Section 11.5
Buying a
House with a
Mortgage
Copyright 2013, 2010, 2007, Pearson, Education, Inc.
INB Table of Contents
2.3-2
Date
Topic
June 23, 2014
Section 11.5 Examples
36
June 23, 2014
Section 11.5 Notes
37
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Page #
What You Will Learn

Homeowner’s Mortgage

Conventional Loans

Adjustable-Rate Mortgages
11.5-3
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Homeowner’s Mortgage
A homeowner’s mortgage is a longterm loan in which the property is
pledged as a security payment of the
difference between the down payment
and the sale price.
11.5-4
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Homeowner’s Mortgage

The two types are the conventional
loan and the adjustable-rate loan (or
the variable-rate loan).

The major difference between the two is
that the interest rate for a conventional
loan is fixed for the duration of the loan,
where as the interest rate for the
variable-rate loan may change every
period, as specified in the loan.
11.5-5
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Homeowner’s Mortgage

Lending institutions may require the buyer to
pay one or more points for a loan at the time
of the closing (the final step in the sale
process).

According to the Internal Revenue Service,
points are interest prepaid by the buyer and
may be used to reduce the stated interest rate
the lender charges.

One point is equal to 1% of the loan amount.
11.5-6
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Example 1: Down Payment and Points
Patricia and Marshall Martin wish to purchase a house selling for
$249,000. They plan to obtain a loan from their bank. The bank
requires a 15% down payment, payable to the seller, and a payment
of 2 points, payable to the bank, at the time of closing.
a)
Determine the Martin’s down payment.
b)
Determine the amount of the Martin’s mortgage.
c)
Determine the cost of the 2 points paid by the Martins on their
mortgage.
11.5-7
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Qualifying for a Mortgage

Banks use a formula to determine the maximum
monthly payment that they believe is within the
purchaser’s ability to pay.

They calculate the adjusted monthly income which
equals the gross monthly income minus any fixed
monthly payments (with more than 10 payments
remaining).

They multiply that result by 28%.

This is the maximum monthly payment the lending
institution believes the purchaser can afford.

This includes: principal, interest, tax, insurance.
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Principal and Interest Payment
Formula
r
m
m is principal and interest payment
p is the amount of the mortgage
r is the interest rate as a decimal
n is the number of payments per year
t is the time in years
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p 
 n

r
1  1  
n

 nt
Example 2: Using the Principal and
Interest Payment Formula
Use the principal and interest payment formula to
calculate the Martin’s monthly principal and interest
payment. Recall that the Martins are seeking a 30-year,
$211,650 mortgage with an interest rate of 7%.
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Example 3: Using the Principal and
Interest Payment Formula
The Rosens found a house selling for $113,500. The taxes on the house are
$1200 per year, and insurance is $320 per year. They are requesting a
conventional loan from the local bank. The bank is currently requiring a 15%
down payment and 3 points, and the interest rate is 10%. The Rosen's gross
monthly income is $4750. They have more than 10 monthly payments remaining
on a car, a boat, and furniture. The total monthly payments for these items is
$420. Their bank will approve a loan that has a total monthly mortgage payment
of principal, interest, property taxes, and homeowners’ insurance that is less
than or equal to 28% of their adjusted monthly income.
a)
b)
c)
d)
e)
Determine
Determine
Determine
Determine
Determine
taxes.
f) Determine
g) Determine
11.5- principal.
15
the required down payment.
the cost of the 3 points.
28% of their adjusted monthly income.
the monthly payments of principal and interest for a 20-year loan.
their total monthly payment, including homeowners’ insurance and
whether the Rosens qualify for the 20-year loan.
how much of the first payment on the loan is applied to the
Copyright 2013, 2010, 2007, Pearson, Education, Inc.
Example 3: Using the Principal and
Interest Payment Formula
a) Determine the required down payment.
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Example 3: Using the Principal and
Interest Payment Formula
b) Determine the cost of the 3 points.
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Example 3: Using the Principal and
Interest Payment Formula
c) Determine 28% of their adjusted monthly income.
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Example 3: Using the Principal and
Interest Payment Formula
d) Determine the monthly payments of principal and interest for a 20-year loan.
11.519
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Example 3: Using the Principal and
Interest Payment Formula
e) Determine their total monthly payment, including homeowners’ insurance and
taxes.
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Example 3: Using the Principal and
Interest Payment Formula
f) Determine whether the Rosens qualify for the 20-year loan.
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Example 3: Using the Principal and
Interest Payment Formula
g) Determine how much of the first payment on the loan is applied to the
principal.
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Amortization Schedule

By repeatedly using the simple interest formula month
to month on the unpaid balance, you could calculate the
principal and the interest for all the payments, which is
a tedious task.

However, a list containing the payment number,
payment on the interest, payment on the principal, and
balance of the loan can be prepared using a computer.
Such a list is called a loan amortization schedule.
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Amortization
Schedule
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Adjustable Rate Mortgages

Also, called ARMs or variable-rate
mortgages.

The monthly mortgage payment rate
remains the same for a 1, 2, or 5-year
period, even though the interest rate of a
mortgage may change every 3 or 6
months or some other predetermined
period.
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Adjustable Rate Mortgages
The monthly payment is readjusted
after the time period so the loan will be
paid off in the set amount of time or
the bank may extend the time period
of the loan beyond the predetermined
years to make the payment affordable.
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Example 4: An Adjustable-Rate
Mortgage
Tony and Keisha Torrence purchased a house for $115,000 with a down
payment of $23,100. They obtained a 30-year adjustable-rate mortgage with
the following terms. The interest rate is based on a 6-month Treasury bill. The
interest rate charged is 3% above the interest rate of the 6-month Treasury
bill (3% is the add on rate). The interest rate is adjusted every 6 months on
the date of adjustment. The interest rate will not change more than 1% (up or
down) when it is adjusted. The maximum interest rate for the duration of the
loan is 12%. There is no lower limit on the interest rate. The initial mortgage
interest rate is 5.5%, and the monthly payments (including principal and
interest) are adjusted every 5 years.
a)
Determine the initial monthly payment.
b)
Determine the adjusted interest rate in 6 months if the interest rate on the
Treasury bill at that time is 2%.
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Table
11.4
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Rate Caps

To prevent rapid increases in interest rates,
some banks have a rate cap. A rate cap limits
the maximum amount the interest rate may
change.

A periodic rate cap limits the amount the
interest rate may increase in any one period.
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Rate Caps

An aggregate rate cap limits the interest rate
increase and decrease over the entire life of
the loan.

A payment cap limits the amount the monthly
payment may change but does not limit
changes in interest rates.
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Other Types of Mortgages
FHA Mortgage
VA Mortgage
Graduated Payment Mortgage (GPM)
Balloon-Payment Mortgage (BPM)
Home Equity Loans
Also, see
www.homemortgageinformation.org
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