Chapter 8. Section 4
Page 1
Section 8.4 – Home Ownership
Homework (pg 460) 1-4
• Definition: A mortgage is a long term loan used to buy a home.
• Definition: The down payment is the amount of money paid at closing towards the purchase price of
a house
• There are fixed rate mortgages (refered to as fixed) meaning the interest rate is fixed for the entire
loan period, and variable rate mortgages (refered to as ARMs) which vary depending on the market
from year to year or even month to month
• Typically one gets a loan from a mortgage broker. This broker gives you the money to purchase the
home (minus the down payment) at a given interest rate and charges you a certain fee, known as a
point or points. One point is one percent of the mortgage amount
• We do not need Table 8.4. We can find these values using the formula we were given in our
previous class. To calculate the monthly payment (principal plus interest) for a home costing A
dollars at i % per month for a total of n months, the monthly payment R is given by
1
11
n
Ai
R
i
=
−
+
Example: The price of a home is $195,000. You put 10% down and finance the rest with a 30
year fixed mortgage at 7.5% APR. What is your monthly payment and how much do you pay
over the life of the loan?
Solution: Loan amount = A = 195000 – 0.1(195000) = $175,500
i = 0.075/12 = 0.00625, and n = 30(12) = 360
360
175500(0.00625)
1227.12
11
11
11.00625
n
Ai
R
i
===
−−
+
Over the life of the loan you pay 1227.12, 360 times = $441,763.20
Your interest alone = 441763.20 – 175500 = $266,263.2
• Example (Checkpoint 1): The price of a home is $240,000. The bank requires a 10% down payment
and three points at the time of closing. The cost of the home is financed with a 30 year fixed
mortgage at 6.5% APM. Find the required down payment, amount of mortgage, amount due at
closing to the lender, the monthly payment and the total interest.
Solution: Down payment = 10% of 240000 = $24,000
Amount of mortgage = 240000 – 24000 = $216,000
Amount due at closing = 3 points of 216000 = 3% of 216000 = $6,480
Monthly payment = 360
216000(0.00542)
1365.27
1
11.00542
R==
−
Total loan paid = 360 (1365.27) = $491,496.10
Total interest paid = 491496.10 – 216000 = $275,496.10
