466 Chapter 10 Consumer Mathematics
Topic Key Ideas, Formulas, and Techniques Examples
Home Equity and Loan to Value,
p. 434- Equity value of property amount owed
on it. - Maximum loan to value is the maximum
percent that can be owed against a given
piece of real estate.
Les and Rhonda own a
house worth $194,825. The
balance they owe on their
fi rst mortgage is $118,548.
They want to take out a
second mortgage, and all
of the lenders they have
spoken with require a
minimum equity of 5%. Find
(a) their equity now, (b) the
maximum amount they can
borrow with the second
mortgage, and (c) their
equity if they borrow the
maximum. (Example 10.2.1)Escrow and PITI, p. 437 • Monthly escrow payment is 1/12 of the annual
taxes and insurance.- PITI mortgage payment escrow
payment PMI.
Chantal’s mortgage
payment is $963.88.
Suppose that her annual
property taxes are expected
to be $3,300 and her
homeowners’ insurance
premium is $750. PMI is
$45 a month. Find her total
PITI. (Example 10.2.6)Qualifi cation Tests, p. 440 • 28% test requires that PITI must be less than
28% of monthly gross income.- 36% test requires that PITI plus long-term
debt payments must total less than 36% of
monthly gross income.
Antoine and Maria earn a
combined annual income
of $76,500. They are trying
to qualify for a mortgage
on a house for which the
total monthly payment
(PITI) would be $1,494.57.
Do they pass the 28%
test? If their PITI and long-
term debt payments total
$1,987.87, do they pass
the 36% test? (Examples
10.2.7 and 10.2.8)Up-Front Expenses, p. 441 • Up-front expenses include down payment,
closing costs, points, and prepaids.Drew and Joanne are
buying a house for
$128,550. They will make
a minimum 3% down
payment, and closing costs
will total $2,100. Annual
property taxes are $2,894
and homeowners’ insurance
is $757 annually. How much
money will they need up
front? (Example 10.2.9)Points and Payback Period,
p. 443- Points may be paid to “buy” a lower interest
rate. - Each point is 1% of the loan amount. Payback
period is the time it takes to recover the cost
of the points. - Payback period is cost of points divided by
monthly savings from the lower-rate loan.
Determine the payback
period for paying points
given a choice between
a no-point 30-year loan
at 7.5% and a 2.5-point
30-year loan at 6.25%
(Examples 10.2.10 and
10.2.11)(Continued)