11.5 Buying a House with a Mortgage FILLED IN.notebook February 17, 2015

Transcription

1 11.5 Buying a House with a Mortgage 1

2 DOWN PAYMENT The amount of cash the buyer must pay the seller before the lending institution will grant the buyer a mortgage for the remaining amount of the home price 2

3 DOWN PAYMENT The amount of cash the buyer must pay the seller before the lending institution will grant the buyer a mortgage for the remaining amount of the home price 3

4 DOWN PAYMENT The amount of cash the buyer must pay the seller before the lending institution will grant the buyer a mortgage for the remaining amount of the home price ADJUSTABLE RATE or VARIABLE RATE LOAN A type of homeowner's mortgage where the interest rate for the loan may change every period as specified in the terms of the loan 4

5 DOWN PAYMENT The amount of cash the buyer must pay the seller before the lending institution will grant the buyer a mortgage for the remaining amount of the home price ADJUSTABLE RATE or VARIABLE RATE LOAN A type of homeowner's mortgage where the interest rate for the loan may change every period as specified in the terms of the loan CONVENTIONAL LOAN A type of homeowner's mortgage where the interest rate is fixed for the life of the loan. THE DIFFERENCE between an adjustable rate and conventional mortgage is that you know what you are paying every month for a conventional loan. You receive notice before your adjustable loan changes and the change can be unlimited in terms of monthly payments (i.e. a jump from $800 to $2000 extreme, but possible) 5

6 DOWN PAYMENT The amount of cash the buyer must pay the seller before the lending institution will grant the buyer a mortgage for the remaining amount of the home price ADJUSTABLE RATE or VARIABLE RATE LOAN A type of homeowner's mortgage where the interest rate for the loan may change every period as specified in the terms of the loan CONVENTIONAL LOAN A type of homeowner's mortgage where the interest rate is fixed for the life of the loan. THE DIFFERENCE between an adjustable rate and conventional mortgage is that you know what you are paying every month for a conventional loan. You receive notice before your adjustable loan changes and the change can be unlimited in terms of monthly payments (i.e. a jump from $800 to $2000 extreme, but possible) POINTS Purchased at a rate of 1% of the amount being mortgage points purchased reduce the interest rate of a loan thus reduces the monthly payments in a conventional loan mortgage. 6

7 DOWN PAYMENT The amount of cash the buyer must pay the seller before the lending institution will grant the buyer a mortgage for the remaining amount of the home price ADJUSTABLE RATE or VARIABLE RATE LOAN (ARMs) A type of homeowner's mortgage where the interest rate for the loan may change every period as specified in the terms of the loan CONVENTIONAL LOAN A type of homeowner's mortgage where the interest rate is fixed for the life of the loan. THE DIFFERENCE between an ARM and conventional mortgage is that you know what you are paying every month for a conventional loan. You receive notice before your adjustable loan changes and the change can be unlimited in terms of monthly payments (i.e. a jump from $800 to $2000 extreme, but possible) POINTS Purchased at a rate of 1% of the amount being mortgage points purchased reduce the interest rate of a loan thus reduces the monthly payments in a conventional loan mortgage. ADD ON RATE or MARGIN This is the amount of interest added on to the interest rate of a 6 month Treasury bill when a Treasury bill is used as the base for an ARM. 7

8 DOWN PAYMENT The amount of cash the buyer must pay the seller before the lending institution will grant the buyer a mortgage for the remaining amount of the home price ADJUSTABLE RATE or VARIABLE RATE LOAN (ARMs) A type of homeowner's mortgage where the interest rate for the loan may change every period as specified in the terms of the loan CONVENTIONAL LOAN A type of homeowner's mortgage where the interest rate is fixed for the life of the loan. THE DIFFERENCE between an ARM and conventional mortgage is that you know what you are paying every month for a conventional loan. You receive notice before your adjustable loan changes and the change can be unlimited in terms of monthly payments (i.e. a jump from $800 to $2000 extreme, but possible) POINTS Purchased at a rate of 1% of the amount being mortgage points purchased reduce the interest rate of a loan thus reduces the monthly payments in a conventional loan mortgage. ADD ON RATE or MARGIN This is the amount of interest added on to the interest rate of a 6 month Treasury bill when a Treasury bill is used as the base for an ARM. PERIODIC RATE CAP Limits the maximum amount by which an ARMs interest rate can change at one time. 8

9 DOWN PAYMENT The amount of cash the buyer must pay the seller before the lending institution will grant the buyer a mortgage for the remaining amount of the home price ADJUSTABLE RATE or VARIABLE RATE LOAN (ARMs) A type of homeowner's mortgage where the interest rate for the loan may change every period as specified in the terms of the loan CONVENTIONAL LOAN A type of homeowner's mortgage where the interest rate is fixed for the life of the loan. THE DIFFERENCE between an ARM and conventional mortgage is that you know what you are paying every month for a conventional loan. You receive notice before your adjustable loan changes and the change can be unlimited in terms of monthly payments (i.e. a jump from $800 to $2000 extreme, but possible) POINTS Purchased at a rate of 1% of the amount being mortgage points purchased reduce the interest rate of a loan thus reduces the monthly payments in a conventional loan mortgage. ADD ON RATE or MARGIN This is the amount of interest added on to the interest rate of a 6 month Treasury bill when a Treasury bill is used as the base for an ARM. PERIODIC RATE CAP Limits the maximum amount by which an ARMs interest rate can change at one time. AGGREGATE RATE CAP Limits the interest rate increase and decrease over the life of and ARM. 9

10 DOWN PAYMENT The amount of cash the buyer must pay the seller before the lending institution will grant the buyer a mortgage for the remaining amount of the home price ADJUSTABLE RATE or VARIABLE RATE LOAN (ARMs) A type of homeowner's mortgage where the interest rate for the loan may change every period as specified in the terms of the loan CONVENTIONAL LOAN A type of homeowner's mortgage where the interest rate is fixed for the life of the loan. THE DIFFERENCE between an ARM and conventional mortgage is that you know what you are paying every month for a conventional loan. You receive notice before your adjustable loan changes and the change can be unlimited in terms of monthly payments (i.e. a jump from $800 to $2000 extreme, but possible) POINTS Purchased at a rate of 1% of the amount being mortgage points purchased reduce the interest rate of a loan thus reduces the monthly payments in a conventional loan mortgage. ADD ON RATE or MARGIN This is the amount of interest added on to the interest rate of a 6 month Treasury bill when a Treasury bill is used as the base for an ARM. PERIODIC RATE CAP Limits the maximum amount by which an ARMs interest rate can change at one time. AGGREGATE RATE CAP Limits the interest rate increase and decrease over the life of and ARM. PAYMENT CAP Limits the amount a single monthly payment can change by in an ARM. 10

11 DOWN PAYMENT The amount of cash the buyer must pay the seller before the lending institution will grant the buyer a mortgage for the remaining amount of the home price ADJUSTABLE RATE or VARIABLE RATE LOAN (ARMs) A type of homeowner's mortgage where the interest rate for the loan may change every period as specified in the terms of the loan CONVENTIONAL LOAN A type of homeowner's mortgage where the interest rate is fixed for the life of the loan. THE DIFFERENCE between an ARM and conventional mortgage is that you know what you are paying every month for a conventional loan. You receive notice before your adjustable loan changes and the change can be unlimited in terms of monthly payments (i.e. a jump from $800 to $2000 extreme, but possible) POINTS Purchased at a rate of 1% of the amount being mortgage points purchased reduce the interest rate of a loan thus reduces the monthly payments in a conventional loan mortgage. ADD ON RATE or MARGIN This is the amount of interest added on to the interest rate of a 6 month Treasury bill when a Treasury bill is used as the base for an ARM. PERIODIC RATE CAP Limits the maximum amount by which an ARMs interest rate can change at one time. AGGREGATE RATE CAP Limits the interest rate increase and decrease over the life of and ARM. PAYMENT CAP Limits the amount a single monthly payment can change by in an ARM. CLOSING The time at which a loan goes into effect the final step in the sale process. 11

12 DOWN PAYMENT The amount of cash the buyer must pay the seller before the lending institution will grant the buyer a mortgage for the remaining amount of the home price ADJUSTABLE RATE or VARIABLE RATE LOAN (ARMs) A type of homeowner's mortgage where the interest rate for the loan may change every period as specified in the terms of the loan CONVENTIONAL LOAN A type of homeowner's mortgage where the interest rate is fixed for the life of the loan. THE DIFFERENCE between an ARM and conventional mortgage is that you know what you are paying every month for a conventional loan. You receive notice before your adjustable loan changes and the change can be unlimited in terms of monthly payments (i.e. a jump from $800 to $2000 extreme, but possible) POINTS Purchased at a rate of 1% of the amount being mortgage points purchased reduce the interest rate of a loan thus reduces the monthly payments in a conventional loan mortgage. ADD ON RATE or MARGIN This is the amount of interest added on to the interest rate of a 6 month Treasury bill when a Treasury bill is used as the base for an ARM. PERIODIC RATE CAP Limits the maximum amount by which an ARMs interest rate can change at one time. AGGREGATE RATE CAP Limits the interest rate increase and decrease over the life of and ARM. PAYMENT CAP Limits the amount a single monthly payment can change by in an ARM. CLOSING The time at which a loan goes into effect the final step in the sale process. ADJUSTED MONTHLY INCOME Computed by a loan officer by subtracting from the gross monthly income (pre tax income) any fixed monthly payments with more than 10 months remaining (i.e. car payment, student loan, etc.) 12

13 Example 1: Chris and Daryl Cahill want to purchase a home selling for $125,000. Their bank requires a 15% down payment and a payment of 1 point at the time of closing. a) What is the amount of the down payment required? b) What is the mortgage amount? c) What is the cost of one point to be paid for by the Chaill's? 13

14 Example 2: Suppose the Cahill's gross monthly income is $4200 and that they have 15 payments of $185 per month remaining on their car loan and 14 remaining payments of $35 per month on a loan used too purchase a new washer and dryer. The taxes on the house they want to purchase are $135 per month and the insurance is $38 per month. a) What is the maximum monthly payment that the Cahill's can afford according to the bank? This is determined by taking 28% of the adjusted monthly income b)the Cahill's want a 30 year fixed mortgage. If the bank is currently offering a 6.5% interest rate determine whether the Cahill's qualify for the mortgage. 14

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16 Example 3: The Cahills obtained a house selling for $125,000. They made a 15% down payment and obtained a 30 year conventional mortgage for $106,250 at 6.5%. They also paid 1 point at closing. Their monthly mortgage payment of principal and interest is $ a) Determine the total amount of principal, interest, down payment, and points that the Cahills will pay the bank for their house over 30 years. b) How much of the cost will be interest? c) How much of the first payment on the mortgage is applied to the principal? 16

17 Example 4: Tony and Keisha purchased a house for $1150,000 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 is 3% above the interest rate of the 6 month bill. The interest rate is adjusted every 6 months on the date of adjustment. The interest rate will not change more than 1% when the rate 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 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% 17