n 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 yo

n 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: 19,850 Mortgage Amount: 178,650

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. It does 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 the amount 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
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?
That when you first start paying off the house the majority of the payment goes toward interest not principle, it is not until many years down the road that the majority of the payment actually goes toward principle.
• Find the number of the first payment when more of the payment goes toward principal than interest.
The 194th payment, which is 16 years into payments on the mortgage.
• 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.
.35x=956.30 solve for x and the minimum monthly pay equals
Minimum monthly take home pay = $2,732.29
• 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.
2,732.29*12 months = $32,787.48
$32,787.48=.73x solving for x we find that the minimum gross pay necessary is
Minimum gross annual salary = $44,914.36

 
Part II: Selling the House
Costs 30 year 15 year
Purchase Price 198,500 198,500
Down Payment -19,850 -19,850
Mortgage over 10 years -114,756 -166,585.20
Balance after 10 years 145,208.55 74,038.43
Value of home after 10 years 293,828.49 293,828.49
Gain 14,013.94 33,354.86

With inflation at 4% you gain money. The quicker you pay off the interest, as in the 15 year mortgage, the more money you make. Even though more money was paid out up front over the 15 year plan more profit was made as well.

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
Total interest paid over 15 years =$71,227.80

Total amount repaid =$249,877.80

• Find the number of the first payment when more of the payment goes toward principal than interest.
This occurs on the 5th payment

• 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?
163 months

• What is the total amount of interest paid over the life of the loan?
$63,908.67

• 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?
Repaid $242,558, Spend $7,319 less

 
Part 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.
Yes, the way I think about buying a house has changed. I have always known that a 15 year mortgage was better than a 30 year. I just did not realize how drastic the actual savings can be. By paying off the mortgage in 15 years you save over $90,000 in interest alone. Your monthly payment is only increased $431.91 per month you begin paying off principal much faster as well, the fifth payment. It is much wiser to buy a home on a 15 year loan. I also think it is very important to evaluate the cost of your monthly payment and how much you can actually afford. It is imperative to do the math and make sure you will have enough money each month to cover all of the bills. I learned that it is not wise to get a house payment higher than 30% of your net income. People can get into trouble with this and that is what caused the housing market crash