What Will a Mortgage Cost?

1.         Explain:  The word “mortgage” is a French term meaning
"dead pledge," meaning that the pledge ends (dies) either when the
obligation is fulfilled, the property (mortgage) is relieved, or the property
is taken through foreclosure.

A
mortgage is a legal agreement to repay a loan that is secured by a home or real
property.  If the loan is not repaid in
the specified time, the mortgagor (lender) can legally claim the property
through foreclosure.

2.         Go to the Ginnie Mae “Loan Estimator”
web page.   

3.         Experts suggest that a homebuyer should
spend mo more than 2 to 2-1/2 times their annual gross salary.  A family with a gross income of $50,000 should
look for a home in a price range of no more than $100,000 to $125,000.

Experts
also suggest the “28/36 Ratio” for mortgage payments.  Most lenders will finance buyers whose
monthly mortgage payment (including loan payment, property  taxes, and insurance) will not exceed 28
percent of their gross monthly income.

Lenders
also look at the borrowers overall debt ratio - your total monthly expenses
including housing, credit card minimum payments, loans, and all other debts.  The “rule of thumb” is that a borrower’s
total debt payments should not be more than 36 per cent of gross monthly
income.

4.         Explain that there are three factors
that determine how much a mortgage payment will be and how much a borrower will
pay on total at the end of the  mortgage..

     a.  Principle – the amount borrowed or owed.

     b.  Interest rate – the cost of the loan
expressed as an annual percentage rate.

     c.
 Time period – how long you will take to
repay the loan.

5.         Use the “Loan Estimator” to demonstrate
how to determine a payment.

Enter
a home sale price, location, time length, interest rate, and down payment.  Click on “Get Estimate.”

Example:           $200,000 sale price

                        Hamilton, Ohio

                        30 year loan

                        6 percent interest

                        $40,000 down payment

The
payment for this mortgage example will be between $1,335 and $1,399, depending
on the type of loan (FHA Regular, VA Regular, or conventional.

6.         If student computers are available,
have the students calculate different mortgage payments by changing the amount,
interest rate or length.

For
example, if the above mortgage was based on a 7% interest rate, the payment
would increase to between $1,451 and $1,508.