Question

6 Part Question -

1. Michael and Ashley have decided to buy a house for $240,000. They will make a 20% down payment, and they expect to be approved for a 30-year mortgage with an interest rate of 4.25%. Find their monthly payment.

2. Construct the first row of the amortization table for their mortgage. How much of their first payment goes toward interest? How much of their first payment goes toward principal? After making their first payment, what is the remaining balance?

3. Construct the second row of the amortization table for their mortgage. How much of their second payment goes toward interest? How much of their second payment goes toward principal? After making their second payment, what is the remaining balance?

4. Continue constructing the amortization table for their mortgage until you have completed 12 rows of the table. What is the total amount of interest that Michael and Ashley will pay on their mortgage in the first year?

5. For the house that Michael and Ashley have chosen, the annual property taxes are $4,260, and their homeowners insurance premium is $900 per year. Since they will make a 20% down payment, they do not have to pay PMI. Find their total PITI.

6. Do Michael and Ashley pass the 28% and 36% tests to qualify for a mortgage? Show your calculations to justify your answers.

Answer 1

1)

Value of House	$2,40,000
% Down payment	20%
Amount of down payment	$   48,000	(= 20% x 240,000)
Value of Loan	$1,92,000	(= 240,000 - 48,000)
Interest Rate	4.25%
Time	30 Years

Monthly payment ->

It is also know as Equated Monthly Instalment or EMI. Formula to calculate EMI is

where,

P = Principal or Amount of Loan = 192,000

R = Monthly rate of interest = 4.25%/12

N = No. of periods = 30x12 = 360

Solving the above equation,

EMI = $944.52

2)

PMT NO.	BEGINNING BALANCE	SCHEDULED PAYMENT	INTEREST PAID	PRINCIPAL PAID	ENDING BALANCE
1	192000.00	944.52	680.00	264.52	191735.48

Principal Paid = EMI - Interest Paid = 944.52 - 680.00 = 264.52Interest Paid = 192,000 x 4.25%/12 = 680.00

Ending Balance = Beginning Balance - Principal Paid = 192,000.00 - 264.52 = 191735.48

3)

PMT NO.	BEGINNING BALANCE	SCHEDULED PAYMENT	INTEREST PAID	PRINCIPAL PAID	ENDING BALANCE
1	192000.00	944.52	680.00	264.52	191735.48
2	191735.48	944.52	679.06	265.46	191470.01

Principal Paid = EMI - Interest Paid = 944.52 - 679.06 = 265.46Interest Paid = 191735.48 x 4.25%/12 = 679.06

Ending Balance = Beginning Balance - Principal Paid = 191735.48 - 265.46 = 191470.01

4)

PMT NO.	BEGINNING BALANCE	SCHEDULED PAYMENT	INTEREST PAID	PRINCIPAL PAID	ENDING BALANCE
1	192000.00	944.52	680.00	264.52	191735.48
2	191735.48	944.52	679.06	265.46	191470.01
3	191470.01	944.52	678.12	266.40	191203.61
4	191203.61	944.52	677.18	267.35	190936.27
5	190936.27	944.52	676.23	268.29	190667.98
6	190667.98	944.52	675.28	269.24	190398.73
7	190398.73	944.52	674.33	270.20	190128.54
8	190128.54	944.52	673.37	271.15	189857.38
9	189857.38	944.52	672.41	272.11	189585.27
10	189585.27	944.52	671.45	273.08	189312.19
11	189312.19	944.52	670.48	274.04	189038.15
12	189038.15	944.52	669.51	275.01	188763.14

Total Amount of Interest Paid in a year is sum of individual interest paid in a year = $8097.43

5)

Annual property taxes = $4,260

Homeowners insurance premium = $900/year

PITI is sum of monthly principal, interest, taxes, and insurance. Here, principal & interest makes EMI.

PITI = EMI + (Annual property taxes)/12 + (Homeowners insurance premium)/12

= 944.52 + 4260/12 + 900/12 = $1,374.52