Chapter 14
Mortgages
Student Performance Objectives:
Section I Mortgages – Fixed-Rate and Adjustable-Rate
14-1 Calculating the Monthly Payment and Total Interest Paid on a Fixed-Rate Mortgage
14-2 Preparing a Partial Amortization Schedule of a Mortgage
Section II Second Mortgages – Home Equity Loans and Lines of Credit
14-6 Calculating the Potential Amount of Credit Available to a Borrower
Chapter Notes, Teaching Tips and Lecture Launchers
• Lecture Launcher: Purchasing and financing a home is one of the major financial decisions a
person will make in his or her lifetime. Substantial research should be done and much care
should be taken in choosing the correct time to buy, the right property to buy, and the best
financial arrangement.
• Ask students who are homeowners, “What research preceded your buying decision?”
• The Collaborative Learning Activity for this chapter, “The Hypothetical Mortgage,” on page
• Spotlight: The Business Decision at the end of this chapter, “For What Size Mortgage Can
You Qualify?” is a very useful exercise that students can apply to their own financial
situations, any time in their lives.
• Classroom Activity: Invite a mortgage loan officer from a bank or mortgage broker to speak
to the class about current “happenings” in the mortgage business.
Section I Mortgages – Fixed-Rate and Adjustable-Rate
• Be sure students understand that real estate is land, including any permanent improvements,
such as homes, factories, apartment buildings, shopping centers, or any other “real” property.
• A mortgage is a loan in which real property is used as security for a debt.
• Lecture Launcher: Talk about the property appraisal business, an industry
that services mortgage lenders. Ask students, “Why are “accurate” property
• In common parlance, we speak of mortgages as the debt we owe on our homes. Technically,
however, the mortgage is the security interest in the home that the borrower gives the lender,
which gives the lender the right to take the property should the borrower default on the loan.
The debt itself is actually evidenced by the note the borrower signs promising to pay back the
lender.
• Lecture Launcher: Ask your students who are homeowners whether they are the
mortgagor or the mortgagee. Most homebuyers think of themselves as the mortgagee,
• Borrowers should be careful with ARMs, however. Will they be able to afford the
payments if interest rates do go up?
• Generally, there is a cap on how high monthly payments can go with increases in the
• Use Table 14-1, Monthly Payments to Amortize Principal and Interest per $1,000 Financed.
• Remind students that the table values are monthly payment “per $1,000,” When
• Spotlight: Once students have learned to calculate the total interest on a mortgage loan,
Performance Objective 14-1, they are usually amazed at how much a mortgage costs over a
period of 25 or 30 years.
• Call attention to Exhibit 14-1, Rates vs. Points. This demonstrates the importance of
negotiating the terms of a loan.
• Classroom Activity: In groups, have students write, solve, and exchange with other
groups:
• Exercises that compare the amount of interest paid on a 15 and a 30-year
mortgage, for a given interest rate.
• When discussing the preparation on an amortization schedule, point out that one month’s
ending balance is the next month’s starting balance. Remind students of the U.S. Rule, that
monthly payments are applied first to interest, then to principal. Point out the amount of
principal paid in the first and second months’ payments on a 30 year fixed mortgage.
• An amortization schedule of the first two or three payments.
• Be sure students understand that PITI stands for principal, interest, taxes, and insurance.
Point out that most mortgage payments include all of these elements, although sometimes the
• Suggest that students use the internet to find a loan amortization calculator program.
• Classroom Activity: On a voluntary basis, for students that own their own home, have them
Section II Second Mortgages – Home Equity Loans and Lines of Credit
• Spotlight: Be sure students understand the difference between a home equity loan and a
home equity line of credit.
• Home equity loan is a lump-sum second mortgage loan made on the available equity
in a home.
• Collaborative Learning Activity: In groups, have students research and report to the class the
typical rates and terms currently being offered in your area for second mortgages and home
equity lines of credit.
• A popular, new type of home equity loan is one in which the total amount borrowed
on a home can exceed its full value. Have them research the advantages and pitfalls
of this type of loan.
• Classroom Activity: Have students choose what price home they think they would purchase
next.
• Based on a 15% down payment and a reasonable estimate of taxes and insurance,
Questions Students Always Ask
“Why is there so much interest being paid on a mortgage?”
• Explain that the amount of interest paid over the life of a mortgage is so large because
the underlying debt is large compared to other consumer debts, and because the debt
“What are points?”
• Points are a way of buying down the interest rate. They are considered by the IRS to
“Why do monthly payments include taxes and insurance?”
• Ask students what happens when homeowners don’t pay their property insurance.
The government takes their property! Lenders don’t like that, because it’s an
impairment of their collateral! Lenders don’t want to rely on the homebuyers to pay
“What is equity?”
• Equity is that part of the market value of the home that the homebuyer actually owns.
For example, if you buy a home for $120,000, with $20,000 down, your equity
“Is it a good idea to get a home equity loan to pay off my debts, buy a car or go on a vacation?”
• A home equity loan is a good idea for some purposes, not for others.
• If you have a substantial amount of credit card debt, the interest rate is probably
relatively high and the interest is not deductible. If you are paying on several