a. housing only b. total debt only c. both

c. both

A statement of final loan terms and closing costs, provided to the borrower at least three days prior to closing

closing disclosure

When in the homebuying process does a lender order a property appraisal?

After the borrower completes the loan application and the lender assembles the application packet for processing

Let's try a calculation. Gerty is purchasing a $250,000 home. She has a $25,000 down payment and would like to buy down her interest rate by one point. How much will this point cost?

$2,250 There are many calculators available online that will show borrowers how to calculate points and what it will save them in their monthly mortgage payments over time.

Now let's consider Brian, Charlie and Wendy's friend. Brian took out a 30-year $500,000 loan with an interest rate of 6.25%. His monthly principal and interest payment is $3,078.59. How much is interest?

$2,604.17

Charlie and Wendy are purchasing a house for $350,000 and financing $335,000. If their lender charges an origination fee of 1%, how much will Charlie and Wendy pay in fees?

$3,350

Charlie and Wendy bought a $350,000 house by taking out a 30-year $335,000 loan at an interest rate of 5%. Their monthly principal and interest payment is $1,798.35. What is the total amount the couple will have paid toward interest at the end of 30 years?

$312,406 Here are the numbers we need: 360 (total payments), $1,798.35 (monthly payment), and $335,000: $1798.35 x 360 = $647,406 ‒ $335,000 = $312,406.

Yes! If $2,604.17 of the $3,078.59 payment is interest, how much is applied to principal?

$474.42

A buyer is purchasing a house for $400,000. The buyer's LTV is 80%. Their lender charges a 2% origination fee.

$6,400

Brian took out a 30-year $500,000 loan with an interest rate of 6.25%. His monthly principal and interest payment is $3,078.59. How much will he have paid in total interest at the end of the loan term?

$608,292.40

How is the monthly principal and interest payment calculated using an amortization chart?

(Loan amount / $1,000) x factor from amortization chart

How is interest paid per month calculated?

(Principal x interest rate) / 12

What's the total debt-to-income ratio formula?

(Total of monthly debt obligations ÷ monthly gross income) x 100

What's the housing debt-to-income ratio formula?

([Principal + interest + taxes + insurance + association fees] ÷ monthly gross income) x 100

Which of the following are two possible loan origination fee percentages that Charlie and Wendy might expect to incur?

1% 3%

The ratio of a loan amount to the value of the property purchased

Loan-to-value ratio (LTVR)

How is the amount of a loan payment that's applied to principal calculated?

Monthly principal and interest payment - interest paid per month

How do you calculate total interest paid?

Monthly principal and interest payment x total number of payments — original loan amount

How do you calculate the new principal balance?

Original principal — amount of payment applied to principal

The South Carolina State Housing Finance & Development Authority; offers programs designed for low- to moderate-income buyers, and those in danger of losing their home

SC Housing

What are the three approaches to value?

Sales comparison, cost, income

How does the lender verify information the borrower claims on the loan application?

Verification of deposits (bank accounts or bank statements, pay stubs, and credit reports)

A buyer with a 20-year, $419,000 loan at a 4.25% interest rate has a monthly principal and interest payment totaling $2,594.59. If $1,483.95 is interest, how much is applied toward principal each month? a. $1,110.64 b. $1,246.10 c. $1,578.57 d. $1,780.75

a. $1,110.64

Now, calculate Charlie and Wendy's payment amount based on their situation: a loan for $335,000 for 30 years, with an interest rate of 5%. a. $1,798.35 b. $1,878.88 c. $624.04

a. $1,798.35 An amortization chart accounts for principal and interest, but remember, insurance and taxes are also components of a monthly mortgage loan payment.

Let's try this with Charlie and Wendy. Remember, they have a $400 credit card payment and a gross monthly income is $6,500. We'll assume Charlie and Wendy will be applying for an FHA loan. What is the maximum housing payment that would still allow them to qualify? a. $2,015 b. $2,395 c. $1,820 d. $1,940

a. $2,015

A buyer has a 30-year, $400,000 loan with a 7% interest rate. How much of the first month's mortgage payment is interest? a. $2,333.33 b. $28,000 c. $3,100 d. $933.33

a. $2,333.33

Here's what we know so far about Charlie and Wendy: They bought a $350,000 house by obtaining a loan for $335,000 for 30 years at a 5% interest rate. Their monthly principal and interest payment is $1,798.35. Of that, $1,395.83 of their first month's payment is interest. How much of their first payment is applied to principal? a. $402.52 b. $265.20 c. $1,708.43 d. $1,395.83

a. $402.52 There are two key numbers in our scenario that will help us answer this question: the payment amount and the amount paid toward interest. The difference between these numbers is the amount applied toward principal: $1,798.35 ‒ $1,395.83 = $402.52

Charlie and Wendy are purchasing a property with a sales price of $350,000. They will be financing $335,000. What is their LTVR? a. 95.7% b. 104% c. 10.4%

a. 95.7% LTVR numbers will vary by lender, and sometimes by type of loan being obtained by the buyer.

What is a loan origination fee? a. A fee a lender charges for processing a loan b. A fee a lender charges for servicing a loan c. A fee a lender charges for the use of its money d. A fee a lender charges when a borrower pays off a loan

a. A fee a lender charges for processing a loan

Front-end ratio is another term for ______ ratio. a. housing b. loan-to-value c. payment d. total debt

a. housing

A condensed history of a title; a summary of all links in the chain and including other public record matters affecting the title; a legal description of the property and a summary of every related document in chronological order

abstract of title

First, let's calculate how much of Charlie and Wendy's first payment is interest. Your resource gives you the equation. (You can also refer to the resource for details about Charlie and Wendy's loan.) Give it a shot! a. $899.18 b. $1,395.83 c. $1,458.33 d. $1,750.00

b. $1,395.83

What's their total debt ratio?

b. 29.2%

Your turn now. Let's walk through the amortization chart using Charlie and Wendy's scenario. The couple is obtaining a loan for $335,000 for 30 years, with an interest rate of 5%. What factor will be used to calculate their payment? a. 3.95121 b. 5.36822 c. 5.99551 d. 11.10205

b. 5.36822

Glenn is purchasing a home for $400,000. The property appraised at $415,000 and Glenn is financing $300,000. What's the loan-to-value ratio? a. 72% b. 75% c. 82% d. 96%

b. 75%

To find a factor on an amortization chart, you need to know the interest rate and the ______. a. loan amount b. loan term c. origination fee d. sales price

b. loan term

Credit card payment a. housing only b. total debt only c. both

b. total debt only

car payment a. housing only b. total debt only c. both

b. total debt only

student loan payment a. housing only b. total debt only c. both

b. total debt only

A buyer with a $242,000 loan has a monthly principal and interest payment of $1,317.66. If $1,033.54 is interest, what's the new principal balance after the first payment is applied? a. $240,682.34 b. $241,672.12 c. $241,715.88 d. $241,976.21

c. $241,715.88

We've determined that of Charlie and Wendy's $1,798.35 loan payment, $1,395.83 is interest and $402.52 is applied toward the principal. What's Charlie and Wendy's new principal balance after this first payment is applied? a. $333,201.65 b. $333,604.17 c. $334,597.48

c. $334,597.48 To calculate the new principal balance, take the original balance ($335,000) and subtract the amount of the payment applied to principal ($402.52).

A buyer with a 15-year, $250,000 loan at a 5.5% interest rate has a monthly principal and interest payment totaling $2,042.71. What's the total amount the borrower will pay back over the life of the loan? a. $250,000.00 b. $30,640.65 c. $367,687.80 d. $735,375.60

c. $367,687.80

Charlie and Wendy's monthly expenses look like this: $400 credit card payment (it was a beautiful wedding and honeymoon!) and a $150 payment for a student loan that will be paid off in six months. They're anticipating a house payment close to $1,500. The couple's combined gross monthly income is $6,500. When calculating ratios, the lender doesn't consider any debt with 10 or fewer payments remaining. What's their current housing ratio?a. 31.5% b. 29.2% c. 23.1%

c. 23.1%

When using an amortization chart, you use the interest rate and the loan term to arrive at a factor, such as 5.17808. Now what do you do? a. Divide the loan amount by the factor. b. Divide the sales price by the factor. c. Multiply the number of thousands in the loan by the factor. d. Multiply the number of thousands in the sales price.

c. Multiply the number of thousands in the loan by the factor.

A buyer with a 30-year, $750,000 loan at a 5.75% interest rate has a monthly principal and interest payment totaling $4,376.80. If $3,593.75 is interest, how much is applied to principal? a. $251.66 b. $3,593.75 c. $4,376.80 d. $783.05

d. $783.05

A buyer anticipates a house payment of $1,000 per month, with monthly homeowner association fees of $150. The buyer also has a car payment of $400 per month. If the buyer earns a monthly gross income of $5,000, what is the total debt ratio? a. 20% b. 23% c. 28% d. 31%

d. 31%

A calculation that looks at all recurring (or installment) debt—such as monthly mortgage, car, credit, and loan payments—as a percentage of the borrower's monthly gross income, is called ______ ratio. a. housing b. loan-to-value c. payment d. total debt

d. total debt

A disclosure the lender gives to the borrower within three days of the borrower applying for a loan; discloses loan terms, interest rate, and estimated payment (replaced the Good Faith Estimate)

loan estimate

What is amortization?

paying off a loan over time

A document outlining that a title insurance policy will be issued to the buyer provided certain conditions are met—usually a required payoff of liens or other title defects

title commitment

A search by a title company to determine marketable title or uncover any deficiencies in title

title search

Evaluates borrower's loan application and property appraisal, then recommends whether or not the application should be approved

underwriter

Charlie and Wendy have an LTVR close to 96%. Looking only at LTVR and assuming they are hoping to obtain an FHA loan, do they qualify?

yes They squeak right in under the maximum LTVR for an FHA loan. If they were looking at a conventional loan, they might not qualify, given their current plan to finance $335,000 of the $350,000 purchase. They would need to look at increasing their down payment in order to lower their LTVR.