AND
Copyright © 2009 Pearson Education, Inc.
Chapter 11 Section 5 - Slide 1
Chapter 11
Consumer Mathematics
Copyright © 2009 Pearson Education, Inc.
Chapter 11 Section 5 - Slide 2
WHAT YOU WILL LEARN
• Mortgages
• Annuities, sinking funds, and
retirement investments
Copyright © 2009 Pearson Education, Inc.
Chapter 11 Section 5 - Slide 3
Section 5
Buying a House with a
Mortgage
Copyright © 2009 Pearson Education, Inc.
Chapter 11 Section 5 - Slide 4
Homeowner’s Mortgage


A long-term loan in which the property is
pledged as a security payment of the difference
between the down payment and the sale price.
The two types are the adjustable-rate loan and
the conventional 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.
Copyright © 2009 Pearson Education, Inc.
Chapter 11 Section 5 - Slide 5
Example: Conventional Loans



The Bentons have decided to purchase a
duplex. A selling price of $120,800 was
agreed upon. Their bank requires a 20% down
payment and a payment of 1 point at closing.
Determine the Benton’s down payment.
With a 20% down payment, determine the
Benton’s mortgage.
What is the cost of the point paid by the
Benton’s on their mortgage?
Copyright © 2009 Pearson Education, Inc.
Chapter 11 Section 5 - Slide 6
Solution



The down payment is
0.20  $120,800 = $24,160
The mortgage is the selling price minus the
down payment.
$120,800  $24,160 = $96,640.
One point equals 1% of the mortgage amount.
0.01  $96,640 = $966.40.

At closing, the Benton’s will pay the down
payment of $24,160 to the seller and 1
point, or $966.40 to the bank.
Copyright © 2009 Pearson Education, Inc.
Chapter 11 Section 5 - Slide 7
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.
Copyright © 2009 Pearson Education, Inc.
Chapter 11 Section 5 - Slide 8
Example: Qualifying for a Mortgage



Suppose the Benton’s gross monthly income is $3600
and that they have 14 remaining payments of $160 per
month on their car loan and 11 remaining payments of
$45 per month on a loan used to purchase a computer
system. The taxes on the duplex they want to purchase
are $105 per month and the insurance is $42 per
month.
What maximum monthly payment does the loan officer
think the Bentons can afford?
The Benton’s want a 25-year $96,640 mortgage. If the
interest rate is 7.5%, determine whether the Bentons
qualify for the mortgage.
Copyright © 2009 Pearson Education, Inc.
Chapter 11 Section 5 - Slide 9
Qualifying for a Mortgage Solution:


Finding 28% of the adjusted monthly income,
0.28  $3395 = $950.60, the maximum
monthly payment is determined.
Table 11.4 on page 696 of your text book
shows that with an interest rate of 7.5%, a 25year mortgage would have a monthly
mortgage payment of $7.39 per thousand
dollars of mortgage.
96,640
 96.64
1000
Copyright © 2009 Pearson Education, Inc.
Chapter 11 Section 5 - Slide 10
Qualifying for a Mortgage Solution
(continued)



Then multiply 96.64  $7.39 ≈ $714.17
To this monthly payment (principal and
interest) add the taxes, $105, and insurance,
$42, for a total of $861.17.
Since this is less than the $950.60 the bank
figured they could afford, they should be
granted the loan.
Copyright © 2009 Pearson Education, Inc.
Chapter 11 Section 5 - Slide 11
Adjustable Rate Mortgages - ARM’s
(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.
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.
Copyright © 2009 Pearson Education, Inc.
Chapter 11 Section 5 - Slide 12
Other Types of Mortgages





FHA Mortgage
VA Mortgage
Graduated Payment Mortgage (GPM)
Balloon-Payment Mortgage (BPM)
Home Equity Loans
Copyright © 2009 Pearson Education, Inc.
Chapter 11 Section 5 - Slide 13