Mortgage Lab Signature Assignment

Introduction: In this lab you will examine a home loan, also known as a mortgage.

In Part I you will be computing various values associated with a 30 year loan.

In Part II you will calculate values associated with selling the house after 10 years.

In Part III you will be computing values associated with a 15 year loan and compare them to the

30 year loan values.

In Part IV you will examine the effects of making extra monthly payments on the 30 year loan.

In Part V you will do a "Reflective Writing" that will accompany the lab and be submitted with

the lab on your e-Portfolio.

Warning! You can submit answers to make sure they are correct before proceeding to the next.

It is a good idea to also keep a written account of the given values (e.g. original price of the

house, annual interest rate, etc.) as you will be asked to refer back to these values as you go.

Once you have "submitted" an answer to a question, you can click back and forth between the

parts if you need to, though you may need to click on "Reattempt this question" at the top of the

page. Don't worry, your correct answers will be saved!

Round all of your answers to the nearest cent when appropriate to do so. Some questions are

programmed to allow for slight variations in the answers due to rounding errors, BUT it is

important that you don't round values you are using in formulas. Only round your final answers.

Part I
Assume that you have found a home for sale and have agreed to a purchase price of $262100.

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.

26210
Down Payment=$

235890
Loan Amount=$

Monthly Payment: Calculate the monthly payment for a 30 year loan (rounding to the nearest

cent, so rounding to two decimal places). For the 30 year loan use an annual interest rate

of 4.41%.

First, express the annual interest rate as a decimal.

0.0441
The annual interest rate expressed as a decimal is

Now use the loan formula to find the monthly payment, d. The loan formula solved for d mis:

d=P0(rk)(1−(1+rk)−Nk)

P0 is the original loan amount.

r is the annual interest rate in decimal form.

N is the length of the loan in years.

1182.64
Monthly Payments=$

Assuming you make the monthly payment each month for 30 years, what will be the total

amount repaid?

425750.4
Total payments=$

Find the total amount of interest paid over the 30 years. To do so, subtract the amount originally

borrowed from the total payments.

189860.4
Total interest paid=$

Calculate your Income: As already mentioned, these payments are for principal and interest

only. You will also have monthly payments for home insurance and property taxes, but for this

lab you will ignore those. In addition, it is necessary to have income leftover for other expenses

like electricity, water, food, and other bills. As a wise homeowner, you decide that your monthly

principal and interest payment should not exceed 35% of your monthly take-home pay so that

you have plenty left over for those other expenses.

What minimum monthly take-home pay (i.e. your monthly pay checks after taxes) should you
earn in order to meet this goal? In other words, 35% of what monthly take-home pay is equal to

your mortgage payment?

3378.97
Minimum monthly take-home pay=$

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, use your monthly take-

home pay to find the minimum gross monthly salary will you need to afford this house.

4628.73
Minimum monthly gross pay=$

Now find the minimum annual gross pay you will need to afford this house.

55544.71
Minimum annual gross pay=$

Research: Do a search on the internet for the "average salary" of either your future profession

or by your future college degree and compare it with your last answer. Make a note of it as you

will need to comment on it in the Reflective Writing for this lab.

Part II: Selling the House

Suppose that after living in the house for 10 years, you decide to sell it. The economy

experiences ups and downs, but in general the value of real estate increases over time.
Recall the original purchase price (you can click back to Question 1 if you need to).

262100
Original purchase price (from Question 1)=$

To approximate the future value of an investment such as real estate, you will use the

compounded interest formula:

PN=P0(1+rk)Nk

This is just an approximation, so we'll use an annual compounding period (so, k=1).

Find the future value of the home 10 years after you purchased it assuming a 4% interest rate.

Use the full purchase price of the home from the previous problem (Question 1) as the principal

(or initial value, P0) in the compound interest formula.

387972.02
Future value of home=$

This "Future value" is the price you will sell the house for after you've owned it for ten years.

Now you will answer the question of whether or not you have made or lost money with this

investment. You will need several pieces of information in order to answer the question. You

will need the amount of your down payment (from Question 1), the amount you paid toward the
mortgage over ten years (your monthly payment from Question 1 times the number of

payments), and finally, the amount of principal you still owe on the mortgage.

26210
Down payment=$

141916.8
Mortgage paid over 10 years=$

To find the principal balance on the mortgage, you will use the Loan Formula:

P0= d(1−(1+rk)−Nk)(rk)

(See your text in the Finance module for help. In this formula, dd is the monthly payment and r is

the annual interest rate expressed as a decimal from Part I, so r=; N is the number of

years remaining on the loan, and, of course, k=12)

188377.99
Principal balance on mortgage after 10 years=$

To determine whether or not you've made or lost money, you must compare the "expenses"

(down payment + mortgage paid + principal balance) to the "return" (future value of the home).

Find the total "expenses".

356504.79
Expenses=$
After 10 years, did you lose or gain money from selling the

gained
house? Answer:

31467.23
How much (did you lose or gain)? Answer:$

Part III: 15 Year Mortgage

In this part of the lab you will examine the values associated with a 1515 year mortgage. You

will use the same purchase price, down payment, and loan amount from Question 1.

Start by confirming you have those correct values.

262100
Original purchase price (from Question 1)=$

26210
Down Payment=$

235890
Loan Amount=$

Typically, the annual interest rate on a 15 year loan is lower than on a 30 year loan.

Assume that you have found a 15 year loan with an annual interest rate of 3.7%

Express the annual interest rate as a decimal.

As you did for the 30 year mortgage in Question 1, compute the monthly payment for the 15 year

loan.

Again, use the loan formula to find the monthly payment, d. The loan formula solved for d is:

d=P0(rk)(1−(1+rk)−Nk)

Hint: what value will you use for N this time?

1709.60
Monthly Payment=$

Assuming you make the monthly payment each month for 15 years, what will be the total

amount repaid?

307728
Total payments=$

Find the total amount of interest paid over the 15 years. To do so, subtract the amount originally

borrowed from the total payments.

71838
Total interest paid=$
Compare the total interest paid with this 15 year mortgage to the total interest paid with the 30

year mortgage (from Question 1).

How much would you save in interest if you use the 15 year mortgage?

118022.4
Difference in interest paid=$

Part IV: Paying Extra

While using a15 year mortgage saves you money on interest compared to the 30year mortgage,

the monthly payment for the 15 year loan is higher than the 30 year. A good alternative is to use

a 30 loan, but to make extra payments toward the principal. This approach gives the homeowner

some flexibility (you can always pay the minimum monthly payment if you can't pay the extra

principal) but results in saving money on interest and paying the loan off quicker.

To see the effect of making extra principal payments, you'll need some information from

Question 1.

Recall from Question 1, the original loan amount was $235890 and the 30 year interest rate

expressed as a decimal was r=0.0441.

Recall that 30 year monthly payment from Question 1. It should have been approximately:
$30 year monthly payment=$1182.64

Using this value, suppose that you pay an additional $100 a month toward principle. You will

need to figure out how long it will take to pay off the loan with this additional payment. In order

to do this, you would have to solve the following loan formula for N, which represents years:

P0=d*(1−(1+r12)−12N)(r12)

(Note: P0P0 is the original loan amount from Question 1 and here we have used k=12and d* is

your monthly payment plus the additional $100.)

In order to solve the above equation for N you would use logarithms. Using the notation log for

the common logarithm, you would get the following formula:

N=log(12d*(12d*−P0r))(12log(1+r12))

Use the above formula to figure out N, the number of years it will take to pay off the loan with

the additional$100 payment. Alternatively, use an online amortization calculator such as:

http://bretwhissel.net/amortization/amortize.html. You will need to enter the principal, the annual

interest rate from this question, and the payment amount (your d*). Leave the "number of regular

payments" blank and hit "Calculate". The number of regular payments divided by 12 should

agree with N from the formula above. Find NN accurate to two decimal places- don't round any

more than that! Give it a try!

To find the total interest paid you need the number of payments you made (which you either

have or can get from N by multiplying it by 12). You can round the number of payments to the

nearest whole number.

307
Total number of regular payments

Now you can find the total payments and the total interest paid. Don't forget to add the

additional$100 to your monthly payment before multiplying by the number of payments.

393770.48
Total payments=$