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Math 1050 Mortgage Project

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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$201'000.
Down Payment: You are going to make a l0o/o down payment on the house. Determine the
amount of your down payment and the balance to furance.
Down Payment Mortgage Amount
Part I: 30,year Mortgage
Monthty Paymcnt: Calculate the monthlypayment for a 30 year loan (rounding up to the
nearest cent) by using the following formula. Show your work.
IPMT
is the monthly loan
paymen! P is the mortgage amoun! r is the annual percent rate for the loan in decimal, and I is
the number of years to pay off the loan.] For the 30 year loan use an annual interest rate of
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Monthly Payment for a 30 yem mortgage
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. Enterthe 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.
Amortization Schedule monthly payment for a 30 year mortgag
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(Note: if this is more than 2 or 3 cents different from your calculation, check your numbers!)
Notice that the amount of the payment that goes towards the principal and the amountthat goes
towards the interest are not constant. What do you observe about each of these values?
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Number of first payment when more of payment goes toward principal than interest
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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 35o/o 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.
Show work here
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It is also important to note that your net or take-home pay (after taies) is less than your
$oss
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(before taxes). Assuming that your net pay is73Yo of your gross pay, what minimum gross
annual salary will you need to make to have the monthly net salary stated above? Show your
work for making this calculation.
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Part II: Selling the House
Let's suppose that after living in the house for l0 years, you want to sell. The economy
experiences ups and downs, but in general the value of real estate increases over time. To
calculate the value of an investment such as real estate, we use continuously compounded
interest.
Find the value of the home 10 years after purchase assuming a continuous interest rate af 4o/o.
Use the full purchase price as the principal. Show your work.
Showwork here.
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Assuming that you can sell the house for this amount, use the following information to calculate
your gains or losses:
selling price of your house
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Mortgage paid over the ten years 1_07,co
The principal balance on your loan after ten years
Do you gain or lose money over the 10 years? How much? Show your arnounts and symmarize
your results:
)ney over the l0 years'l How mucil? Show your amounts ano summarEe
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Part III: 15 year Mortsage
Using the same purchase price and down payment, we will investigatn a 15 year mortgage.
Month$ Payment: Calculate the monthly payment for a 15 year loan (rounding up to the
nearest cenQ by using the following formula. Show your work!
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is the monthly loan
payment, P is the mortgage amoun! r is the annual percent rate for the loan in decimal, and I is
thi number of years to pay offthe loan.l For the l5 year loan use an annual interest rate of
4.735%.
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Show work here.
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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 mortgag ,
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(Note: ifthis is more than2 or 3 cents different from your calculation, check your numbers!)
Number of first payment when more of payment goes toward principal than interest
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Suppose you paid an additional $100 towards the principal each month. How long would it take
to pay offthe loan with this additional payment and how will this affect the total amount of
interest paid on the loan?
[If
you are making exka payments towards the principal, include it in
the monthly payment and leave the number of payments box blank.]
Length oftime to pay offloan with additional payments of $100
per montlq tL>
Total interest paid over rhe life of rhe loan with additional $100 month ,,
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Total amount paid with additional $100 month ty prv^rnoAa4*bb,Z7
Compare this total amount paid to the total amount paid without exha monthly payments. How
much more or less would you spend if you made the extra principal payments?
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Part III: Reflection
Did this project change the way you think about buying a home? Write one paragraph stating
what ideas changed and why. Ifthis project did not change the way you thinlq write how this
project gave further evidence to support your existing opinion about buying a home. Be specific.