Section i • MortgageS—Fixed-rate and adjuStable-rate 463
REViEW ExERCiSES
Using Table 14-1 as needed, calculate the required information for the following mortgages.
Amount
Financed
Interest
Rate
Term
of Loan
(years)
Number
of $1,000s
Financed
Table
Factor
Monthly
Payment Total Interest
1. $80,000 9.00% 20 80 9.00 $720.00 $92,800.00
8. Marc Bove purchased a home with a $78,500 mortgage at 9% for 15 years. Calculate the
monthly payment and prepare an amortization schedule for the first four months of Marc’s loan.
Payment
Number
Monthly
Payment
Monthly
Interest
Portion Used to
Reduce Principal Loan Balance
0 $78,500.00
As one of the loan officers for Grove Gate Bank, calculate the monthly principal and interest,
PI, using Table 14-1 and the monthly PITI for the following mortgages.
Amount
Financed
Interest
Rate
Term of
Loan (years)
Monthly
PI
Annual
Property Tax
Annual
Insurance
Monthly
PITI
9. $76,400 8.00% 20 $639.47 $1,317 $866 $821.39
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?
b. How much interest will they pay over the life of the loan?
The month 1 worked-out solution for
Exercise 8 appears in Appendix B.
14
Section i
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464 cHapter 14 • MortgageS
16. Michael Sanchez purchased a condominium 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?
b. Construct an amortization schedule for the first four months of Michael’s mortgage.
Payment
Number
Monthly
Payment
Monthly
Interest
Portion Used to
Reduce Principal
Loan
Balance
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?
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 and the Northern Trust Bank is offer-
ing an 8.75% mortgage with no points. Luis 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 is the total interest paid on each loan?
b. Taking into account the closing points, which bank is offering a better deal and by how
much?
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?
85461_ch14_hr_451-482_1.indd 464 9/23/15 4:59 PM
Section i • MortgageS—Fixed-rate and adjuStable-rate 465
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?
19. Larry and Cindy Lynden purchased a townhome in Alison Estates with an adjustable-rate
mortgage. The lender’s margin on the loan is 4.1%, and the overall rate cap is 5% over the life
of the loan. The current index rate is the prime rate, 3.25%.
a. What is the calculated interest rate of the ARM?
Calculated ARM interest rate =Index rate +Lender’s margin
C
alculated ARM interest rate =3.25 +4.1 =7.35%
b. What is the maximum overall rate of the loan?
Maximum overall ARM rate =Initial rate +Overall rate cap
M
aximum overall ARM rate =7.35 +5.0 =12.35%
20. Heather Gott bought a home with an adjustable-rate mortgage. The lender’s margin on the loan
is 3.5%, and the overall 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 ARM rate of Heather’s loan?
21. Joe and Gloria Moutran are purchasing a house in Winter Springs financed with an adjustable-
rate mortgage. The lender’s margin on the loan is 2.75%, and the overall rate cap is 6.2% over
the life of the loan. The current index rate is 5.8%.
a. What is the calculated interest rate of the ARM?
b. What is the maximum overall ARM rate of the loan?
22. You are a real estate broker for Aurora Realty. One of your clients, Erica Heston, has agreed
to purchase one of the homes your office has listed for sale for a negotiated price of $235,000.
The down payment is 20%, and the balance will be financed with a 15-year fixed-rate mortgage
at 8.75% and
31
2
discount points. The annual property tax is $5,475, and the hazard insurance
premium is $2,110. When Erica signed the original contract, she put down a deposit of $5,000,
which will be credited to her down payment. In addition, at the time of closing, Erica must pay
the following expenses:
Appraisal fee $215
Credit report $65
Roof inspection $50
Mortgage insurance premium
1
2
% of amount financed
Title search $125
Attorney’s fees $680
Escrow fee $210
Prepaid interest $630
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466 cHapter 14 • MortgageS
As Erica’s real estate broker, she has asked you the following questions:
a. What is the total monthly PITI of the mortgage loan?
buSinESS DECiSion: buying DoWn thE MoRtgagE
23. The buyer of a piece of real estate is often given the option of buying down the loan. This
option gives the buyer a choice of loan terms in which various combinations of interest rates
and discount points are offered. The choice of how many points and what rate is optimal is
often a matter of how long the buyer intends to keep the property.
Darrell Frye is planning to buy an office building at a cost of $988,000. He must pay 10%
down and has a choice of financing terms. He can select from a 7% 30-year loan and pay
4 discount points, a 7.25% 30-year loan and pay 3 discount points, or a 7.5% 30-year loan and
pay 2 discount points. Darrell expects to hold the building for four years and then sell it. Except
for the three rate and discount point combinations, all other costs of purchasing and selling are
fixed and identical.
a. What is the amount being financed?
b. If Darrell chooses the 4-point 7% loan, what will be his total outlay in points and payments
after 48 months?
c. If Darrell chooses the 3-point 7.25% loan, what will be his total outlay in points and
payments after 48 months?
d. If Darrell chooses the 2-point 7.5% loan, what will be his total outlay in points and
payments after 48 months?
e. Of the three choices for a loan, which results in the lowest total outlay for Darrell?
b. What is the total amount of interest that will be paid on the loan?
c. How much is due from Erica at the time of the closing?
d. If your real estate office is entitled to a commission from the seller of
6
1
2
%
of the price of
the home, how much commission is made on the sale?
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470 cHaPter 14 • MortgageS
REviEw ExERcisEs
Note: round all answers to the nearest cent when necessary.
for the following second mortgage applications, calculate the percentage of appraised value
and the potential credit.
Appraised
Value
Lender’s
Percentage
Percentage of
Appraised Value
Balance of
First Mortgage
Potential
Credit
1. $118,700 75% $89,025 $67,900 $21,125
2. $124,500 70% $87,150 $53,400 $33,750
Calculate the housing expense ratio and the total obligations ratio for the following
mortgage applications.
Applicant
Monthly
Gross
Income
Monthly
PITI
Expense
Other Monthly
Financial
Obligations
Housing
Expense
Ratio (%)
Total
Obligations
Ratio (%)
8. Parker $2,000 $455 $380 22.75 41.75
9. Forman $3,700 $530 $360 14.32 24.05
15. Use Exhibit 14-4, Lending Ratio Guidelines, on page 468 to answer the following questions:
a. Which of the applicants in Exercises 8–14 would not qualify for a conventional mortgage?
b. Which of the applicants in Exercises 8–14 would not qualify for any mortgage?
16. Ronald and Samantha Brady recently had their condominium in Port Isaac appraised for
$324,600. The balance on their existing first mortgage is $145,920. If their bank is willing to loan
up to 75% of the appraised value, what is the amount of credit available to the Bradys on a home
equity line of credit?
324,600 ×.75 =$243,450
− 145,92
0
Available credit $97,530
14
SECTION II
To help home buyers estimate mortgage
expenses, various companies provide
online calculators that are free to use.
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Section ii • Second MortgageS—HoMe equity LoanS andLineSofcredit 471
17. The Barclays own a home that was recently appraised for $219,000. The balance on their existing
first mortgage is $143,250. If their bank is willing to loan up to 65% of the appraised value, what
is the potential amount of credit available to the Barclays on a home equity loan?
18. Ransford and Alda Mariano own a home recently appraised for $418,500. The balance on their
existing mortgage is $123,872. If their bank is willing to loan up to 80% of the appraised value,
what is the amount of credit available to them?
19. Michelle Heaster is thinking about building an addition on her home. The house was recently
appraised for $154,000, and the balance on her existing first mortgage is $88,600. If Michelle’s
bank is willing to loan up to 70% of the appraised value, does she have enough equity in the
house to finance a $25,000 addition?
20. Jamie and Alice Newmark have a combined monthly gross income of $9,702 and monthly
expenses totaling $2,811. They plan to buy a home with a mortgage whose monthly PITI
will be $2,002.
a. What is Jamie and Alice’s combined housing expense ratio?
b. What is their total obligations ratio?
c. For what kind of mortgage can they qualify, if any?
d. (Optional challenge) By how much would they need to reduce their monthly expenses in order
to qualify for an FHA mortgage?
21. You are a mortgage broker at Interamerican Bank. One of your clients, Bill Cramer, has submit-
ted 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 per month.
a. What is his housing expense ratio?
b. What is his total obligations ratio?
intermediary between consumers and
lenders during mortgage transactions.
A mortgage broker works with
85461_ch14_hr_451-482_2.indd 471 9/23/15 5:00 PM
472 cHaPter 14 • MortgageS
c. According to the Lending Ratio Guidelines on page 468, 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 he need?
MORtGAGe ReFINANCING WORKSHeet
SteP 1. Current monthly mortgage payment………………………………………..
│
$1,458.50
│
SteP 2. New monthly mortgage payment if you refinance….………….…….
│
$1,220.06
│
│
│
│
│
businEss DEcision: DoEs it Pay to REfinancE
youR MoRtgagE?
22. According to money.CNN.com, with mortgage rates near 35-year lows, you may be able to cut
your payments sharply by refinancing your loan. To qualify for the best rates, you need a credit
score of 740 or higher and usually at least 20% equity.
Even if you have to settle for a higher rate, a new loan may save you money. The main consider-
ation is whether you will live in your home long enough to offset the refinance closing costs.
Your current mortgage payment is $1,458.50 per month, with a balance of $214,800. You have a
85461_ch14_hr_451-482_2.indd 472 9/23/15 5:00 PM