Section 30: Mortgage-Related Calculations in Delaware

The monthly payment (multiplier) of 5.36822 is per thousand. So the total principal should be divided by 1,000. Remember, we were looking at a $200,000 property. What would the payment per month would be?

$1,073.64 200,000 / 1,000 = 200. 5.36822/100= 0.0536822 x 200= $1,073.64 Multiply 200 by the factor to get the principal and interest payment per month.

If a property's market value was $155,000, its tax-assessed value was $135,000, and the tax rate was .09%., what would the annual property tax be?

$121.50 The property tax for this property this year would be .09 (tax rate) x $135,000 (tax assessed value) = $121.50 (property tax).

Felicia's loan amount is $263,000, and her PMI factor is .78. How much will she pay monthly for PMI?

$170.95

The value of Bea's home is $289,000, and the replacement rate for her home type and zip code is $3.32. Her monthly insurance premium is $79.96. (T/F)

$289,000 x $3.32= 959480/12= 79.96

Jane's loan amount is $198,000 and her PMI factor is .23. How much will she pay monthly for PMI?

$37.95 0.0023 x 198,000 =455.4 / 12

Chandler and Monica's gross monthly income is $6,200, and they have $600 in monthly debt payments. The lender's qualifying ratios are 28% for the housing ratio and 36% for the total DTI ratio. What's the maximum housing payment they can afford?

$6,200-600= 5,600 The total debt ratio is $5,600 x 36% ($2,016); the housing debt ratio is $6,200 x 28% ($1,736). Borrowers must qualify by calculating using both ratios, then using the lower of the two numbers as their maximum mortgage payment.

Interest Paid Per Month

(Principal x interest rate) / 12

You just stopped at your favorite coffee place to grab a mocha latte when you run into Diane, a buyer client. She inherited a substantial amount of money and is considering paying off her mortgage early. She asks for your advice. What three things do you tell her?

-Determine the outstanding principal that's still owed to your lender. -Look for the terms of any pre-payment penalties that might exist in the mortgage loan contract. -If a pre-payment penalty exists, determine if it's calculated based on a percentage of interest or a percentage of the outstanding principal.

PITI

-PITI is made up of principal, interest, taxes, and insurance. -As the interest portion of the mortgage payment decreases, more of the payment goes toward principal.

What is Joe's first month's payment on that 30-year, $120,000 loan at 4.5% interest? Calculate the amount of interest owed for the first month.

A) The factor for a 30-year loan at 4.5% interest is 5.06685. Multiply the factor by the number of thousands in the loan principal: 5.06685 x 120 (divide 120,000/1000) = 608.02. Joe's monthly payment is $608.02. B) Now calculate the amount of interest owed for the first month. 1. Principal = $120,000 2. Rate = 4.5%, or .045 Use this formula: interest = principal x rate remembering that the interest rate is stated as an annual percentage. 20,000 x .045 = 5,400. This is the annual interest paid when the principal is $120,000. Since we're calculating for one month, we'll divide that amount by 12. 5,400 / 12 = 450. oe will pay $450 dollars in interest when he makes his first payment. Since his monthly payment is $608.02, and he's paying $450 of that as interest, the amount of principal he pays in that first month is $158.02. Note: If Joe's mortgage is a budget mortgage, he'll also pay a portion of his hazard insurance and real estate taxes with each monthly payment.

Mortgage Loan Vocabulary: Amortization

Amortization is the process of paying off a loan over time. Every monthly loan payment made on a mortgage loan reduces the amount of principal owed and also pays the portion of interest owed for the past month. A typical mortgage loan is designed so that at the end of the loan term, the entire principal balance is paid off. This is called a fully amortized loan. Negative amortization means that the monthly payment a borrower makes isn't sufficient to fully pay off the loan at the end of the loan term. For example, balloon mortgages are designed so the borrower pays off a portion of the loan's principal while making payments but then pays off a lump sum at the end of the loan term. Many amortization charts and tables are available, especially online. Sometimes, though, even using a table can be confusing. To complete a monthly principal and interest payment, you need to know the interest rate and the loan term.

Ted's monthly mortgage payment is $984. His annual property taxes are $822, and his combined annual homeowners insurance premium is $679. His principal and interest payment is $858.92. Correct or Incorrect?

Correct Add annual property taxes and insurance together, divide by 12, and subtract that number from the total mortgage payment to determine the P&I.

The monthly principal and interest for the Bransons' retirement home equals $728.12. Their monthly property taxes are $68.23, and their homeowners insurance is $47.36. Their PITI is $843.71. Correct or Incorrect?

Correct Add their monthly P & I to their monthly property taxes and insurance. $728.12 + $68.23 + $47.36 = $843.71.

Olivia's LTV is 85%, and her credit score is 690. Her PMI factor is .40%. (T/F)

False

The value of Ken's home is $265,000 and the replacement rate for his home type and zip code is $2.67. His monthly insurance premium is 70.75? (T/F)

False

The March Payment and Amortization

If we were to calculate Joe's April payment, we would begin our calculation with a principal amount of $119,841.98 (the original principal amount less the amount of principal paid with the March payment). This results in a reduction of the amount of interest paid each month, a corresponding increase in the amount of principal paid each month, and ultimately, in the complete amortization of the loan by the end of the loan term.

Mortgage Loan Vocabulary: Interest

Interest is the cost of borrowing money from someone else. If Joe borrows money from Larry's Lending, Larry will charge Joe interest for using Larry's money. Loan interest is stated as an annual percentage; i.e., 4.5%.

What's simple interest?

Interest that's calculated based on the current principal of the loan amount multiplied by the interest rate

Your friends Ross and Rachel asked you to help them find a house, but they need your help estimating what monthly payment they might qualify for. Their gross monthly income is $7,954, and they have $485 in monthly debt payments. Their lender requires 28% for the housing DTI ratio and 36% for the total DTI ratio to qualify. Complete your calculations and fill in the blanks with the correct information. Maximum payment to meet lender's housing DTI ratio = $______________ x ___________% (max lender housing DTI ratio) = $2,227.12. Maximum payment to meet lender's total DTI ratio = $7,954 - ___________ x _________% (max lender total DTI ratio) = __________. Because Ross and Rachel need to meet both lending ratios, their maximum housing payment is ______________.

Maximum payment to meet lender's housing DTI ratio = $7,954 x 28% (max lender housing DTI ratio) = $2,227.12. Maximum payment to meet lender's total DTI ratio = $7,954 - $485 x 36% (max lender total DTI ratio) = $2,688.84. Because Ross and Rachel need to meet both lending ratios, their maximum housing payment is $2,227.12

$100,000, interest rate: 6%, annual taxes: $1,000, and combined annual insurance: $500. The loan term is 360 years. What is the total PITI?

Monthly principal and interest equals $599.55 Total PITI equals $724.55 PITI = $100,000 X (0.06 ÷ 12 + (Taxes ÷ 12) + (Insurance ÷ 12) ------------------------------------------------- 1 - [1 ÷ (1 + 0.06 ÷ 12 ^ 360

Loan Payment Applied to Principal

Monthly principal and interest payment - interest paid per month

Mortgage Loan Vocabulary: Payment

Most mortgage loans are paid off using monthly installments, or payments. Joe's monthly payment will probably include principal, interest, taxes, and insurance (called PITI). These loans are sometimes called "budget loans" because the monthly amount remains mostly the same every month, making it easier to budget for the payments.

Mortgage Loan Vocabulary: Principal

Principal is the actual amount borrowed. If Joe is borrowing $120,000 to buy a house, the principal amount of his loan is $120,000.

Mortgage Loan Vocabulary: Term

The loan's term is the amount of time over which it will be paid. If Joe's loan is a 30-year mortgage, the loan term is 30 years.

Katerina's loan amount is $197,000, and her PMI factor is .42%. She will pay $68.95 monthly for PMI. (T/F)

True

Nick's LTV is 89% and his credit score is 712. His PMI factor is .41%. (T/F)

True

Roscoe's loan amount is $212,000, and his PMI factor is .65%. He'll pay $114.83 monthly for PMI. (T/F)

True

Add-on interest includes ________________________________.

additional interest on each payment based on the original amount of the loan.

Compound interest is

interest earned on interest.

TJ's gross monthly income is $5,200, and he has $600 in monthly debt payments. His lender's maximum qualifying ratios are 28% for the housing DTI and 36% for the total DTI. What's the maximum housing payment TJ can afford?

$5,200 x 28% (maximum lender housing DTI ratio) = $1,456 $5,200 - 600 x 36% (maximum lender total DTI ratio) = $1,656 Because TJ must be qualified by using both ratios, and the $1,456 amount is the lesser of the two, his maximum housing payment is $1,456.

Calculating Interest

-Simple interest formula: Interest = principal x rate x time -Payments on loans will consist of a portion applied toward principal-the loan balance-and a portion toward interest. -Loan payments can be determined using an amortization payment schedule. Amortization is the paying off of a loan over time.

Borrowers generally need to put ____ down to avoid having to purchase private mortgage insurance.

20%

Principal (Amortization Table)

Amount of payment that will be applied to the loan balance

Which of the following options describes principal as it relates to loans?

Amount of payment that will be applied to the loan balance

Interest (Amortization Table)

Amount of payment that will be paid toward interest

Scheduled payment/total amt (Amortization Table)

Amount to be sent for payment

To calculate property taxes, multiply the ______ by the tax rate.

Assessed value

Principal

Balance on the loan. - the actual amount owed. As the interest portion of the mortgage payment decreases more of the payment is applied to principal.

Compound formula

Beginning deposit or principal x (1 + interest rate per period) number of periods

How much will a homeowner pay annually in interest on a $275,000 loan with a 4.75% interest rate?

Equation used: Annual interest amount = loan balance x interest rate $275,000 x 4.75% = $13,062.50

Using a base deposit of $25,000 at an interest rate of 4% compounded annually, what would be the total after five years?

Equation used: Compound interest sum = beginning deposit or principal x (1+ interest rate per period) number of periods C = $25,000 x (1 + 4% [or 0.04]) 5 C = $25,000 x (1.21665) C = $30,416.32 after five years compounding annually

Calculating PITI

For this example we'll use the following information: Loan amount = $100,000 Interest rate = 6% (0.06) Annual taxes = $1,000 Combined annual insurance = $500 Loan term = 30 years (360 months) Plug in loan amount, interest rate in decimal form, and loan term in months to calculate principal and interest payments PITI = $100,000 x (0.06/12) ------------------------------------ 1 - [1 / (1 + 0.06/12) ^ 360 PITI = $100,000 x 0.005 ------------------------------------ 1 - [1 / (1 + 0.005) ^ 360 PITI = $100,000 x 0.005 ------------------------------------- 1 - [1/ (1.005) ^ 360 PITI = 500 ------------------------------------- 1 - [1/6.02258] PITI = 500 ------------------------------------- 1 - [0.16604] PITI = 500 ------------------------------------- 0.83396 Plug in annual tax and insurance amounts to find monthly payments PITI = $599.55 + 1,000/12 + 500/12 PITI = $599.55 + 83.33 + 41.67 PITI = 724.55/ Monthly payment

Mortgage, homeowners, and flood ______ may be included the mortgage payment.

Insurance

Interest and Amortization

Interest is the fee charged for the use of money. Interest may be charged at a consistent rate for a specified period of time, or its rate may adjust. When used, rate adjustments are generally tied to an index, such as the consumer price index (CPI). When the index changes, so will the interest rate of an adjustable rate loan (within the loan's allowed parameters).

Market value

Market value is used in preparing a comparative market analysis for a seller. It's the probable sales price if a home was listed today by a willing seller and was purchased by a willing buyer.

To compute a monthly principal and interest payment, which of the following pieces of information do you need to know?

Mortgage loan value, annual percentage rate, loan term, and payment frequency

PITI Formula

PITI = Loan amount x (Interest rate/12)/1- [1/(1 + Interest rate/12) ^ months in loan terms + taxes/12 + insurance/12

Computing Private Mortgage Insurance

PMI rates are based on many factors, including the loan type (e.g., fixed rate, adjustable rate), property type, and whether the PMI will be paid up front or monthly. PMI factor x loan amount = annual PMI ÷ 12 = monthly PMI Example A PMI factor of .0078 on a $125,000 loan would calculate like this: .78% X $125,000 = $975 ÷ 12 = $81.25

What does PITI stand for?

Principal, interest, taxes, insurance

Jurisdiction tax rates and assessed value are used to calculate what?

Property taxes

Annual interest rate (Amortization Table)

Rate of interest for the loan

Special assessments

Special assessments may also be levied, resulting in a rise in property taxes. Road or other infrastructure improvements can result in an assessment shared among the parcels of real estate that will benefit from the improvements. Assessment can vary, based on how an individual parcel benefits. Special assessments aren't ad valorem taxes. They apply specifically to the parcels receiving the benefit from the improvements. The geographic areas in which special assessments are levied are called special assessment districts .

Debt-to-Income Ratio

TI, also known as total debt ratio or back-end ratio, calculates the borrower's total monthly debt payments against gross monthly income. The calculation is: (Total monthly debt obligations / monthly gross income) x 100 Example Mary's monthly debts include a car payment obligations of $400 and housing expenses of $925. Her gross income is $4,900. Her DTI ratio is 27.04% (($1,325 / $4,900) x 100), so she falls below the DTI range of most lenders (31% to 36%). Being below the range is a good thing, and Mary can easily afford her mortgage.

What is the formula used to calculate general property tax?

Tax assessed value X tax rate = property tax

Assessed Value (assessment)

The assessed value (assessment) isn't market value; it's a percentage of market value. Assessed value is a percentage of that probable sales price. It's the amount of property value to which the tax rate is applied. When a tax is levied based on value, this is called ad valorem. The tax rate that's applied to the assessed value is determined by the budgetary needs of the local government. Ex. A property's real market value is $100, and its tax-assessed value is $85. Given the county's budgetary needs, this year's tax rate is .05. The property tax for this property this year would be .05 (tax rate) x $85 (tax assessed value) = $4.25 (property tax).

Housing Ratio

The housing ratio is also known as a front-end ratio. It compares total monthly housing payments to gross monthly income and doesn't include other debt obligations. The calculation is: (Monthly housing expenses / monthly gross income) x 100 Example Joe anticipates his monthly housing expenses will be $1,600, and he has a gross monthly income of $4,500. His housing DTI ratio is 35.5% ([$1,600 / $4,500] x 100), which would put him outside the housing DTI qualifying range (25% to 28%) of most lenders. Joe can't afford this mortgage.

Insurance

This may include mortgage, home owners and/or flood insurance

The reason the tax calculation is important is that if the market value of a property increases, its ______________________ will also increase.

tax-assessed value

Market value is

the probable sales price of a property if the property was sold under normal market conditions.

Phoebe's gross monthly income is $4,200, and she has $360 in monthly non-housing debt payments. The lender's qualifying ratios are 28% for the housing ratio and 36% for the total DTI ratio. What's the maximum housing payment she can afford?

$1,152

First time homebuyers Charlie and Wendy just celebrated one month of living in their new house, and it's almost time for their first loan payment as homeowners. They purchased a $350,000 house by obtaining a loan for $335,000 for 30 years at a rate of 5%. Using an amortization chart, we've determined the principal and interest portion of their payment to be $1,798.35. How much of Charlie and Wendy's first payment is interest?

$1,395.83 $335,000 x 0.05= $16750 /12 = 1,395.83

Cletis and Marcie are thinking about paying off their mortgage loan early, even though a pre-payment penalty will apply. After they looked at their loan contract, they discovered that their lender figures the pre-payment penalty based off of the remaining principal due. The lender charges a 2% pre-payment penalty. Cletis and Marcie's outstanding principal is $8,000. How much will they owe in penalty fees?

$160 $8000 x 0.02

Sophia's annual property taxes are $1,295, and her annual insurance premium is $942. How much of her monthly mortgage payment goes toward taxes and insurance?

$186.42

The value of Gordon and Susan's home is $365,000, and the replacement rate for their home type and zip code is $6.35.

$193.15 (Home value ÷ 1,000) x insurance company replacement rate = annual rate ÷ 12 = monthly rate

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 $250,000-$25,000 = 225,000 x 0.01= 2250

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?

$2,333.33 $400,000 × 0.07 = $28,000; then $28,000 ÷ 12 = $2,333.33

You're preparing to list a client's home, and you've got some comps that give you an estimated value of $265,000. Your clients have been in the home for seven years. They've put about $12,000 worth of improvements into the property, and have $130,000 left on their mortgage. Using these figures, how much equity do they have in the property?

$265,000-$130,000= $135,000

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?

$335,000 - $402.52= $334,597.48 Principal - amount applied toward the principal

A buyer with a $350,000 loan has a monthly principal and interest payment of $2,102.36. If $1,801.23 is interest, what's the new principal balance after the first payment is applied?

$349,698.87 $2,102.36 - $1,801.23 = 301.13 - $350,000= $349,698.87

One point is equal to 1% of the mortgage balance. If a borrower wanted two discount points on a $200,000 mortgage, it would cost ___________________.

$4,000 Solve: (200,000 x .02 = $4,000). If borrowers want to secure a lower interest rate, they pay discount points. When a borrower purchases discount points, the points are good for the entire loan term. Discount points are essentially pre-paid interest, paid at the beginning of a loan to drive down overall monthly payments on a loan.

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?

$402.52 $1,798.35 (monthly principal and int.) - $1,395.83 (1st mo. payment of interest)

An annual insurance premium is $500. What's the monthly insurance payment?

$41.67

The value of Carl and Ellie's home is $197,000, and the replacement rate for their home type and zip code is $2.70.

$44.33 (Home value ÷ 1,000) x insurance company replacement rate = annual rate ÷ 12 = monthly rate

A homeowner's monthly mortgage payment is $580.23. If the taxes are $83.33 and the insurance is $41.66, how much of the monthly payment is principal plus interest?

$455.24

The value of Rob and Laura's home is $197,000, and the replacement rate for their home type and zip code is $3.50.

$57.46 (Home value ÷ 1,000) x insurance company replacement rate = annual rate ÷ 12 = monthly rate

If your clients' home value is $156,000, and the homeowners insurance company replacement rate is $4.67, what would the monthly premium be?

$60.71

Buster's total monthly mortgage payment is $939.86. His taxes are $1,800 annually, and his insurance is $900 annually. How much of Buster's total payment is applied to the principal plus interest?

$714.86 $1,800 + $900 = 2700/12= $225 $939.86 - $225= $714.86

Carlos is thinking about paying his mortgage loan early. After he looked at his loan contract he discovered that the lender figures the penalty based off of the remaining principal due. The lender charges a 4% pre-payment penalty. Carlos's outstanding principal is $18,000. How much would he owe in penalty fees?

$720 $18,000 x 0.04

A buyer with a $750,000 loan has a monthly principal and interest payment of $4,376.80. If $3,593.75 is interest, what is the new principal balance after the first payment is applied?

$749,216.95 $4,376.80 - $3,593.75=$783.05 -$750,000= $749,216.95

Steph and Bob are buying their first house. Their principal plus interest will be $643.66 every month. Taxes on the property are $1,400 annually, and combined insurance is $800 annually. How much will their total monthly mortgage payment be?

$826.99 Annual taxes and insurance are divided by 12 to get the monthly amount, and then added to the principal and interest to make the total monthly payment. $1,400 + $800 = 2200/12 = 183.3 643.66 + 183.33 = $826.99

Kay and Roger are thinking about paying off their mortgage loan early. They looked at the loan contract and found that their lender will charge them a pre-payment fee based on the balance owed and a percentage of interest paid within six months. The lender charges 60% of six months' interest. Kay and Roger's mortgage has $50,000 remaining and they pay 6% interest. How much would they owe in penalty fees?

$900 First, divide the interest rate in half (6 ÷ 2 = 3). Then multiply this value by the outstanding balance to get interest paid in six months ($50,000 x 0.03). Next, multiply this result by 60% to find the pre-payment penalty ($1,500 x 0.60).

The value of Harry and Sally's home is $305,000, and the replacement rate for their home type and zip code is $3.65.

$92.77 (Home value ÷ 1,000) x insurance company replacement rate = annual rate ÷ 12 = monthly rate

Gabe's home has an assessed value of $172,000, and his tax rate is .55%. What are the annual taxes?

$946

Calculating Monthly Insurance Premiums

(Home value ÷ 1,000) x insurance company replacement rate = annual rate ÷ 12 = monthly rate Example: Sam's property value is $228,000, and the replacement rate set by his insurance company is $3.50. His monthly insurance premium = ($228,000 ÷ 1,000) x $3.50 = $798 annually, or ÷ 12 = $66.50 per month.

Pre-Payment Penalties

-A consequence for paying off a loan before its intended time -A lender makes its money off of the interest you pay on a loan; the longer you're paying it off, the more money it gets. Because of this, some lenders charge a pre-payment penalty if a loan is paid off early.

Real estate taxes are based on two items:

-A property's assessed value (assessment) -The jurisdiction's tax rates

Compound Interest

-Compound interest is interest earned on the principal plus interest already earned, and then that amount reinvested with the principal amount. -In other words, interest is earned on the interest. This is similar to how you'd earn interest in a savings account.

Who are taxed levied by?

-General taxes, are comprised of taxes levied by the state and local government (state, cities, towns, villages, and counties as well as school districts, parks and lighting districts, drainage, water, and sanitary districts.) -Taxes can also be levied by school, parks and lighting districts, as well as drainage, water and sanitary districts. -These rates will be levied similarly across all parcels in the area, and may also be ad valorem in nature.

How Much Can They Afford?

-If buyers don't know what they qualify for and haven't yet picked out a home you must start with their lender's qualifying total debt and housing ratios. -In most cases, the borrower will need to be qualified using both ratios. -The maximum payment for which a borrower would qualify would be the lesser amount of the two ratios which falls within the lender's acceptable DTI percentage. - Maximum housing payment to meet housing ratio = monthly gross income x lender maximum housing ratio % - Maximum housing payment to meet total DTI ratio = monthly gross income - other debt x lender maximum total DTI ratio %

Qualifying a Buyer for a Mortgage Payment

-Lenders calculate a borrower's ability to repay the loan based on the borrower's debt-to-income ratio and housing debt-to-income ratio, both calculated using the borrower's gross income. -All lenders have different underwriting standards, but a qualifying housing debt-to-income (DTI) ratio for a conventional loan is typically 25% to 28%, and a qualifying total DTI ratio is 31% to 36%, and up to 43% for FHA loans. -Usually, borrowers must qualify with both ratios, being approved to pay the lesser of the two loan payment amounts calculated using the ratios. Those who do may qualify for financing, depending on credit score, assets, and other factors.

Homeowners Insurance Coverage

-State laws don't require homeowners to have home insurance coverage. Unlike automobile owners, homeowners can legally go without homeowners insurance. -If the home is financed, the lender will require the homeowners to carry insurance coverage to protect the lender's interest in the home (the loan amount). This protects lender interests (the loaned funds). -A basic homeowners insurance policy will cover damage caused by fire, lightning, theft, vandalism, windstorms, and hail. However, buyers should verify specific coverage, especially for windstorms and hail, because policies and coverage can vary. -Insurance companies use replacement rates to calculate premiums. Replacement rates vary depending upon location, home type, and other factors.

Steps for Calculating a Pre-Payment Penalty

1. Read the mortgage loan contract. In the contract, they'll find the terms of any pre-payment penalties that might exist. 2. Find the outstanding principal. This is the amount that's still owed to the lender. This amount should be located on the most recent bill. For example, if your client made a down payment of $10,000 on a $150,000 home and have since paid an additional $8,000 toward the principal in monthly payments, the outstanding principal would be $132,000 ($150,000 - $10,000 -$8,000). 3. Find the annual interest rate. This information can be found in the loan contract. The annual interest rate is a key part of figuring out the pre-payment penalty. Once these steps have been followed, the lender may calculate the pre-payment penalty based on a percentage of the interest or of the remaining balance. 1. Calculate the pre-payment penalty using a percentage of interest. Many lenders charge a pre-payment fee based on a percentage of interest paid within a certain time period, such as six months. A common penalty is 80% of six months' interest. a. For a mortgage with $50,000 remaining and a 3% interest rate, start by finding the interest-only portion of the payments in the past six months. First, divide the annual interest rate in half to get 1.5%. Then, multiply this value by the outstanding balance to get interest paid in six months. This would be $50,000 x 0.015, or $750. b. Then, multiply this result by 80% to find the pre-payment penalty. This would be 0.8 x $750, or $600. 2. Calculate the pre-payment penalty using a percentage of the outstanding principal . A lender may charge anywhere between 1% to 4% of the remaining loan balance. a. For a loan with $50,000 remaining and a 3% penalty, the penalty would be $50,000 x 0.03, or $1,500. It's important for your clients to read the loan contract so that they know and understand the pre-payment penalty of their loan. It could be the difference between paying $750 or $1,500.

APR (Annual percentage rate) Calculations

A loan's annual percentage rate (APR) is a standard calculation used by lenders and creditors to help borrowers compare different loan options. A loan with a lower stated interest rate and high fees may actually be a poor choice when compared to a loan with a high rate but very low fees. The only way to know for certain is to compare APRs. The APR calculation combines interest rate and fees into a single rate so it's easier to compare loans with different fees, rates, and terms.

What is assessed value?

A percentage of market value; also the amount of property value to which the tax rate is applied

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?

A. $500,000 x 6.25% (0.0625)/12= 2,604.17 You can find the amount of interest paid by multiplying the original loan amount by the interest rate and dividing by 12. B. If $2,604.17 of the $3,078.59 payment is interest, how much is applied to principal? $2,604.17 - $3,078.59= $474.42 C. If $474.42 is applied to principal, what is Brian's new principal balance after his first payment? $500,000 - $474.42= $499,525.58 The new principal balance is found by subtracting the amount applied to principal from the original loan amount.

What's the interest rate if $12,000 is paid in annual interest on a loan balance of $455,000?

Equation used: Interest rate = annual interest amount paid ÷ loan balance $12,000 ÷ $455,000 = 0.0264 or 2.64%

What's the current loan balance if $15,000 is paid toward interest on a loan with a 7.5% rate?

Equation used: Loan balance (principal) = annual interest amount paid ÷ interest rate $15,000 ÷ 7.5% = $200,000

Interest

Interest is the fee paid back to the lender for the use of their money. The interest portion of the payment generally decreases over the life of the mortgage.

Simple interest

Interest that's calculated based on the current principal of the loan amount multiplied by the interest rate.

Add-on interest

Interest that's calculated based on the total amount of the original loan in addition to the amount calculated for each payment.

Compound interest

Interest that's reinvested into an account that then earns interest.

Which loan is more affordable: Loan A with an interest rate of 6%, $25 in fees, and an APR of 6.5%; or loan B with an interest rate of 5.75%, $150 in fees, and an APR of 7%?

Loan A

Francis is doing his homework and comparing loan options. Here are a couple of loans he came across. Which is more affordable? A) Loan A: Term: one year; principal: $5,000; interest rate: 8%; other fees: $0 B) Loan B: Term: one year; principal: $5,000; interest rate: 7%; other fees: $100

Loan A: Term: one year; principal: $5,000; interest rate: 8%; other fees: $0 oan A = ($5,000 X 8%) = $400. Loan B = ($5,000 X 7%) = $350 + $100 (fees) = $450. There just has to be an easy way to compare loans! And there is.

After researching lenders, Cara has narrowed down her options to two choices: Loan A: $1,000, term one year = 5% interest rate, $25 transaction fee Loan B: $1,000, term one year = 6% interest rate, no transaction fee Which loan is the better deal for Cara?

Loan B! The interest rate doesn't tell the whole story. This is where the APR, which accounts for charges and fees associated with a loan or credit in addition to the interest rate, gives you a clearer picture. With Loan B, Cara pays $60 in interest (6% x $1,000) and no fees. When she divides this by her loan amount ($60 ÷ $1,000) it returns an APR of 6%. With Loan A, she's paying $50 in interest (5% x $1,000) plus $25 in other charges or fees. Her lender deducts the transaction fee from her loan total, so she actually only receives $975 but pays $75 total for the loan. When she divides this by the amount received ($75 ÷ $975) it returns an APR of 7.7%. Loan B has a much lower APR.

The APR accounts for all of the costs of obtaining a loan, and makes it easier for borrowers to compare loan products. Let's help Francis narrow down more loan options. Which of these two is more affordable? A) Loan C, Term: one year; principal: $5,000; interest rate: 8%; other fees: $25; APR 8.5% B) Loan D, Term: one year; principal: $5,000; interest rate: 7%; other fees: $50; APR 8%

Loan D, Term: one year; principal: $5,000; interest rate: 7%; other fees: $50; APR 8 The lower APR is the more affordable option.

Ending balance (Amortization Table)

Loan balance after payment is applied

Beginning balance (Amortization Table)

Loan balance prior to the monthly payment being applied

Insurance replacement rates for homeowners insurance can vary depending on many factors, including home type and ____

Location of the property

What does the "T" in PITI stand for?

Taxes

What's an outstanding principal balance?

The amount that's still owed to the lender

Why PMI?

The reason down payment requirements for financed home purchases are often 20% is that, in the event the lender has to foreclose, chances are good that at least 80% of the value will be realized at the foreclosure sale. So, the lender recoups the amount it originally loaned. Private mortgage insurance (PMI) is used to protect lender interests when buyers don't have at least a 20% down payment.

Sophia and Antonio are expecting twins. They want to sell their old house and buy a larger home using a conventional loan. In order to be sure they'll get the PMI waived, what will they need to have?

They should have a loan-to-value ratio of 80% or less. Primary mortgage insurance may kick in when the loan-to-value ratio exceeds 80%; that is, the borrower is borrowing more than 80% of the property's value. To be sure they can avoid paying PMI, Sophia and Antonio need to put at least 20% down.

Taxes

This portion includes the property taxes, which is the cost of public services divided by the value of property for the area.

Trisha and Juan's monthly debt obligations are $450, their anticipated mortgage payment will be $1,425. Their combined gross income is $9,856 and their combined net income is $6,895. Their DTI is 19.02%.

True $450 + $1,425= 1875/$9,856= 0.1902 x 100

Rachel and Yoshi's monthly debt obligations are $1,200 and their anticipated mortgage payment is $1,800. Their combined monthly gross income is $12,956, and their combined net income is $8,685. Their DTI is 23.15%.

True $1,200 + $1,800 / $12,956 = .2315 x 100

Drew's monthly debt obligations are $250, and his anticipated mortgage payment will be $950. His gross income is $3,850. His DTI is 31.17%.

True $250 + $950= 1200/$3,850 = 0.3116 x 100

Brendan's lender set him up with a loan in which the majority of Brendan's early payments go toward interest, his monthly payments remain the same, and he doesn't start paying much toward his principal until closer to the end of the loan. This is ______.

Typical amortization

PMI rate factors are based on _____________________________________.

credit score and loan-to-value ratios.

Private mortgage insurance (PMI) is used to fill the ____________________________________.

down payment gap for buyers who don't have 20% to put down when financing a home loan. This insurance protects lenders in the event of a foreclosure.

PMI factors can be located _________________________________________.

online or on mortgage insurance rate cards.

To find the amount of monthly interest paid, multiply the __________________________________________.

original loan amount by the interest rate and divide by 12.