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Earn Your Future ®

Digital Classroom
Level 2: Mortgage
Mystery

Module Resource
Guide
Table of contents
“Mortgage Mystery” Module Resource Guide .............................................................................................................. 3

Background information about the topic ..................................................................................................................... 4

Teaching the module .................................................................................................................................................... 5

Assessing student learning ......................................................................................................................................... 10

Extending student learning .........................................................................................................................................16

National standards for financial literacy ..................................................................................................................... 17

Related resources for students ....................................................................................................................................18

Module notes/sources ................................................................................................................................................. 19

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“Mortgage Mystery” Module
Resource Guide
Topic: Home Buying

Suggested grade level

Although this module may be used for all grade levels, the content was designed for grades six through eight.

Hardware recommendation
All Earn Your Future (EYF™) Digital Classroom modules are accessible on any device, however, for optimal user
experience it is recommended modules are accessed via desktop or tablet. Please note, the EYF Digital Classroom
modules are not optimized for use on mobile devices (iOS and Android).

Technical Specifications
While the EYF Digital Classroom modules will function in all browsers, including Internet Explorer, Safari,
Chrome, and Firefox, browser load speeds will vary. For best performance, it is recommended that the most
current version of your browser of choice is used when accessing the modules. Please note, connection speeds may
be impacted by factors such as highly trafficked shared WiFi access, public WiFi, and accessing modules behind a
firewall.

Module summary
In “Mortgage Mystery,” students learn what mortgages are and how they work. Students meet three families—with
different financial profiles and priorities—who are all trying to buy the same home. Students investigate why each
family has a different estimated monthly payment for a home loan. They also figure out which family would pay
the most for their loan over time. Students explore the effects of down payments, interest rates, and the lengths of
loans on monthly mortgage payments to compare the immediate and long-term costs of home loans.

Key learning objectives

• Students will understand key terms and concepts associated with home buying
• Students will understand that a mortgage is a type of long-term loan used to buy a home
• Students will explain why people use mortgages to pay for homes
• Students will understand how down payment, interest rate, and term affect monthly mortgage payments and
the full cost of a loan

Procedure
This module is designed to be flexible to meet the needs of many different learning environments.

• One-to-one environment – Students using the module for independent, self-paced learning, can simply
move through the module at their own pace.
• Working in pairs or at centers – Students can take turns answering the questions throughout the module
and in this guide, or they can work together to answer the questions. As students may have different reading
levels, you will want to guide them to provide each group member with an opportunity to read and
comprehend the information before moving on.
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• Class environment – If you are leading a group in a one-to-many environment, you can use a projector and
screen or whiteboard to make the module the focus of instruction and discussion. Use the questions in this
guide and a show of hands during each topic to gauge student comprehension.
• Customized instruction – You may also choose to use discrete elements from the module (e.g., video,
activity, assessment) that fit your timeframe and curriculum. The navigation at the upper left corner of the
module can help you select specific parts once you have reviewed the module. Keep in mind that many
modules take students through a storyline about a character or event. If you start in the middle of a module,
you may want to provide students an overview such as the Module Summary above.

Background information about the

topic
Investigation 1—The basics of mortgages
Most people who are looking to buy a home do not have enough money saved up to
pay the full price of the home up front. Instead, they pay for part of the home with a
mortgage, a loan to a homeowner made by a bank or other financial institution, in
which the home serves as collateral. This means that if the homeowner does not
repay the loan, the bank can assume ownership of the home to cover the loan’s
unpaid balance.

As a first step in buying a home and getting a mortgage, homeowners typically offer a down payment, which is a
cash payment representing a portion of the agreed-upon selling price of the home. The homeowner then seeks a
mortgage loan for the remainder of the home’s price from the bank. The total amount of money they borrow on the
mortgage is called the principal. Borrowers also pay interest at some specified rate on the amount borrowed.

Mortgages are paid on a monthly basis over a fixed period of time known as the term. Common mortgage terms
are 10, 15, 20, and 30 years.

Investigation 2—Down payments, interest rates, and terms

The term, the size of the down payment and the loan, and the rate of interest on the
mortgage are three key factors in determining the size of a monthly mortgage
payment.

Down payments: The size of a homebuyer’s down payment determines the amount
they need to borrow—the principal. Most lenders prefer a down payment of at least 20
percent of the home’s purchase price. A sizeable down payment lowers the bank’s risk
because it reduces amount the bank could lose if the homeowner doesn’t pay back the
loan.

Homeowners may get their down payment from savings or from equity in a home they currently own. For
example, if they own a home that is worth $150,000 and the balance of their mortgage on that home is $100,000,
they have $50,000 in equity in that home. If they sell the home at full price, they can then use the $50,000 as a
down payment.

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If a homebuyer cannot make a down payment of 20%, the bank may require he or she obtain private mortgage
insurance, or PMI. PMI reimburses the bank if the homeowner fails to pay off the loan. The cost of a PMI policy is
usually added onto a homeowner’s monthly mortgage bill.

Interest rates: Recall that homeowners pay back the principal of their mortgages at a specific interest rate.
Interest rates available to borrowers can vary based on several factors, including the credit history of the borrower.
People who have a low credit score will generally pay higher interest rates than those with high credit scores. In
addition, mortgage rates tend to be higher the longer the term of the loan. That is, rates for 30-year mortgages are
generally higher than rates for 20-year mortgages, and so on.

Terms: The term of a mortgage also influence a homeowner’s monthly payment. The shorter the term, the higher
the monthly payment. Monthly payments are higher for shorter-term mortgages because the total cost of the
mortgage is split up over fewer months.

Investigation 3—The lifetime cost of buying a home

Homeowners pay back the principal and interest over many years, usually in a series of equal monthly payments.
The total of the principal and interest paid represents the lifetime cost of the loan, and it is much larger than the
original amount of the loan.

Mortgages are paid off according to amortization tables, which divide up the total amount of principal and the
total amount of interest over the total number of months in the term. An amortization table specifies:

• Payment date
• Total monthly payment
• Portion of each monthly payment going toward principal
• Portion of the monthly payment that goes toward interest
• The total interest paid on the loan after each payment
• The balance of the mortgage after each payment.

By examining an amortization table, it becomes clear that in the first months and years of a loan, a relatively large
amount of the payment goes toward paying interest. This is because the amount of principal generating interest
charges is relatively large. But as the amount of principal gets smaller, the interest charges get smaller, and an
increasingly large share of the payment goes toward principal.

Reducing the lifetime costs of a mortgage: Borrowers can reduce the lifetime cost of a mortgage by paying
extra each month to reduce the amount of principal owed. Again, as the principal gets smaller, the interest charges
get smaller. Over the life of a loan, even a relatively small additional payment against the principal can reduce the
interest charges by significant amounts.

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Teaching the module
Preparation
It is recommended that you complete the module yourself prior to sharing it with students. This will allow you to
build your background knowledge and experience what students will experience so that you are better able to
anticipate their reactions, questions, and misconceptions.

Key vocabulary

Repaying of a loan on a regular schedule, such as making a payment on the

Amortization
1st of every month.

Something of value a borrower promises to give to a lender if the borrower

Collateral
fails to repay a loan.

A record of a borrower’s payment behavior that reflects his or her ability to

Credit history
repay a loan.

A number calculated by a credit monitoring agency and assigned to a

Credit score person that reflects the person’s history of borrowing money and paying
back loans.

A portion of the purchase price paid in cash when the rest is paid with
Down payment
borrowed money (e.g., a loan).

The difference between the value of a property at current prices and the
Equity
amount of money owed on any loan for that property.

Money paid at a specified rate for money that is borrowed, deposited in a

Interest
bank, or owed to a lender.

A type of loan used for buying a home that is secured by the value of the
Mortgage
home.

Approved for a mortgage of a specific size based on the lender’s evaluation

Prequalified of the homebuyer’s ability to pay back the loan prior to requesting a
mortgage, so to understand how much one is able to borrow.

Principal A sum of money originally invested or borrowed.

Insurance used to reimburse the lender if a borrower defaults on a home

Private mortgage loan. The borrower pays the premiums. Many lenders require PMI if the
insurance (PMI) borrower’s down payment is less than 20% of the purchase price of the
home.

Term A fixed period of time over which a mortgage is paid.

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Pre-module guiding questions
The following questions can be used to activate students’ prior knowledge and extend their learning throughout
the module.

1. Why do you think most homeowners borrow money to pay for their homes?
2. Many homebuyers borrow tens or even hundreds of thousands of dollars. Why do you think banks are willing
to make such large loans?
3. A credit rating is a measure of how likely you are to pay your bills. How might a good credit rating help you to
borrow money for a home?

Discussion questions/writing prompts

Consider pausing at the end of each module topic to pose questions to students. Suggested questions and prompts
are provided below.

Investigation 1: Mortgage basics

In this investigation, students learn that people should not spend more than 30% of their income on housing, and
that people often use mortgages to purchase homes. They also discover that there are many factors that influence
monthly mortgage payments.

Investigation 1 questions/prompts

1. Think about the three families who are thinking about buying the Alvarez’s house. How will a mortgage help
them afford to make the purchase?
Possible answer: It’s clear that none of the three potential buyers has enough cash to pay for the home
outright. So in all three cases, a mortgage will enable the family to pay for the house over time.

2. All three potential buyers would have to borrow a lot of money to buy the Alvarez property. Why do banks
agree to lend large sums of money to people who want to buy homes?
Possible answer: Banks earn money by charging interest on their loans to homeowners.

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3. You know that the three potential buyers are looking at different monthly payments, ranging from $824 to
$1,355 a month. Identify the factors that impact monthly payments and that may explain this difference.
Possible answer: The principal, rate of interest, homeowner’s credit score, and term of the mortgage impact
monthly payments.

Investigation 2: Down payments, interest rates, and terms

In this investigation, students explore how down payments, interest rates, and terms affect monthly payments for
three families interested in purchasing the same home.

Investigation 2 questions/prompts

1. What advantage(s) does each family have regarding their monthly mortgage payments?
Possible answer: The Cho family has a low interest rate. The Robinson-Carlson family has equity to use toward
a large down payment. The Hernandez family has a lot in savings to use toward a large down payment.

2. The Hernandez family is shopping for a 15-year mortgage—lower than the 30-year term that the other
potential buyers are seeking. How does a shorter term affect the monthly payments?
Possible answer: Shorter terms lead to higher monthly payments because the total cost of the loan must be
paid in fewer months.

3. Compare the situations of the Chos and the Carlson-Robinsons. How do large down payments and a lower
interest rate affect monthly mortgage payments?
Possible answer: A large down payment lowers the amount of the home loan, resulting in lower monthly
mortgage payments. Interest is the cost of borrowing money. Lower interest rates means paying a lower
percentage of the amount owed, which also lowers monthly payments.

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Investigation 3: Understanding amortization
In this investigation, students use an amortization table to explore the full costs of a home over the term of the
mortgage. They also learn strategies families can use to decrease their long-term housing costs.

Investigation 3 questions/Prompts

1. The three potential buyers are borrowing different amounts of money for different terms and at different
interest rates. We know this affects their monthly payments. But what else did the Chos learn by looking at the
amortization table for their mortgage?
Possible answer: In addition to their monthly payments, the amortization table shows how much is applied to
principal and how much to interest, the outstanding balance on the mortgage. It also tells the total amount of
interest paid over the life of their loan.

2. Explain how paying just $100 more than required each month would affect the Hernandezes’ lifetime cost for
the mortgage they’re seeking.
Possible answer: By paying more than the monthly payment, the Hernandezes could pay down the principal
faster. As a result, they would pay off their loan one year and four months faster, resulting in lower total
interest payments over the life of the loan.

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Assessing student learning
Post-test questions, answers, and scoring
Students answer assessment questions that measure their understanding of, and ability to apply, the module
content. Each question is crafted to reveal complete understanding, partial understanding, or very little to no
understanding of the financial literacy skill being measured. Points, ranging from zero to two, are earned based on
answer selections.

In this module, the post-test consists of seven questions for a total point value of 10. Students who achieve a
minimum score of six points will earn a badge reflecting their understanding of the module content. Students who
earn five or fewer points will have the opportunity to retake the test to try to increase their score and earn a badge.

In Question 1, students understand key terms related to home buying and recognize that a
mortgage is a loan used to buy a home. These answers are correct because they accurately
represent the relationship between each term and description. If students answer incorrectly,
refer to Investigations 1 and 2, and the Glossary.

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 In Question 2, students determine how a down payment affects a monthly mortgage
payment. These answers are correct because they accurately describe the relationship
between the size of the down payment and the size of the monthly payment. Higher down
payments lead to lower monthly payments, and lower down payments lead to higher
monthly payments. If students answer incorrectly, refer to Investigation 2.

or

In Question 3, students explain why people use mortgages to pay for homes. Option B is
correct because it is the only choice that correctly explains a reason that people use
mortgages. The other options are either not true (A) or do not accurately describe how
mortgages work. If students answer incorrectly, refer to Investigation 1.

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 In Question 4, students determine how the term affects the loan. Options B and D correctly
identify the impact of an increase in a mortgage’s term, assuming no change in the principal
and interest rate. Lengthening a term lowers the monthly payment and increases the cost of
the home. If students answer incorrectly, refer to Investigations 2 and 3.

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 In Question 5, students explain how extra principal payments impact the total cost of a
loan. Option A is correct because it accurately describes what is shown in the table. Regularly
paying extra money toward the principal means the loan will be paid off sooner. If students
answer incorrectly, refer to Investigation 3.

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 In Question 6, students recognize the factors that affect the price of a mortgage. These
answers are correct because they accurately reflect the different factors that influence—and
do not influence—a monthly mortgage payment. If students answer incorrectly, refer to
Investigation 1.

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 In Question 7, students recognize the recommended percentage for a down payment on a
mortgage. Option B is correct because it represents the general lender’s preference for a 20%
down payment. The other options are either more or less than the 20% recommendation. If
students answer incorrectly, refer to Investigation 2.

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Extending student learning
The following activities are designed to help students continue their exploration of key concepts. They
are intended to be used after students have completed the module.

Writing prompts/projects

1. Have students determine how different interest rates and different payment schedules affect the cost
of borrowing money to buy a home. Using a mortgage calculator tool, students should imagine that
they bought a home for the purchase price below after putting down a 20% deposit.
Home purchase price: $200,000

Downpayment applied: $ 40,000 (20% of the purchase price)

Mortgage: $160,000

Mortgage loan term: 30 years

• Ask students to calculate the payments for interest rates of 4%, 5% ad 6%. They should record
their monly payments, total amount paid after 30 years (or 360 payments) and total amount of
interest paid.
• Next, ask studnets to consider the interest saved by making mortgage payments every two weeks,
instead of monthly. Students should record the different pay-off dates and total interest paid for
both kinds of payment schedules after different interest rates.

2. Ask students to compare the basic costs of renting a home versus buying a home in your community.
• First, they can use online resources to research the typical rent for a basic three-bedroom home
or apartment in your community. They should multiply this cost by 240—the number of monthly
payments they would make in 20 years.
• Next, have students research the purchase price of a typical, basic three-bedroom home in your
community and then use the mortgage calculator to figure the monthly mortgage payments for a
20-year mortgage at an interest rate of five percent.
• Instruct students to use the amortization table to find the “lifetime” cost of owning this home.
• Finally, keeping in mind that with the purchased home, they would own it outright at the end of
20 years, have students write a statement comparing the costs and benefits of owning versus
renting.

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National standards for financial
literacy
This module is correlated to the National standards for financial literacy from the Council for Economic
Education. Standards are classified as primary or secondary. Primary standards are addressed directly
and thoroughly. Secondary standards are addressed indirectly or partially.

Primary

Saving – Grade 8: Principal is the initial amount of money upon which interest is paid.

Using Credit – Grade 8: People who apply for loans are told what the interest rate on the loan will be.
An interest rate is the price of using someone else’s money expressed as an annual percentage of the
loan principal.

Using Credit – Grade 8: The longer the repayment period on a loan and the higher the interest rate on
the loan, the larger is the total amount of interest charged on a loan.

Using Credit – Grade 8: Lenders charge different interest rates based on the risk of nonpayment by
borrowers. The higher the risk of nonpayment, the higher the interest rate charged. The lower the
risk of nonpayment, the lower the interest rate charged.

Using Credit – Grade 8: People can use credit to finance investments in education and housing. The
benefits of using credit in this way are spread out over a period of time and may be large. The large
costs of acquiring the education or housing are spread out over time as well. The benefits of using
credit to make daily purchases of food or clothing are short-lived and do not accumulate over time.

Secondary

Saving – Grade 8: Different people save money for different reasons, including large purchases (such
as higher education, autos, and homes), retirements, and unexpected events. People’s choices about
how much to save and for what to save are based on their tastes and preferences.

Using Credit – Grade 12: Loans can be unsecured or secured with collateral. Collateral is a piece of
property that can be sold by the lender to cover all or part of a loan if a borrower fails to repay.
Because secured loans are viewed as having less risk, lenders charge a lower interest rate than they
charge for unsecured loans.

Using Credit – Grade 12: People often make a cash payment to the seller of a good–called a down
payment–in order to reduce the amount they need to borrow. Lenders may consider loans made with a
down payment to have less risk because the down payment gives the borrower some equity or
ownership right away. As a result, these loans may carry a lower interest rate.

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Related resources for students
These resources can be used to reinforce or expand upon students’ understanding of key concepts in the
module.

Resource: Applying for a Mortgage

Source: 360 Degrees of Financial Literacy, American Institute of CPAs
Description: An overview of the process of applying for a mortgage, giving students an understanding
of the details required.
Link: http://www.360financialliteracy.org/index.php/Topics/Home-Ownership/Mortgages/Applying-
for-a-mortgage.

Resource: Glossary of Mortgage Terms

Source: Mortgage Calculator
Description: Comprehensive list of mortgage terms with definitions.
Link: http://www.mortgagecalculator.org/helpful-advice/glossary.php.

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Module notes/sources
General
This module does not address the option of an adjustable-rate mortgage. These mortgages start out at a
fixed interest rate and payment. Then, at a set time, they readjust based on prevailing interest rates. The
readjustment can significantly alter monthly payments. Adjustable-rate mortgages may be a good option
for some people in some situations, but for purposes of illustrating the basic concepts, it is most helpful
to focus on fixed-rate mortgages.

Investigation 1
The recommendation that one not spend more than 30% of one’s income on housing is based on the
United States National Housing Act of 1937, which created public housing. According to the law, a
tenant’s income couldn’t be more than five or six times the rent on the public housing unit, or roughly
20% of their income. As housing expenses increased, so did the maximum rent standards of the law.
Generally, though, the 30% guideline is a rule of thumb that ensures there is enough money in the
budget after housing to afford other necessities, such as groceries, car and insurance payments, etc.
(Source: “Who Can Afford to Live in a Home?: A look at data from the 2006 American Community
Survey.” Mary Schwartz and Ellen Wilson. US Census Bureau.
http://www.census.gov/housing/census/publications/who-can-afford.pdf)

© 2016 PwC Charitable Foundation, Inc. The PwC Charitable Foundation, Inc., is a section 501(c)(3) organization that makes charitable
contributions to the people of PwC in times of financial hardship, and to nonprofit organizations that promote education and humanitarianism.
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