Teaching Students the Effects of Closing Costs on Mortgages

Abstract

The concept of the time value of money is a cornerstone of undergraduate business education, yet a significant gap exists between textbook knowledge and practical applications in the home mortgage market. While most standard introductory finance texts cover amortized loans, they frequently provide insufficient detail regarding how mortgage Annual Percentage Rates (APRs) are determined and the specific role that closing costs play in these calculations. This paper addresses this pedagogical deficiency by providing a comprehensive guide for teaching the effects of closing costs on mortgages. Through detailed numerical examples and financial calculator applications, the paper demonstrates the step-by-step determination of APR. Furthermore, it explores the impact of early loan repayment, showing how shorter durations increase the effective interest cost to the borrower. The paper allows educators to integrate these materials into existing finance curricula to better prepare graduates for their personal and professional lives.