Mortgage Math.

  In many small schools, consumer math is no longer being taught.  The school only offers math classes designed for college bound students.  Unfortunately, many of the consumer math classes do not take time to look at mortgages and how a simple eighth of a percentage can change the over amount paid.

When I was growing up, my mother always told me to pay extra every month so the mortgage would be paid off sooner.  This does work because you end up making at least one additional payment per year.

Furthermore, most students don't realize that the larger the down payment, the lower the amount of money they have to borrow which is important to planning ahead.

Lets look at the down part of buying a house.  Most down payments are either 3%, 10%, and 20% of the agreed upon price.  It is good to point out that with a 20% down payment, the purchaser does not have to purchase PMI or private mortgage insurance to protect the lender in case you cannot make payments.  PMI costs between 1/2% and 1 % per year added to the mortgage payment.  Once the loan balance amount reaches 78 percent of the original amount, the PMI is removed.

When securing the mortgage, there are several different types such as a conventional loan for a flat percent over a 15, 20, or 30 year term.  Rates change frequently so its important when choosing a rate, to choose one of the going rates.  In addition, to conventional there are ARM or adjustable rate mortgages which are often guaranteed to remain fixed for a set period of time such as 5 or 10 years before the interest rate is recalculated every year.  This type of mortgages is often appealing in a time when mortgage rates are rising frequently.  Another type is the interest only where the borrower pays for the interest only and often requires the borrower to pay the whole borrowed amount after 2 to 5 years. The idea is the borrower will secure a proper loan before the balloon payment is due.

The last element to look at are interest rates.  Every lender offers a slightly different rate based on your credit scores but many online real estate places such as Realtor.com and Zillow.com offer current interest from several sources so students get an idea of the different rates.

So here are three elements students can explore using a spreadsheet while using math formulas for interest, payment, and down payments to decide which deal is the best.  Use this information to provide a spreadsheet based project where they:

1.  Find a house they would like.
2.  Determine the down payment for 3, 10, and 20 percents.  How much is each.
3.  Find the amount being borrowed.
4.  Calculate the monthly payment for each balance based on mathematical formulas using a low, medium, and high interest rate.
5.  Use the figures for taxes, etc from the websites to be included in the monthly payment.
6.  Calculate any PMI payments at 1 percent of the loan per year.
7.  Once the spread sheet is set up, let them play with paying off the loan by adding $50, $100, or $200 per month to see how it changes the payoff time. 

This is real world application of Math which prepares students for the real world in which they may consider buying a home.  The more they know, they better job they will do planning for buying the house.

Let me know what you think, I'd love to hear.  Have a great day.