Mortgage Project

Math 1050 Mortgage Project

Names____________Stephanie Pavlov_____ Due date: ___Oct 23___

In this project we will examine a home loan or mortgage. Assume that you have found a home

for sale and have agreed to a purchase price of $198,500.

Down Payment: Assume that you are going to make a 10% down payment on the house.

Determine the amount of your down payment and the balance to finance.

Down Payment___$19850_______ Mortgage Amount___$178650_______

Part I: 30 year Mortgage

Monthly Payment: Calculate the monthly payment for a 30 year loan (rounding up to the

nearest cent) by using the following formula . Show your work. [ PMT is the monthly loan

payment, P is the mortgage amount, r is the annual percent rate for the loan in decimal, and Y is

the number of years to pay off the loan. For the 30 year loan use an annual interest rate of

4.975%.

Monthly Payment for a 30 year mortgage = ____$956.30_________

Note that this monthly payment covers only the interest and the principal on the loan. Itdoes not

cover any insurance or taxes on the property.

Amortization Schedule: In order to summarize all the information regarding the amortization of

a loan, construct a schedule that keeps track of the payment number, the principal paid, the

interest, and the unpaid balance. A spreadsheet program is an excellent tool to develop an

amortization schedule. We can use a free amortization spreadsheet on the web.

The web address is: http://www.bretwhissel.net/amortization/amortize.html. Enter theamount

of the loan, i.e. the selling price minus the down payment, the interest rate, and the appropriate

number of years. Check the box to show the schedule. If you are making extra payments

towards the principal, include it in the monthly payment and leave the number of payments box

blank.

Amortization Schedule monthly payment for a 30 year mortgage =___$956.30__________

(Note: if this is more than 2 or 3 cents different from your calculation, check your numbers!)

Total interest paid over 30 years = ___$165,618_________

Total amount repaid = ___$344,268__________

Notice that the amount of the payment that goes towards the principal and the amount that goes

towards the interest are not constant. What do you observe about each of these values?

For the first 17 years, most of the monthly payment goes towards interest.

Find the number of the first payment when more of the payment goes toward principal than

interest.

Payment 194

As already mentioned, these payments are for principal and interest only. You will also have

monthly payments for home insurance and property taxes. In addition, it is helpful to have

money left over for those little luxuries like electricity, running water, and food. As a wise home

owner, you decide that your monthly principal and interest payment should not exceed 35% of

your monthly take-home pay. What minimum monthly take-home pay should you have in order

to meet this goal? Show your work for making this calculation.

Minimum monthly take home pay = _________$2732_______________.

It is also important to note that your net or take-home pay (after taxes) is less than your gross pay

(before taxes). Assuming that your net pay is 73% of your gross pay, what minimum gross

annual salary will you need to make to have the monthly net salary stated above? Show your

work for making this calculation.

2731 =    73

X           100

273100= 73X

3741.10= X

3741.10(12)

Minimum gross annual salary = _______$44893.15___________________

Part II: Selling the House

Let’s suppose that after living in the house for 10 years, you want to sell. The economy

experiences ups and downs, but in general the value of real estate increases over time. To

calculate the value of an investment such as real estate, we use continuously compounded

interest.

Find the value of the home 10 years after purchase assuming a continuous interest rate of 4%.

Use the full purchase price as the principal. Show your work.

A= Pe^rt

A=198500e^(.04)(10)

A=$296127.20

Assuming that you can sell the house for this amount, use the following information to calculate

your gains or losses:

Selling price of your house ____$296127.20_______________

Original down payment ______$19850__________

Mortgage paid over the ten years __$114756___________

The principal balance on your loan after ten years___$145,208.55_______________

Do you gain or lose money over the 10 years? How much? Show your amounts and summarize

your results:

Gained $16,312.65

Selling Price – ( Down Payment + Mortage Paid + Principal Balance )

Part III: 15 year Mortgage

Using the same purchase price and down payment, we will investigate a 15 year mortgage.

Monthly Payment: Calculate the monthly payment for a 15 year loan (rounding up to the

nearest cent) by using the following formula . Show your work. [ PMT is the monthly loan

payment, P is the mortgage amount, r is the annual percent rate for the loan in decimal, and Y is

the number of years to pay off the loan. For the 15 year loan use an annual interest rate of

4.735%.

Monthly Payment for a 15 year mortgage = ______$1388.21_______

Use the amortization spreadsheet on the web again, this time entering the interest rate and

number of payments for a 15 year loan.

Amortization Schedule monthly payment for a 15 year mortgage =____$1388.21_________

(Note: if this is more than 2 or 3 cents different from your calculation, check your numbers!)

Total interest paid over 15 years = _____$71,228.58_______

Total amount repaid = _____$249,878.58________

Find the number of the first payment when more of the payment goes toward principal than

interest.

Payment 5-           $ 694.14 Prin, $694.07 Int

Suppose you paid an additional $100 towards the principal each month.

How long would it take to pay off the loan with this additional payment?

13 years, 8 months

What is the total amount of interest paid over the life of the loan?

$63899.69

Compare this total amount repaid to the total amount repaid without any extra payments. How

much more or less would you spend if you made the extra principal payments?

$7328.89 less spent with 100 extra in principal/month.

III: Reflection

Did this project change the way you think about buying a home? Write one paragraph stating

what ideas changed and why. If this project did not change the way you think, write how this

project gave further evidence to support your existing opinion about buying a home. Be specific.

This changed the way I look at buying a home. Well, more like the way I look at paying my current mortgage. 100 extra per month significantly reduces the amount of interest paid over the life of the loan. Also, it changes the way I look at loan terms. 30 years is the standard, but 15 years is a slightly higher payment and saves a lot more money.

 

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