View
237
Download
0
Category
Tags:
Preview:
Citation preview
Chapter 9
The Housing Decision: Factors and Finances
The Housing Decision: Factors and Finances
McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Evaluating Housing Alternatives
• Your lifestyle and your choice of housing. How you spend your time and money, affects
your housing choice. Personal preferences are modified by financial
factors.• Traditional financial guidelines suggest you
spend no more than 25-33% of take-home pay on housing, or no more than 2 1/2 times your annual income.
9-2
• Opportunity costs of housing choices include some common trade-offs. Interest earnings lost on money used for a
down payment or the interest on a security deposit for an apartment.
Time and cost of commuting to live in an area that offers less costly housing or more space.
Renters lose tax advantages and equity growth. Time and money you spend to repair and
improve a lower-priced home. Time and effort when you have a home built to
your personal specifications.
Evaluating Housing Alternatives
9-3
(continued)
Rent versus Own: Evaluating Housing Alternatives
• Advantages of renting. Fewer maintenance and repair responsibilities. Easier to move. Lower initial costs.
• Disadvantages of renting. No tax benefits. Limitations regarding remodeling. Restrictions regarding pets and other activities. Legal concerns of a lease. Costs including a security deposit, utilities and
renter’s insurance.
9-4
Housing Rental Activities
• The search. Select an area and rental cost for your needs. Compare costs and facilities between units. Talk to current and past residents.
• Before signing a lease. Verify the lease dates, costs, and facilities. Talk to a lawyer about unclear lease clauses. Note in writing, signed by the landlord, the
condition of the rental unit. Any person who signs a lease is responsible
for the full rent.9-5
Legal Details of a Lease
• Description and address of property.• Name and address of the owner/landlord (lessor).• Name of tenant (lessee).• Effective date and length of the lease.• Amount of security deposit.• Amount and due date of rent.• Location where rent is due.• Date and amount for late rent payments.• List of included utilities, appliances.• Restrictions on certain activities.• The right to sublet the unit.• Conditions where landlord may enter rental unit.
9-6
Housing Rental Activities
• Living in rental property. Keep all appliances and facilities in good condition. Contact the owners regarding needed repairs. Respect the rights of others (stereo and parties). Obtain renter’s insurance.
• At the end of the lease. Clean and leave unit in same condition you got it. Provide landlord with new address for deposit. Require than any deductions from security deposit
be documented.
9-7
(continued)
Home Buying Process Step 1: Determine Homeownership Needs
• Benefits of Home Ownership Pride of ownership.
• American dream Financial benefits.
• Deduct property taxes and mortgage interest.• Potential increase in value of your home.• Building equity in your home.
Lifestyle flexibility - express your individuality.
9-8
Home Buying Process Step 1: Determine Homeownership Needs
• Drawbacks of Homeownership. Financial uncertainty.
• Obtaining money for the down payment.
• Obtaining mortgage financing.
• Home values could drop. Limited mobility.
• Can take time to sell your home. Higher living costs.
• Home improvements.
• Rising real estate taxes.
9-9
(continued)
• Assess Types of Housing Available Single-family dwelling. Multi-unit dwelling.
• Duplex, townhomes Condominium.
• You own your unit in a building of units.• It is not a type of building structure, but rather
a form of homeownership. Cooperative housing.
• Non-profit organization - members own shares and rent a unit in a building with multiple units.
9-10
Home Buying Process Step 1: Determine Homeownership Needs
(continued)
Assess Types of Housing Available
• Manufactured homes. Fully or partially assembled in a factory, and then
moved to the housing site. Prefabricated type has components built in the
factory and assembled at the site. Mass production under factory conditions keeps
costs lower than site built homes.
• Mobile homes. A type of manufactured home, often <1,000 sq. ft. Offer same features as a conventional house. Safety is debated and they tend to depreciate.
9-11
• Building a home Does the contractor have needed experience? Does contractor have a good working
relationship with architect, suppliers, electricians, plumbers, carpenters and others?
Assess Types of Housing Than Can be Purchased
9-12
Assess Types of Housing Than Can be Purchased
What assurance do you have about quality? What are payment arrangements? What delays will be considered legitimate? Is the contractor licensed and insured? Are there any complaints about
this contractor? Contract should have a time schedule, cost
estimates, description of work, and a payment schedule.
9-13
(continued)
Home Buying Process Step 1: Determine Homeownership Needs
• Calculate how much you can afford. Consider both price and quality. Look at your income, your current living
expenses, and how much you have for a down payment.
Pre-qualify for a loan Purchase what you can afford - you can always
move up.
9-14
Home Buying Process Step 2: Finding and Evaluating a Property to Purchase
• Location Be aware of zoning laws. Assess the school system if you have children.
• Consider using a real estate agent. They present your offer, negotiate the price,
assist you in obtaining financing, and represent you at the closing.
• Conduct a home inspection or hire an inspector.
• Mortgage company will want an appraisal.
9-15
Home Buying Process Step 3: Pricing the Property
• Determine an appropriate market price.
• Price is affected by whether it is a seller’s or a buyer’s market.
• Negotiate an agreement price. Counteroffers are common.
• Contingency clauses, such as... Buyer must be able to obtain financing. Sale contingent on the sale of the buyer’s
current home.
9-16
• Determine the amount of the down payment. Mortgage insurance (PMI) if less than 20% down.
• Investigate the rates, types, & terms of mortgages.
• Apply for a mortgage and evaluate types of mortgages. Guidelines for affordability of housing costs are 33% to 38% of gross income.
• Qualifying for a mortgage includes your income, debts, credit history, down payment amount, length of the loan, and current mortgage rates.
• Points are prepaid interest as a % of the loan amount.
Home Buying Process Step 4: Obtaining Financing
9-17
• Conventional. Fixed rate, fixed payment, amortized. 5%, 10% or 20% down. 15, 20 or 30 years of fixed payments.
• Government-guaranteed financing programs. Veterans Administration. Federal Housing Authority. Lower down payment than conventional.
• Adjustable rate mortgages. During the life of the loan the interest rate
varies with the prime rate, but has a rate cap.
Type of Mortgages
9-18
Type of Mortgages
• Graduated payment. Payments start lower and go up. Income should increase over time.
• Balloon. Fixed monthly payments plus one large
payment, usually after 3, 5 or 7 years.
• Growing-equity. Increases in payments to allow the loan to be
paid off more quickly.
(continued)
9-19
Type of Mortgages
• Shared appreciation. Borrower gets a lower interest rate and agrees
to share appreciated value of the home with the lender.
• A second mortgage. Home is collateral and interest may be tax
deductible. Home equity loans are an example.
• Reverse mortgages. Provides elderly with tax-free income based on
the home equity.
• Refinance if interest rate drops at 2-3%.
(continued)
9-20
• Documents signed; meeting of buyer, seller, and lender
• Closing costs include... Title insurance and search fee. Attorney’s and appraisers fees. Property survey; Pest inspection. Recording fees; Transfer taxes. Credit report; Lender’s origination fee. Escrow account for tax and insurance
reserve. Pre-paid interest; Real estate commission.
Home Buying Process Step 5: Close the Purchase Transaction
9-21
Overview of the Main Elements of Buying a Home
• Location.
• Down payment.
• Mortgage application.
• Points.
• Closing costs.
• PITI (principal, interest, taxes, insurance).
• Maintenance costs.
9-22
Selling Your Home
• Preparing your home. Repair, repaint, and clean. When showing home turn on lights and open
drapes. Bake bread or make coffee for a welcoming smell.
• Determining the selling price. Appraiser estimates the current value. Real estate agent markets your home.
• If “for sale by owner,” use a lawyer or title co.
• Listing with a real estate agent for services.
9-23
Comparison of 15 and 30 Year Mortgages
• $100,000 6% loan for 30 years: Payment of $600 per month; 360 months X $600 = $216,000
• $100,000 6% loan for 15 years: Payment of $843 per month: 180 months X $843 = $151,740
• Savings of $64,260 with shorter loan
9-24
Comparison of Different Rates
• $100,000 loan for 30 years at 6%; payment of $600 per month X 360 months = $216,000
• $100,000 loan for 30 years at 7%; payment of $665 per month X 360 months = $239,400
• Savings of $23,400 by lowering the rate by 1%.
9-25
Online Activity
• Go to www.bankrate.com to determine the best mortgage rates in your area.
• Would you prefer a fixed-rate or adjustable rate mortgage? Why?
9-26
Recommended