In this video we are going to compute the first mortgage payment used in the article “How to Help Your Children Purchase a Home.” We will do so as a time value of money problem using a financial calculator.
For example, say you are hoping to help your child purchase a home for $200,000. The 20% down payment you would provide is $40,000. Your child would purchase the remaining 80% of the home by obtaining a 30-year fixed home mortgage, potentially with you co-signing the loan. When qualifying with a good credit score, interest rates are currently around 3.5% for this type of loan. Using this interest rate, your child’s monthly mortgage payment would be $718.47. …
If you are offering your child the down payment as a loan, let’s say you extended that loan over a 5-year term. The current market rate for a 5-year loan is about 3.22%. Using this rate, your child would make monthly payments of $722.66 to you for 5 years. After those 5 years, your child would have 20% equity in the home, along with whatever they’ve paid off from their 30-year mortgage.
All time value of money problems are set up using the five variables at the top of the calculator. You supply four of them and then solve for the fifth. You also must be clear about how many payments per year are being made. We recommend setting up your problem by writing down the four variables that are provided on a simple scratch sheet and then entering them into the calculator in that order. I recommend having a sheet with the five variables listed so that you can put down numbers as you read the problem. Once you have four variables listed, you enter them into your calculator and solve for the fifth.
This is the calculation for the mortgage payment of the 30-year loan.
The initial mortgage is for $160,000. The interest rate for the mortgage is 3.50%. The payments are monthly. The term is 30 years or 30*12 = 360 months.
Here is my scratch work:
Here are the keystrokes required to compute the monthly payment:
12 Payments per Year
360 Number of payments
3.5% Interest per Year
$160,000 Present value of the loan (positive because we are receiving the loan)
Future value of the loan is zero
Solve for Payment
Answer: -$718.47 (answer is negative because we are paying the money)
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