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Borrowing to Buy a Home

Borrowing to Buy a Home. 6.1. Down Payments and Closing Costs. Terms to know: Down Payment Mortgage Loan Principal Closing Costs Points. Down Payments and Closing Costs (Cont.). Formula’s to know Calculate the amount of loan you will need… Mortgage Loan = Purchase Price – Down Payment

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Borrowing to Buy a Home

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  1. Borrowing to Buy a Home 6.1

  2. Down Payments and Closing Costs • Terms to know: • Down Payment • Mortgage Loan • Principal • Closing Costs • Points

  3. Down Payments and Closing Costs (Cont.) • Formula’s to know • Calculate the amount of loan you will need… Mortgage Loan = Purchase Price – Down Payment • Amount of money you need to borrow… Cash Needed to Buy a Home= Down Payment + Closing Costs

  4. Down Payments and Closing Costs (Example) • Joe is buying a house for $74,000. • 20 % down payment • Estimates closing costs as: • Legal fees $950, Title insurance $140 • Property survey $250, Inspection $175 • Loan processing fee $84, Recording fee $740 • How much will the mortgage loan be? • How much cash is needed?

  5. Down Payments and Closing Costs (Solution) • How much will the mortgage loan be? (Mortgage Loan = Purchase Price – Down Payment) Down Payment = 20% X $74,000 = $14,800 Mortgage Loan = $74,000 - $14,800 = $59,200

  6. Down Payments and Closing Costs (Solution Part 2) • How much cash is needed? (Cash Needed = Down Payment + Closing Costs) Total closing costs = $950 + $140 + $250 + $175 + $84 + $740 = $2,339 Cash needed = $14,800 + $2,339 = $17,139

  7. Check For Understanding(Solution A) • How much will the mortgage loan be? (Mortgage Loan = Purchase Price – Down Payment) Down Payment = 25% X $86,000= $21,500 Mortgage Loan = $86,000 – $21,500= $64,500

  8. Check For Understanding(Solution B) • How much cash is needed? (Cash Needed = Down Payment + Closing Costs) Down Payment = 5% X $64,000= $3,200 Total closing costs = $64,000 x 3.5%= $2,240 Cash needed = $3,200 + $2,240= $5,440

  9. Mortgage Loan Interest Costs • Terms to know: • Two most common types of loans • Fixed rate mortgage • Variable rate mortgage • Amortized

  10. Mortgage Loan Interest Costs (Example) • Anika wants to buy a home for $83,000. • She will pay $13,000 down payment • Loan is $70,000 for 25 years @ 8% • What are Anika’s monthly payments? • What is the total amount of interest she will pay over the term of the mortgage?

  11. Mortgage Loan Interest Costs (Solution) • What are Anika’s monthly payments? • You will use the Amortization Table in your packet… • Match the amount with the number of years under the % of the loan… • $540.27 is the monthly payment

  12. Mortgage Loan Interest Costs (Solution) • What is the total amount of interest she will pay over the term of the mortgage? • Figure out number of months… 25 years x 12 months/year = 300 months • Number of months x monthly payments 300 x $540.27 = $162,081 (total payments) 3. Total payment – amount of mortgage = Interest paid $162,081 - $70,000 = $92,081

  13. Mortgage Loan Interest Costs (Solution C Part 1) • Find the monthly payments… • Look at the Amortization Table under $80,000 and 20 years @ 7% • Monthly payment = $620.24

  14. Mortgage Loan Interest Costs (Solution C Part 2) • Find the total amount to be paid in interest over the 20-year loan payment… • Figure out number of months… 20 years x 12 months/year = 240 months • Number of months x monthly payments 240 x $620.24 = $148,857.60 (total payments) 3. Total payment – amount of mortgage = Interest paid $148,857.60 - $80,000 = $68,857.60

  15. Mortgage Loan Interest Costs (Solution D Part 1) • What is the monthly payment? • Look at the Amortization Table under $40,000 and 25 years @ 6% • Monthly payment = $257.72

  16. Mortgage Loan Interest Costs (Solution D Part 2) • What is the total interest they will pay on the loan over the 25 years? • Figure out number of months… 25 years x 12 months/year = 300 months • Number of months x monthly payments 300 x $257.72 = $77,316 (total payments) 3. Total payment – amount of mortgage = Interest paid $77,316 - $40,000= $37,316

  17. Refinancing a Mortgage • Terms/Things to know: • Interest rates go down…businesses and property owners refinance or look for lower rates. • Refinancing • Pay fees and closing costs

  18. Refinancing a Mortgage (Example) • Amy had a fixed rate mortgage at 9.65% with an unpaid balance of $40,000 and a monthly payment of $511.09. • Amy’s new mortgage @ 7.98% for the $40,000. The monthly payment is $340.73. • Paid closing costs of $935 • Paid Prepayment penalty of $500 • How much did Amy save in the first year by getting the new mortgage?

  19. Refinancing a Mortgage (Solution) • How much did Amy save in the first year by getting the new mortgage? • Old monthly payment x # of months in a year = 1 years payment under old mortgage. 12 x $511.09 = $6,133.08 2. New monthly payment x # of months in a year = 1 years payment under new mortgage. 12 x $340.73 = $4,088.76

  20. Refinancing a Mortgage (Solution- Continued) • How much did Amy save in the first year by getting the new mortgage? 3. Old mortgage payment for 1 year – new mortgage payment for 1 year = difference in yearly payment $6,133.08 - $4,088.76 = $2,044.32 4. Calculate the total costs for new loan $935 + $500 = $1,435

  21. Refinancing a Mortgage (Solution- Continued) • How much did Amy save in the first year by getting the new mortgage? • Difference in yearly payments – total costs of new loan = amount saved in first year $2,044.32 - $1,435 = $609.32

  22. Exercises due • Web Quest • http://www.yorkville.k12.il.us/webquests/HomeBuying/HomeBuying.html

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