Business Mathematics - Chapter 15

Ben Brown bought a home for $225,000. He put down 20%. The mortgage is at 6 ½% for 30 years. Using the table in the handbook, his monthly payment is:

$1,139.40

Craig Hammer purchased a new condominium for $225,000. The bank required a $30,000 down payment. Assuming a rate of 8% on a 25-year mortgage, Craig's monthly payment is (use the table in the handbook):

$1,505.40

Joe Levi bought a home in Arlington, Texas for $140,000. He put down 20% and obtained a mortgage for 30 years at 5.5% Table Factor: 5.68%

$140,000 x .20 = $28,000 $140,000 - $28,000 = $112,000 Monthly Payment: $112,000 / 1000 = 112 112 x 5.68 = $636.16 Total Interest: 30 x 12 = 360 months 360 x 636.16 = $229,017.60 $229,017.60 - $112,000 = $117,017.60

Mike Jones bought a new split-level home for $150,000 with 20% down. He decided to use Victory Bank for his mortgage. They were offering 13.75% for 25-year mortgages. Provide Mike with an amortization schedule for two periods. Table Factor: 11.85

$150,000 x .20 = $30,000 $150,000 - $30,000 = $120,000 1. Monthly Payment: 120,000 / 1000 = 120 120 x 11.85 = $1422 Interest: 13.75% / 12 = 0.0114583 0.0114583 x 120,000 = $1375 Principal: $1422 - $1375 = $47 Balance Outstanding: $120,000 - $47 = $119,953 2. Monthly Payment: $119,953 / 1000 = 119.95 119.95 x 11.85 = $1421.44305 Interest: 13.75% / 12 = 0.0114583 0.0114583 x $119,953 = $1374.46 Principal: $1422- $1374.46 Principal: $47.54 Balance Outstanding: $119,953 - $47.54 = $119,905.46

CNBC.com reported mortgage applications dropped in March 2015 due to an increase in the rate on 30-year fixed rate mortgages to an average of 4.01%. Dennis Natali wants to purchase a vacation home for $235,000 with 20% down. Calculate his monthly payment for a 20-year mortgage at 3.5%. Calculate total interest. Table Factor: 5.80

$235,000 x 20% = $47,000 $235,000 - $47,000 = $188,000 Monthly Payment: $188,000 / 1000 = 188 188 x 5.80 = $1090.40 Total Interest: 20 years x 12 months = 240 Months 240 x $1090.40 = $261,696 $261,696 - $188,000 = $73,969

Bill Moore took out an $80,000 mortgage on a ski chalet. The bank charged 4 points at closing. The points in dollars cost Bill:

$3,200

Harriet Marcus is concerned about the financing of a home. She saw a small cottage that sells for $50,000. Assuming that she puts 20% down, what will be her monthly payment and the total cost of interest over the cost of the loan for each assumption?

$50,000 x .20 = $10,000 $50,000 - $10,000 = $40,000 $40,000 / 1000 = 40 25 years , 11.5% : 10.17 Monthly Payment: 40 x 10.17 = $406.80 Total Cost of Interest: 12 months x 25 years = 300 Months 300 x $406.80 = $122,040 $122,040 - $40,000 = $82,040 25 years, 12.5% : 10.91 Monthly Payment: 40 x 10.91 = $436.40 Total Interest: 300 x 436.40 = $130,920 $130,920 - $40,000 = $90,920 25 years, 13.5%: 11.66 Monthly Payment: 40 x 11.66 = $466.40 Total Interest: $466.40 x 300 = $139,920 $139,920 - $40,000 = 25 years: 15% : 12.81 40 x 12.81 = 512.40 total Interest: 512.40 x 300 = $153,720 $153,720 - $40,000 = $113,720 what is the savings in interest cost between 11.5% and 15%? $113,720 - $82,040 = $31,680 If Harriet Uses 30 years instead of 25 for both 11.5% and 15%, what is the difference in interest? 30 years, 11.5%, TF: 9.91 40 x 9.91 = $396.40 360 x $396.40 = $142,704 $142,704 - $40,000 = $102,704 30 years, 15%, TF: 12.65 40 x 12.65 = $506 360 x 506 = $182,160 $182,160 - $40,000 = $142,160 Difference: $142,160 - $102,704 = $39,456

Oprah Winfrey has closed on a 42-acre estate near Santa Barbara, California for $50,000,000. If Oprah puts 20% down and finances at 7% for 30 years, what would her monthly payment be? Table factor: 6.66

$50,000,000 x 20% = $10,000,000 $50,000,000 - $10,000,000 = $40,000,000 Monthly Payment: $40,000,000 / 1000 = $40,000 x 6.66 = $266,400

Order the steps to calculate interest, principal, and the new balance of monthly payments.

1. Calculate the interest for a month (use current principal) Interest = Principal x Rate x Time 2. Calculate the amount used to reduce the principal: Principal Reduction = Monthly payment - interest 3. Calculate the new principal: Current Principal - reduction of principal = new principal

The monthly amount to be paid in to escrow for insurance and taxes is ____ of the annual costs.

1/12

Match the mortgage type to the related disadvantages:

15-year fixed rate: A larger down payment is needed. Monthly payment is higher. 30-year fixed rate: locked into a higher rate in periods of falling interest. You can refinance, but will incur various costs to do so. Adjustable Rate: Monthly payments could rise if interest rates rise. Riskier than fixed rate mortgages in regards to monthly payments. Biweekly: extra payment made each year. Only good for those seeking early payoff of loan. Graduated-payment: Higher APR than variable or fixed-rate mortgages. home equity loan: you could lose your home if the loan is defaulted on. No annual or interest caps. Interest-only: no equity is built up in the early years. interest-only:

Match the mortgage type to the related advantage:

15-year fixed rate: Lower interest. Equity builds up faster while interest costs are cut by more than one-half. 30-year fixed rate: a predictable monthly payment Adjustable rate: ARM's have lower rates than fixed rate mortgages. Rates can be lowered without refinancing if market rate drops. Caps limit how high the rate can go. biweekly: shorten loan term, saves on interest and builds equity twice as fast. graduated-payment: easier to qualify for than 15 or 30 year fixed rate mortgages. Monthly payments start low and increase over time. home equity loan: inexpensive and reliable lines of credit backed by home equity. Interest is tax deductible. Rates can be locked in. interest-only: borrowers pay interest but no principal in the first 5 to 15 years of the loan.

Lizzy Clar bought a home for $160,000, putting down $30,000. The rate of interest is 7% for 25 years. The total yearly mortgage payment is:

160,000-30,000=130,000 $130,000 / 1000 = 130 25 years x 12 months = 300 Months .07 / 12 = 0.00583 $130 × $7.07 = $919.10 $919.10 × 12 months = $11,029.20

Beverly Frost bought a home for $190,000 with a down payment of $19,000 at 7% for 25 years. Since then the rate has risen to 9%. How much more would her monthly payment be if she bought the house at 9%?

227

if one point equals 1% of the mortgage, than 3 points equals ___% of the mortgage

3%

Points represent:

An additional cost of receiving the mortgage

Mortgage Bankers Association reported the median price of a home sold in the United States in January 2015 was $199,600. Pat Radigan wants to purchase a new home for $305,500. Pat puts 20% down and will finance the remainder of the purchase. Compare the following two mortgage options he has: 10 years at 3.5% or 15 years at 5%.

Calculate Pat's monthly payment for both the 10 and 15 year mortgage? $305,500 x .20 = $61,100 $305,500 - $61,100 = $244,400 $244,400 / 1000 = 244.40 10 years, 3.5%, TF: 9.89 Monthly Payment: 244.40 x 9.89 = $2417.12 15 years, 5%, TF: 7.91 Monthly Payment: 244.40 x 7.91 = $1933.20 Calculate Pat's total cost of interest for both the 10 and 15 year mortgage? interest: 10 years x 12 months = 120 months 120 x 2417.12 = $290,054.40 $290,054.40 - $244,400 = $45,654.40 15 years x 12 months = 180 months 180 x $1933.20 = $347,976 $347,976 - $244,400 = $103,576 What is the difference in interest paid between the 10 and 15 year mortgage? $103,576 - $45,654.40 = $57,921.60

A biweekly mortgage results in six extra payments per year.

False

Points are to be paid off as part of the regular monthly payment.

False

Daniel and Jan agreed to pay $560,000 for a four-bedroom colonial home in Waltham, Massachusetts, with a $60,000 down payment. They have a 30-year mortgage at a fixed rate of 6.00%. (Use Table 15.1)

How much is their monthly payment? $560,000 - $60,000 = $500,000 $500,000 / 1000 = 500 500 x 6 = $3000 Monthly Payment: $3000 After the first payment, what would be the balance of the principal? Portion to: Interest: .06 / 12 = 0.005 0.005 x $500,000 = $2,500 Principal: $3000 - $2500 = $500 Balance of loan outstanding: $500,000 - $500 = $499,500

As of the printing of this text, what costs are tax deductible?

Interest and taxes

over time the amount applied to ______ decreases and the amount applied to the _____ increases.

Interest, Principal

Purchasing a home is considered to be a (major/minor) lifetime decision.

Major

Complete the following table: Selling Price: $150,000 Down Payment: $30,000 Amount Mortgage: $120,000 Rate: 7% Years: 30 Table Factor: 6.66

Monthly Payment: $120,000 / 1000 = 120 120 x 6.66 = $799.20 Interest: 0.07 / 12 = 0.005833 0.005833 x $120,000 = $700 Principal: $799.20 - $700 = $99.20 Balance at end of month: $120,000 - $99.20 = $119,900.80

Joe Levi bought a home in Arlington, Texas for $140,000. He put down 20% and obtained a mortgage for 30 years at 7.5%. What is the difference in interest cost if he had obtained a mortgage rate of 5.5%? Table Factor for 7.5%: 7 Table Factor for 5.5%: 5.68

Mortgage Rate of 5.5%:: Monthly Payment: $636.16 Total Interest: $117,017.60 --- Mortgage Rate of 7.5%: $140,000 x .20 = $28,000 $140,000 - $28,000 = $112,000 Monthly Payment: $112,000 / 1000 = 112 112 x 7 = 784 Total Interest: 360 x 784 = $282,240 $282,240 - $112,000 = $170,240 Difference: $170,240 -$117,017.60 = $53,222.40

Bob Jones bought a new log cabin: Selling Price: $70,000 interest: 11% Time: 30 years Table Factor: 9.53

PAYMENT 1: Monthly Payment: $70,000 / 1000 = 70 70 x 9.53 = $667.10 Interest: 11% / 12 = .009167 .009167 x $70,000 = $641.67 Principal: $667.10 - $641.67 = $25.43 $70,000 - $25.43 = $69,974.57 PAYMENT 2: Interest: .009167 x $69,974.57 = $641.43 Principal: $667.10 - $641.43 = $25.67 New Loan Outstanding: $69,974.57 - $25.67 = $69,948.90 PAYMENT 3: Interest: .009167 x $69,948.90 = $641.20 Principal: $667.10 - $641.20 = $25.90 $69,948.90 - $25.90 = $69,923

Drew purchases a $144,000 home on a 30 year fixed rate mortgage at 7.5%. Match the following values to the terms:

Table Factor: 7.00 N = 30-year term, I = 7.5%; TF = 7 Term of loan in years: 30 Monthly payment: $1,008 Dividing the mortgage amount by $1,000 then multiplying this by the table factor: $144,000 / $1,000 = 144 x 7.00 = $1,008

Yvette took out a 30-year loan for $122,900 at 8%. The monthly payments are $902.09 Match each of the values to their respective terms.

Total Cost of Interest: Subtract the mortgage amount from the total of all payments. $324,752.40 - $122,852.40 Total of all payments: Multiply the monthly payment by the number of periods. 30 years x 12 months x 902.09 = $324,752.40 Table Factor: N= 30 years, I = 8%, Table Factor = 7.34

A monthly payment of $850 on a 30-year $80,000 mortgage results in a total cost of interest of $226,000.

True

True or False: Abby's monthly payment is $781.60 per month. The principal is $80,000 at a rate of 11 1/2% for 35 years. The principal reduction after the first mortgage payment is $14.93.

True

True or False: The mortgage loan amortization table is the same type as used for installment loans.

True

A subprime loan is what type of mortgage.

adjustable rate

which loan type has a substantial reduction in interest paid and can also reduce the length of the loan?

biweekly

Title search, recording, and lawyer fee are an example of:

closing costs

Subprime loans threatened the stability of the housing markets when home prices (increased, Decreased)

decreased

refinancing should be considered if interest rates _____ .

drop

landscaping is an example of what type of cost?

repairs and maintenance.

which mortgage type allows senior homeowners to borrow against their home equity, often allowing the owner to receive monthly checks?

reverse