Chapter 14 How much interest will they pay over the life

Level 2

Chapter 14 – Section I – Exercise 15

Ben and Mal Scott plan to buy a home for $272,900. They will make a 10% down

payment and qualify for a 25-year, 7% mortgage loan.

a. What is the amount of their monthly payment?

Home price = $272,900

b. How much interest will they pay over the life of the loan?

Level 2

Chapter 14 – Section I – Exercise 16

Michael Sanchez purchased a condominum for $88,000. He made a 20% down

payment and financed the balance with a 30-year, 9% fixed-rate mortgage.

a. What is the amount of the monthly principal and interest portion, PI, of Michael‘s

loan?

Purchase price = $88,000.00

b. Construct an amortization schedule for the first 4 months of Michael’s mortgage:

Amortization Schedule

$70,400 Loan, 9%, 30 years

c. If the annual property taxes are $1,650 and the hazard insurance premium is $780 per

year, what is the total monthly PITI of Michael’s loan?

Taxes = $1,650.00

Level 1

Chapter 14 – Section I – Exercise 17

Luis Schambach is shopping for a 15-year mortgage for $150,000. Currently, the Fortune

Bank is offering an 8.5% mortgage with 4 discount points; the Northern Trust Bank is

offering an 8.75% mortgage with no points. Jeff is unsure which mortgage is a better

deal and has asked you to help him decide. (Remember, each discount point is equal

to 1% of the amount financed.)

a. What would be the total interest paid on each loan?

Mortgage amount = $150,000.00

b. Taking into account the closing points, which bank is offering a better deal and by

how much? Fortune Bank Northern Trust Bank

Interest = $115,950.00

Level 3

Chapter 14 – Section I – Exercise 18

Phil Pittman is interested in a fixed-rate mortgage for $100,000. He is undecided

whether to choose a 15- or 30-year mortgage. The current mortgage rate is 5.5% for

the 15-year mortgage and 6.5% for the 30-year mortgage.

a. What are the monthly principal and interest payments for each loan?

b. What is the total amount of interest paid on each loan?

c. Overall, how much more interest is paid by choosing the 30-year mortgage?

Level 1

Chapter 14 – Section I – Exercise 20

Katie Mergen bought a home with an adjustable-rate mortgage. The margin on the loan

is 3.5%, and the rate cap is 8% over the life of the loan.

a. If the current index rate is 3.75%, what is the calculated interest rate of the ARM?

b. What is the maximum overall rate of Katie’s loan?

Level 2

Chapter 14 – Section II – Exercise 4

Calculate the percentage of appraised value and the potential credit available for a

second mortgage if the appraised value is $324,600, the lender’s percentage is 75%

and the balance owed on the first mortgage is $197,500.

Level 1

Chapter 14 – Section II – Exercise 19

Michelle Heaster is thinking about building an addition on her home. The house was

recently appraised at $154,000, and the balance on her existing first mortgage is

$88,600. If Michelle’s bank is willing to loan 70% of the appraised value, does she

have enough equity in the house to finance a $25,000 addition?

Level 3

Chapter 14 – Section II – Exercise 21

You are a mortgage broker at Interamerican Bank. One of your customers, Bill

Cramer, has submitted an application for a mortgage with a monthly PITI of $1,259.

His other financial obligations total $654.50 per month. Bill earns a gross income

of $4,890.00 per month.

a. What is his housing expense ratio?

b. What is his total obligations ratio?

c. According to the lending ratio guidelines (given in this secion of your text), for

what type of mortgage would Bill qualify, if any?

d. If Bill decided to get a part time job so that he could qualify for a conventional

mortgage, how much additional monthly income would be he need?

Level 1

Chapter 14 – Assessment Test – Exercise 14

Larry Mager purchased a ski lodge in Telluride for $850,000. His bank is willing to

finance 70% of the purchase price. As part of the mortgage closing costs, Larry had to

pay 4 1/4 discount points. How much did this amount to?

Level 2

Chapter 14 – Assessment Test – Exercise 16

How much more total interest will be paid on a 30-year fixed-rate mortgage

for $100,000 at 9.25% compared with a 15-year mortgage at 8.5%?

30-year fixed 15 -year fixed

Level 2

Chapter 14 – Assessment Test – Exercise 17d

Adam Marsh is purchasing a $134,000 condominium apartment. If the sellers are responsible

for the 6% broker’s commission, $900 in closing costs, and the existing first mortgage with a

balance of $45,000, what proceeds will be received on the sale of the property?

Level 3

Chapter 14 – Assessment Test – Exercise 23

You are applying for a conventional mortgage from the Americana Bank. Your

monthly gross income is $3,500, and the bank uses the 28% housing expense

ratio guideline.

a. What is the highest PITI you can qualify for? Hint: Solve the housing expense

ratio formula for PITI. (Remember, this is an application of the percentage formula,

Portion = Rate x Base, where PITI is the portion, the expense ratio is the rate, and

your monthly gross income is the base.)

b. Based on your answer from part a, if you are applying for a 30-year, 9% mortgage,

and the taxes and insurance portion of PITI is $175 per month, use Table 14-1 to

calculate what size mortgage you qualify for. Hint : Subtract TI from PITI. Divide the

PI by the appropriate table factor to determine how many $1,000s you qualify to borrow.

c. Based on your answer from part b, if you are planning on a 20% down payment, what

is the most expensive house you can afford? Hint : Use the percentage formula again.

The purchase price of the house is the base, the amount financed is the portion, and

the percent financed is the rate.