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Chapter 8: Problem 15

How is the amount of a mortgage determined?

Short Answer

Expert verified
The amount of a mortgage is determined by the cost of the house, the downpayment made, the loan term, and the interest rate on the loan. The principal amount is obtained by subtracting the down payment from the cost of the house. The total interest is calculated by multiplying the principal by the interest rate and the loan term. The mortgage payment is derived by dividing the sum of the principal and total interest by the number of months in the loan term. Thus, mortgages values are influenced by these four variables.

Step by step solution

01

Determining Principal Amount

This is basically the loan amount that is required to buy the house. It is determined by subtracting the down payment from the cost of the house. For example, if a house costs $200,000 and a down payment of $50,000 is made, the principal amount will be $150,000.
02

Calculate Total Interest

Next step is to calculate the total interest on the loan. This is done by multiplying the principal amount by the interest rate and then by the number of years the loan is for. This total interest is then added to the principal amount to find the total amount that will be paid back. Using the example above, if the interest rate is 5% and the term of the loan is 20 years, the total interest will be \(150,000\times 0.05\times 20 = 150,000\). Then the total amount is \(150,000 + 150,000 = 300,000\)
03

Calculate Mortgage Payment

Mortgage payment can be calculated by dividing the total amount to be paid back by the number of months in the loan term. From the previous example, the mortgage for 20 years will be for \(20 \times 12 = 240\) months. Therefore, the monthly mortgage payment will be \(300,000 / 240 = 1,250\)

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Most popular questions from this chapter

Suppose that you earned a bachelor's degree and now you're teaching high school. The school district offers teachers the opportunity to take a year off to earn a master's degree. To achieve this goal, you deposit \(\$ 2500\) at the end of each year in an annuity that pays \(6.25 \%\) compounded annually. a. How much will you have saved at the end of 5 years? b. Find the interest.

In Exercises 11-18, a. Determine the periodic deposit. Round up to the nearest dollar. b. How much of the financial goal comes from deposits and how much comes from interest? $$ \begin{array}{|l|l|l|l|} \hline \$ ? \text { at the end of each month } & 8.25 \% \text { compounded monthly } & 40 \text { years } & \$ 1,500,000 \\ \hline \end{array} $$

Describe two advantages of home ownership over renting.

In Exercises 11-18, a. Determine the periodic deposit. Round up to the nearest dollar. b. How much of the financial goal comes from deposits and how much comes from interest? $$ \begin{array}{|l|l|l|l|} \hline \$ \text { at the end of every three months } & 3.5 \% \text { compounded quarterly } & 5 \text { years } & \$ 20,000 \\ \hline \end{array} $$

Describe two advantages of leasing a car over buying one.
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