A mortgage is a long term loan that is secured by a piece of real estate. If you were interested in buying a home but did not have sufficient cash, you would need to borrow from a bank or a mortgage company.

Banks or mortgage companies will typically lend up to $75\%$ of the purchase price of a home assuming that you have sufficient income to meet their lending requirements $($see page $5$ for qualification criteria$).$ The most common terms for mortgages are $15$ years and $30$ years. The longer the term, the lower the monthly payments will be$.$

To set up an amortization $($repayment$)$ schedule for a mortgage, you will need to do several things:

$$ First, you must decide on the amount of mortgage $($amount you will borrow$),$ the term $(15$ or $30$ years$)$ and the interest rate of the loan.

$$ Then you must determine what the required monthly payment would be for the loan you selected.

$$ Prepare an amortization schedule using the example illustrated on the PowerPoint provided as a guide.

CALCULATING REQUIRED MONTHLY PAYMENT

Each monthly payment consists of an amount for interest and repayment of loan balance $($principal$).$ To calculate your monthly principal and interest payments:

$1.$ Locate the interest rate in the left hand column

$2.$ Look across the table to the column with the desired term $(15$ or $30$ years$)$

$3.$ The number found where the term and rate intersect is the interest rate factor.

This is the dollar amount required to pay off or amortize a $$1,000$ loan over the specified term.

$4.$ Calculate the required payment for your loan, multiply the interest rate factor by the amount borrowed expressed in multiples of $$1,000.$

Example: $$120,000,30$ year, $9\%$ mortgage.

Interest factor, $9\%,30$yr from Exhibit $1=$ $$8\mathrm{.}23$

Required monthly payment for $$120,000$ loan $=$ $$120,000/$$$1000$ x $$8\mathrm{.}23=$$$987\mathrm{.}60$

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EXHIBIT $1$

INTEREST FACTOR TABLE

Example: Mortgage amount : $$120,000$

Interest rate: $91/4\%$

Term: $30$ years

Interest Factor$/$$$1,000$: $$8\mathrm{.}23$

Required monthly payment: $$8\mathrm{.}23$ x $120=$ $$987\mathrm{.}60$

FACTORS PER $$1,000$

INTEREST RATE $(\%)15$ YEARS $30$ YEARS

$4\%$ $$7\mathrm{.}40$ $$4\mathrm{.}77$

$4\%$ $$7\mathrm{.}52$ $$4\mathrm{.}92$

$4(1)/(2)\%$ $$7\mathrm{.}65$ $$5\mathrm{.}07$

$4\%$ $$7\mathrm{.}78$ $$5\mathrm{.}22$

$5\%$ $$7\mathrm{.}91$ $$5\mathrm{.}37$

$5(1)/(2)\%$ $$8\mathrm{.}04$ $$5\mathrm{.}52$

$5(1)/(2)\%$ $$8\mathrm{.}17$ $$5\mathrm{.}68$

$5\%$ $$8\mathrm{.}30$ $$5\mathrm{.}84$

$6\%$ $$8\mathrm{.}44$ $$6\mathrm{.}00$

$6\%$ $$8\mathrm{.}57$ $$6\mathrm{.}16$

$6(1)/(2)\%$ $$8\mathrm{.}72$ $$6\mathrm{.}33$

$6\%$ $$8\mathrm{.}85$ $$6\mathrm{.}49$

$7\%$ $$8\mathrm{.}99$ $$6\mathrm{.}66$

$7\%$ $$9\mathrm{.}13$ $$6\mathrm{.}83$

$7(1)/(2)\%$ $$9\mathrm{.}28$ $$7\mathrm{.}00$

$7\%$

$$9\mathrm{.}42$ $$7\mathrm{.}17$

$8\%$ $$9\mathrm{.}56$ $$7\mathrm{.}34$

$8\%$ $$9\mathrm{.}70$ $$7\mathrm{.}51$

$8(1)/(2)\%$

$$9\mathrm{.}85$ $$7\mathrm{.}69$

$8\%$ $$9\mathrm{.}99$ $$7\mathrm{.}87$

$9\%$ $$10\mathrm{.}14$ $$8\mathrm{.}05$

$9\%$

$$10\mathrm{.}29$ $$8\mathrm{.}23$

The above calculation of required monthly payment for a $$120,000.91/4\%,30$ year mortgage is for principal and interest only. It does not include property taxes, insurance, association dues, or other charges.

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CALCULATING TOTAL MORTGAGE AND INTEREST PAYMENTS

To calculate total mortgage payments that would be paid over the life of the mortgage mentioned above $($i$.$e$.$ $$120,000,9\%,30$ years$)$:

To calculate total interest paid over the life of the mortgage mentioned above $($i$.$e$.$ $$120,000,91/4\%,30$ years$)$:

As you can see above, if you paid the required monthly payment of $$987\mathrm{.}60$ for $30$ years, your $$120,000$ would be paid in full. However, you would have paid $$235,536$ in interest to the bank for that privilege. By paying an additional amount each year, it is possible to accelerate the payoff of your mortgage and substantially reduce the amount of interest paid.

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Qualification Criteria for Mortgage:

I. Housing ratio

Principal $+$ Interest $+$ Taxes $+$ Insurance $($PITI$)<=28\%$ of Gross Annual Income

Example: Purchase house for $$150,000,$ borrow $$120,000,9\%,30$ years

Prinicpal $+$ interest $=$ $$987\mathrm{.}60$

Insurance $50\mathrm{.}00$

Taxes $100\mathrm{.}00$

PITI $$1,137\mathrm{.}60-$: $28\%$

Monthly income required $=$ $$4,062\mathrm{.}86$ x $12$

Annual income required $=$ $$48,754\mathrm{.}29$

II$.$ Debt Ratio

PITI $+$ Debt service $<=36\%$ of Gross Annual Income

Student loan $=$ $$150$

Car loan $260$

Credit cards $225$

$$635$

$$1,137\mathrm{.}60+$ $$635=$ $$1,772\mathrm{.}60/$month

Monthly income required $=$ $$1,772\mathrm{.}60-$: $36\%=$ $$4,923\mathrm{.}89$

Annual income required $=$ $$4,923\mathrm{.}89$ x $12=$ $$59,086\mathrm{.}67$

In this case, the applicant must be able to show proof of at least $$59,086\mathrm{.}67$ annual gross income to qualify for this loan.