Financial Mathematics Lesson #4: Mortgages Mortgages A mortgage is a special type of loan that is used to purchase property. The property itself is used as collateral - which the lending institution uses to recover its loan in the event that the bomower dees not pay back the loan. The person borrowing the money is called the mortgagor and the institution lending the money is called the mortgagee. Amortization To amortize a mortzage is to cepay a mortgage in equal periodic payments over a given period of time. ‘The amortization period is the time it would take to completely pay off the mortgage if the interest and periodic payments remained constant. Itis common to have amortization periods of 15,20, or 25 years The term of the mortgage is the length of time the mortgagee agrees to make the mortgage payments to the bank. In the past, the term of the mortzage and the amortization period were the same thing Today, with fluctuating interest rates and the desire of lending institutions to increase profits, the term of s morzaze has taken a different meaning. An amortization period is still given as the period of time it would take to pay off the loan, but the term of the Ioan can be a much shorter period of time. At the end of the term, a new mortgage agreement is negotiated with the lending institution and a new amortization period may result, with a different interest rate Therefore, for mortgages, C'Y will always be 2, and most of the time P/Y is 12, which 2 + By Canadian law, mortgage interest must be calculated at most semi-annually. represents monthly payaieats. + Payments are made at the end of the month for mortgages and loans Cas Eee | Complete the chast Sconarto Amortization Period Term a) A three year morwwage at 5.25% amortized over 25 years. b) A mortgage negotiated for five years at420%. If payments are continued at this rate, the loan will be paid off in 15 years.Justin and Jennifer bought a house in Ridge Acres for $300,000. They made a 20% down payment and negotiated a five year mortgage at 3.82% per annum compounded semi-annually. ‘The mosteage is amortized over 25 years. a) Determine: * the amortization period ‘+ the term of the mortzaze + the amount of the down payment * the amount to be financed 1b) Complete the following using the TVM Solver to determine what the monthly mortgage ‘payment will be. Explain why the entry Resa mf s 25412 = 300, ‘What is the PMT value 308 and why isit negative? Le hb ‘What is the PV value and why is it positive? PMT: ia BEGIN ©) What would their house really cost ifthe |) Afterthe five year term, the mortgage term was continuously renegétiated to be the} 8 up for renewal. What is the same throughout the amortization period? ‘amount on the mortgage left to be renewed? €) Deseribe the changes to the TVM solver if Justin and Jennifer choose to pay their morgage weekly, Calculate their weekly payments under this scenario, f) Most banks offer an accelerated weekly payment plan. The weekly payment is calculated by dividing the monthly payment by 4, then the resulting amounts paid weekly + Explain why the accelerated weekly payment plan will pay the mortgage off faster.Assuming that the interest rate remains the same throughout the amortization period, determine how long it will take to pay off the mortgage using the accelerated wee payment plan Cau Z:.# | James and Courtney purchased a house for $280,000. They made a 30% down payment and ©: | negotiated a three year mortgage at 5.25% amortized over 20 years 4 a) Calculate their /b) After the three year term was completed, they re-negotiated monthly payments,| a new term for seven years at 3.17% amortized over 15 years. Determine their new monthly payments. * = = qe Tee pve aoe Fv= Pir cre Par: END BEGIN ‘Complete Assignment Questions #1 - #10 Assignment 1. Calculate the monthly mortgage payment in each of the following, a) $185.00 at 8.25% | b) S315549.at3.35% | «) $215 725 at 5.14% per annum for three per year for five years | "per annurn for four ‘years amortized amortized over 25 years amomtized over 15 years. years. ver 20 years. Ne ™ Tie wie Pye Eve pare Reo a Pi By cre ci PME: END BEGIN EMI: END BEGIN2. Calculate the remaining amount left on the loan after the term has been completed. a) $205000 at 7.15% | b) $159549.at3.35% | c) $50 8006. 14% ‘per annum for three per year for five years | "per annum for two ‘years amortized amortized over 15 years amortized over 20 years years. over 20 years. P/v= 3. Calculate the interest rate, to the nearest 0.01%, on the term of the morgage, a) $110 000 mortgage with |b) $215 000 mortgage with |c) $575 000 mortgage with 2 monthly payment of 4a monthly payment of 2 monthly payment of $00. Amortization is $1795. Amortization is | $4908'59° Amortization 25 years. 20 years. is 15 years. = = ae 18 Pv Pv r= ed B= r= P= Bir che iy PMT: END BEGIN PMT: END BEGIN 4. A land development company purchased a rental property for $279 000. They made a 10% down payment and negotiated a five year mortgage at 6.95% amortized over 25 years. a) Detemnine: + the amortization period + the term of the mortgage «+ the amount of the down payment «+ the amount to be financedb) Determinethe |e) What would the rental @) After the five year term, monthly payment. | property really cost if the the mortgage is up for term was continuously renewal. What is the renegotiated to be the same amount of the mortzage throughout the amortization left to be renewed? eS period’ i= wv were re Byes Audrey bought a condominium for $1: 32 500. She made a 15% down payment and negotiated a three year mortgage at 7.75% per annum compounded semi-annually. ‘The mortgage is amortized over 25 years. Determine: a) the term of the morgage b) the amortization period ¢) the amount to be financed d) the monthly morigage payment €) the total amount paid for the condominium if the interest rate semained at 7.75 throughout the amortization period et sa of EMI: END BEGIN Vancouver Credit Union offers a $115 000 mortzage amortized over 20 years at 8% per year compounded semi-annually. a) Determine the b) Calculate the tial | ¢) Calculate the monthly payments. amount to be paid. ‘amount of interest to be paid. = ris P= Per r= Pix 4) What would happen to the monthly payments and the total crys to be paid if the mortgage was amortized over 25 years? mer: snp Bscin| (No calculations are required.)7. Kimis shopping for a $105 000 mortgage. Two banks gave her the following options: * Grand Bank: a two year term at 7.72% amortized over 10 years + Bank for Less: a five year term at 7.35% amortized over 15 Years a) Which option has the lower monthly payment? Grand Bank Bank For Less N= Te Pv= pers Fv= P/e= c/x~ Pr: EXD BEGIN b) Assuming the interest rate remains the same over the amortization period of each loan, determine the total amount of interest paid for each option. c) Even though the monthly payments are higher, why might Kim choose Grand Bark? d) Even though the total amount of interest paid is higher, why might Kim choose Bank for Less? 8. Tera and Bill purchased an acreage with a large house close to the city limits of a major city The acreage and home were sold to them for $752,000. From the sale of their old house plus savings they had accumulated, they were able to make an 86% down payment. Tera and Bill negotiated a seven year mortgage at 4.10% amortized over 20 years for the remaining amount. a) State: i) the amortization period ii) the term of the mongage b) Determine the ©) What would their house |) The seven year term of monthly payment. really cost if the interestrate | the mortgage is up for remained at 4.1% throughout! renewal. What is the the amortization period? amount on the mortgage left to be renewed?In 2011, Phil and Stephanie moved into a new home and assumed a $137 000 morgage amortized to the year 2026 at 5.89 per annum compounded semi-annually for a three rear term. At the end of the dare year term, the mortgage rate had increased by 1.5%. -y renegotiated their mortgage for a further three year term at this new rate. Calculate the monthly payment for their renegotiated mortgage if the moztgage was still to be paid in full by the year 2026. 10. Andrea would like to take out a mortgage for $125 000 amortized over 25 years at 65% perannum, The banlk has presented her with two options The first option is to make 12 monthly payments per year for 25 years. The second option is to make 52 weekly payments per year for 25 years. How much will Andsea save over the full amortization by using the weekly payments instead of the monthly payments? ‘Answer Key 1. a) $1779.90 b) $1550.56 ¢) $1433.94 2. a) $18936267 by S114917.10 ¢) $48.02298, 3. a) 772% b) Be €) 6.55% 4. a) amortization is 25 years, crm is 5 years, down payment is $27 900, financed amourt is $231 100 b) $1751.00) $853200 —d)_$228 468.35 5. a) 3yers —b) 25 yeas ©) 5112625 a) Se4187 —e)§272378 6. a) $952.61 b) $228 626.40 ¢) $113 626.40 4) monthly payments decrease, overall cost of house increases 7. a) BankfocLess -b) Grand Bark — $25 213.60, Bask for Lest ~ $67 423.80 €) Because the overall interest paid out wall be $22 210.20 less, 4). Because she may only be able to afford the lower monthly payment. 8. al) 20 year amomization 11) Tyearterm —b) $641.51 c) $80070640 a) $77 64559 9. $12 10.$518.00