Math 1090 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 $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.

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Part 1: 30 year Mortgage

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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, Pis 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%.

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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, we 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 will use a free amortization spreadsheet at
http://www.bretwhissel.net/amortization/amortize.html. Enter the principal (amount of the
loan), i.e. the selling price minus the down payment, the annual interest rate, and the
appropriate number payments per year and number of regular payments. Check the box to
show the amortization schedule.

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Amortization Schedule monthly payment for a 30 year mortgage=

(Note: if this is more than 2 or 3 cents different from your calculation, check your numbers!)
Scroll down to find the total interest paid over 30 years=
and the total amount repaid=

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Part II: Selling the House

Let's suppose that after living in the house for 10 years, you want to sel l. 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.

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We witTJassume ~t you can sell the house for this amount. Determine the following '(~ ~ '
information in order to calculate your gains or losses:
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Selling price of your house

Original down payment

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The principal balance on your loan after ten years

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Part Ill: 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
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payment, Pis the mortgage amount, r is the annual percent rate for the loan in decimal, andY.-l2.C
is the number of years to pay ofJJhe loan. For the 15 year loan use an annual interest rate of
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4.735%.
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Use the amortization spreadsheet on the web ,again, this time e.ntering the
number of payments for a 15 year loan.

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Amortization Schedule monthly payment for a 15 year mortgage= \;
(Note: if this is more than 2 or 3 cents different from your calculation, check your numbers!)
Total interest paid over 15 years=
Total amount repaid=

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Find the number of the first payment when more of the payment goes toward principal than
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interest.
Compare the total interest paid for the 15-year mortgage verses the total interest paid for the
30 year mortgage- what is the difference?

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Use the online amortization schedule to explore the effect of paying an additional amoun~
towards the principal each month. To make the extra payment, include it in the monthly
payment and leave the number of payments box blank.

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For the 15- year mortgage, 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? ~
What is the total amount of interest paid over the life of the loan?

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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?

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Scroll down and look over the amortization schedule . Notice that the amount of the payment
that goes towards the principal and the amount that goes towards the interest are not .
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cons_tant. What do you observe about each of these values over time?
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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 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 . $ J too -::::
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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 month~.~ et salary stated above? Show your
work_for ~aking this calculation.
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Minimum gross monthly salary=

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Part IV: Reflection