ACOS Objective Algebra 1: Use algebraic techniques to make financial and economic decisions.

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1 The single, largest purchase for most people in their lifetime is a home. Purchasing a home and making mortgage payments requires significant planning. Knowing what costs are involved will help prepare you. ACOS Objective Algebra 1: Use algebraic techniques to make financial and economic decisions. Today we focus on costs involved in owning a home, such as mortgage, insurance, and maintenance.

2 For most people, buying a home is a sound investment that makes financial sense. Why is this true? Home prices usually climb Tax Incentives Mortgage interest is tax deductible Settled in one area for an extended period of time When is it not? If a person moves a lot for job reasons

3 What You ll Learn Section 10-1 Section 10-2 Section 10-3 Section 10-4 Section 10-5 Section 10-6 Section 10-7 Section 10-8 Compute the mortgage loan amount. Determine the monthly payment, total amount paid, and total interest charged. Figure out the total closing costs. Compute the allocation of monthly payment toward principal, interest, and new principal. Calculate the assessed value and real estate taxes. Work out the amount of coverage. Calculate the annual homeowners insurance premium. Compute the total housing cost and compare it with suggested guidelines.

4 When Will You Ever Use This? Shelter is one of life s basic needs, right after water and food. At some point in your life you might want to buy a house and make it your home. In doing so you ll need to take into consideration all the costs involved in buying a house. What Issues Should You Consider? Price Location

5 Key Words to Know: Mortgage Loans mortgage loan - A property loan that gives the lender the right to seize and sell the property if the borrower fails to make the payments on the loan. Mortgage Loan = Selling Down Amount Price Payment Why do you think a majority of homeowners take out 15- to 30-year mortgages as opposed to a 5-year mortgage?

6 Example 1 Jessica and Kirk Cramer consider purchasing a new home for $140,000. A 15 percent down payment is required. What is the amount of the mortgage loan needed to finance the purchase? Step 1: Find the down payment. $140,000 15% = $21,000 Step 2: Find the mortgage loan amount. Selling Price Down Payment $140,000 $21,000 = $119,000

7 Practice Santos and Anna Rivera made an offer of $158,000 on a home that was priced at $164,000. Their offer was accepted. They made a down payment of 25 percent and financed the remaining amount. What is the amount of the mortgage? $118,500

8 Practice Mary Schoen is buying a house that costs $179,000. She made a 25 percent down payment. What is the amount of the mortgage loan needed to finance the purchase? $134,250

9 What do you think Can you shop around for mortgage rates or are they all the same no matter where you go?

10 Key Words to Know: Total Interest Interest - The amount of money paid for the use of a lender s money. Monthly = Amount of Mortgage Monthly Payment Payment $1,000 for a $1,000 Loan Amount Paid = Monthly Payment Number of Payments Total Interest = Amount Paid Amount of Mortgage Charged

11 Example 2 Carol and Adam Burke have applied for an $80, mortgage loan at an annual interest rate of 8.00 percent. The loan is for a period of 30 years and will be paid in equal monthly payments that include interest. (Use the Monthly Payment for a $1,000 Loan table on page 799 of your textbook.) What is the total amount of interest charged?

12 Example 2 Answer: Step 1: Find the monthly payment. Amount of Mortgage Monthly Payment $1,000 for a $1,000 Loan $80, $7.34 = $ $1, Step 2: Find the amount paid. Monthly Payment Number of Payments $ (12 months 30 years) $ = $211,392.00

13 Example 2 Answer: Step 3: Find the total interest charged. Amount Paid Amount of Mortgage $211, $80, = $131,392.00

14 Practice (Use the Monthly Payment for a $1,000 Loan table on page 799 of your textbook.) Selling price: $276,000. Down payment: 25 percent. Terms: 8 percent for 15 years. What is the total interest charged? $149,205.60

15 Practice The Ekharts bought a home for $235,000. They made a down payment of 20 percent and financed the rest at 7 percent for 30 years. What is the monthly payment? What is the total amount to be paid? What is the interest charged? How much interest would they save if they financed the same amount at 7 percent for 15 years? Monthly payment: $1, Total amount to be paid: $450,072 Interest charged: $262,072 Interest they would save if they financed the same amount at 7 percent for 15 years: $145,850.40

16 Key Words to Know: Closing Costs closing costs - The costs of transferring ownership of property, such as credit checks, lawyer fees, surveys, taxes, document preparation fees, and title searches, to the buyer by the seller. Closing Costs = Sum of Bank Fees Why might the lender charge additional costs (over and above the loan documents)?

17 Example 3 Trudy and Germane Hallett have been granted a mortgage loan at an annual interest rate of 8 percent for 25 years by State Bank. The home has a selling price of $95,500. They need a 15 percent down payment. State Bank will allow them to finance the closing costs as part of the mortgage. What are the total closing costs? What is actual amount financed with the mortgage? Step 1: Find the down payment. $95,500 15% = $14,325 Step 2: Find the amount of the mortgage. $95,500 $14,325 = $81,175 Step 3: Find the closing costs (see table) Step 4: Actual Amount Financed = Amount of Mortgage + Closing Costs $81,175 + $3, = $84,369.96

18 Practice Joseph and Marla Liebowitz have agreed to purchase a house for $362,000. They made a down payment of 30 percent and are financing the remaining amount. The total closing costs are 3.25 percent of the mortgage loan. What are the closing costs? What is the total mortgage loan? Closing costs: $8, Total mortgage loan: $261,635.50

19 Key Words to Know: Monthly Payment principal - The amount borrowed to finance a mortgage. Interest = Principal Rate Time Payment to Principal = Monthly Payment Interest New Principal = Previous Balance Payment to Principal Why would most people be interested in the proportion of principal-to-interest for their monthly payments?

20 Example 4 Rod and Carey Finn obtained a 30-year, $80, mortgage from State Bank and Trust. The interest rate is 8 percent. Their monthly payment is $ For the first payment, what is the interest? What is the payment to principal? What is the new principal? Step 1: Find the interest. Principal Rate Time $80, % 1/12 = $ Step 2: Find the payment to principal. Monthly Payment Interest $ $ = $53.87 Step 3: Find the new principal. Previous Balance Payment to Principal $80, $53.87 = $79,946.13

21 Example 5 The amount of principal that you owe decreases with each payment that you make. The figure below shows the interest and principal paid for payment numbers 325, 326, and 327 on an original $80,000 mortgage loan. For payment number 328, what is the interest? What is the payment to principal? What is the new principal?

22 Example 5 Answer: Step 1: Find the interest. Principal Rate Time $17, % 1/12 = $ Step 2: Find the payment to principal. Monthly Payment Interest $ $ = $ Step 3: Find the new principal. Previous Balance Payment to Principal $17, $ = $16,644.06

23 Practice Mortgage loan of $154,000. Interest rate is 8 percent for 30 years. Monthly payment is $1, How much of the first monthly payment is for interest? How much of the first monthly payment is for principal? What is the new principal? Portion of the first monthly payment to interest: $1, Portion of the first monthly payment to principal: $ New principal: $153,896.31

24 Practice Mortgage is $125,000. Interest is 7½ percent for 20 years. Monthly payment is $1, How much of the first monthly payment is for interest? How much of the first monthly payment is for principal? What is the new principal? Portion of the first monthly payment to interest: $ Portion of the first monthly payment to principal: $ New principal: $124,773.75

25 Key Words to Know: Real Estate Taxes real estate taxes - Taxes collect by the city or county from homeowners to pay for roads, parks, and other public services. assessed value - The dollar value assigned to property by a tax assessor for tax purposes. tax rate - The percentage of property value collected in taxes, sometimes expressed in mills per dollar. market value - The price at which a house can be bought or sold. rate of assessment - Percent of the market value of property that is taxed.

26 Formulas To Know Assessed Value = Market Value Rate of Assessment Real Estate Tax = Tax Rate Assessed Value Mill = $0.001 or Mill = $1.00 1,000

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33 Example 6 The Fulton County tax assessor determined that the market value of Courtland Farm is $340, The rate of assessment in Fulton County is 40 percent of market value. The tax rate is mills. What is the real estate tax on Courtland Farm? Step 1: Find the assessed value. Market Value Rate of Assessment $340, % = $136, Step 2: Express the tax rate as a decimal mills 1, = Step 3: Find the real estate tax. Tax Rate Assessed Value , = $6,899.28

34 Practice A townhouse s market value is $163,000. The rate of assessment is 36 percent. The tax rate is $75 per $1,000. What is the annual real estate tax? $4,401

35 Practice A home s market value is $580,000. The rate of assessment is 80 percent. The tax rate is mills. What is the annual real estate tax? $11,660.32

36 If someone falls on your property and gets hurt, how will you protect yourself against a lawsuit?

37 Key Words to Know: Homeowner Insurance homeowners insurance - Financial protection for homeowners against fire, theft, personal liability, and other damages. loss-of-use coverage - Insurance coverage for homeowners that pays for the costs of living away from home while the home is being repaired. personal liability - Insurance coverage for homeowners if someone is injured in their home. medical coverage - Insurance for homeowners that pays medical expenses if someone is injured in their home. replacement value - The amount required to reconstruct a home if it s destroyed, used to determine the amount of insurance a home should have.

38 Average Insurance Costs by Region

39 Formula Amount of Coverage = Amount of Coverage on Home Percent

40 Example 7 The replacement value of Joy and Ron Amodeo s home is estimated at $94,000. They have insured their home for 80 percent of its replacement value. Using the table, what is the amount of coverage on the Amodeo s personal property? Step 1: Find the amount of coverage on the home. Replacement Value Percent $94, % = $75,200 Step 2: Find the amount of coverage on personal property. Amount of Coverage on Home Percent $75,200 50% = $37,600

41 Practice Use the table. A home s replacement value is $78,000. Coverage on the home is 80 percent. a. What is the insurance coverage on the home? a. $62,400 b. What is the amount of coverage on personal property? b. $31,200

42 Practice Use the table. A home s replacement value is $136,000. Coverage on the home is 90 percent. a. What is the coverage on the home? a. $122,400 b. What is the loss-of-use coverage? b. $24,480 c. What is the coverage on the garage? c. $12,240

43 How does an insurance company compute the amount of your premium? Many factors are taken into consideration, such as The type of insurance you want The amount of coverage you want Location of house Age of house Building material

44 Key Words to Know: Insurance Premiums premium - The amount paid to an insurance company for insurance. fire protection class - A number assigned to property based on how safe it is from fire, used to determine the cost of insuring it.

45 Example 8 The replacement value of Marcia Syke s home is $150,000. She has insured her home for 80 percent of its replacement value. The home is of wood-frame construction and has been rated in fire protection class 4. What is the annual premium? Step 1: Find the amount of coverage. Replacement Value of Home $150,000 80% = $120,000 Insured Percent of Replacement Value

46 Step 2: Find the annual premium. (See Figure 10.5 on page 359 of your textbook.) Find the column, Wood Frame. Find the Fire Protection Class 1-6 column Find the Amount of Insurance Coverage column with 120,000. Follow across the column and down the row to where 120,000 and 1-6 meet. $381

47 Practice A brick home s replacement cost is $250,000. It is insured for 100 percent. It is in an area rated fire protection class 3. What is the annual premium? $737

48 Practice Robert Huynh has insured his $70,000 woodframe home for 100 percent of its replacement cost. The home is located in an area rated fire protection class 6. What is the annual policy premium? What would the premium be if he owned a brick home? Annual policy premium: $225 Premium for a brick home: $213

49 Section Objective Compute: total housing cost Compare: total housing cost with suggested guidelines

50 Key Words to Know: Other Housing Costs utility costs - The costs or public services such as electricity, water, and gas. Who pays for their apartment s repairs? Who pays for the repairs once they own a home?

51 Example 9 Sue and Paul Kwan have a combined monthly take-home pay of $3,320. The list of their expenses for May is shown in Figure 10.6 below. Were their housing costs for May within the FHA guidelines of less than 35 percent of their take-home pay?

52 Figure 10.6

53 Example 1 Answer: Step 1 Find the total monthly cost. Sum of expenses = $1,221.63

54 Example 1 Answer: Step 2 Find the recommended maximum. $3, % = $1,162.00

55 Example 1 Answer: Step 3 Compare: Is the total monthly cost less than the recommended maximum? Is $1, less than $1,162.00? No, the Kwan s are not within the guidelines.

56 Practice Juaquin and Maria Eloyza have a combined monthly net income of $4,928. The following is a list of their housing expenses for the month of April: Mortgage payment, $846; insurance, $31; taxes, $210; electricity, $67; phone, $55; cable TV, $21.95, Internet service; $38; fuel, $55; water, $29.43; washing machine installment payment, $45; repairs, $

57 Practice 1 (cont.) Find the total monthly housing cost. Is it within the FHA guidelines?

58 Practice 1 Answer FHA recommendation: $1, Total monthly housing cost: $1, Is it within the FHA guidelines? No.

59 Practice 2 Marcus and Shonda Olson have a combined monthly net income of $6,125. Their monthly housing expenses for September are as follows: mortgage payment, $931; insurance, $38.77; taxes, $397; electricity, $118.55; gas heat, $32.87; water, $40.28; garbage pick-up, $15.30; telephone, $31.18; cable TV service, $69.95; cell phone, $39.73; new lawn edger, $79.95; air conditioner repair, $ What is their total housing cost for September? Is it within the FHA recommendation?

60 Practice 2 Answer FHA recommendation: $2, Total housing cost for September: $1, Is it within the FHA recommendation? Yes.