2005 Chris Robinson, Kwok Ho and Captus Press Inc.
The first part of the chapter is standard mortgage mathematics.
Every instructor will be familiar with this material already, and
many of the students.
The only complication is the Canadian law
requiring compounding no more frequently than semi-annually.
have chosen to include this topic in the chapter on housing because
it is directly related, and provides a good review of the time
value of money.
You could equally well choose to cover it with
Decisions relating to home ownership are a matter of personal
choice, and we discuss only the financial aspects.
personal choices have different financial implications, we have
modelled the house valuation decision in order that buyers can link
their choices to the costs involved.
We also discuss the owner-
occupied home as a financial investment, and how that financial
aspect leads into the rent versus buy decision.
Personal finance books usually explain the details of how to
deal with real estate agents, register titles, etc.
generally the case, these matters vary across jurisdictions and
change over time, and we have no special expertise to add.
this chapter provides the conceptual basis for home ownership and
mortgage decisions, but not the mundane details.
We suggest that teaching by doing examples in class is
suitable for this chapter.
The mortgage financing problems are a
review of time value, and you can teach the house valuation model
by asking them to do one of the adjusted price problems without
looking at Table 13.2 first.
Solutions to Problems
Note that for specific mortgage calculations we extend to 5 decimal
places, since the differences can matter.
3-year mortgage (1 + .08/2)
5-year mortgage (1 + .085/2)
- 1 = 0.69611%
Assuming a 25 year amortization
3 yr: PV = 150,000; I/Y = .65582; N = 300
PMT = $1,144.82 per month
5 yr: PV = 150,000; I/Y = .69611; N = 300
PMT = $1,193.05 per month
3-yr: N = 264, PV = $143,482.84
5-yr: N = 240, PV = $138,959.09
For the 3-year mortgage, the advantage is the lower
interest rate, and the disadvantage is the risk of a big
hike in interest rates at the end of the term.