38
Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose an area before they choose a house. Considerations for a certain area include: Employment Commuting distance and time Taxes Public services Schools

Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Embed Size (px)

Citation preview

Page 1: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Where Do You Want to Live?Location is probably the main consideration in

choosing a place to live. Usually people choose an area before they choose a house.

Considerations for a certain area include:– Employment– Commuting distance and time– Taxes– Public services– Schools

Page 2: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Financial ResourcesPlay perhaps the most important role in your personal housing decisions. Financial resources give you the ability to:–Pay monthly housing expenses–Have enough cash to make the down payment on a home

Page 3: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• The Kind of Home You Want and Need Most people want bigger, but bigger means more expensive–Important to do a needs vs. want analysis

–Also important to consider the different needs at various stages of life:

• a family with young children needs more space and other features (a yard) than a retired couple does

Page 4: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Major Housing OptionsOne of the most basic decisions you must make is what type of home you want. Sometimes the area you prefer determines type of options available. Options include:– Single family attached or detached home– A condominium (either high rise tower or garden apartment)– A manufactured (mobile) home– A rental apartment

Page 5: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Single-Family Homes–Accounts for 60% of all American households.• Buyer must obtain a mortgage (loan in which

property is put up as collateral).

• Lender has right to foreclose (sell) property if borrower defaults.

Page 6: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Condominiums–May include duplexes, row houses, high rise and garden apartments• Refers to a type of ownership rather than a type

of building

• Buyer receives title to unit plus ownership in all common areas (for example: the pool area)• Owner pays all costs of structure as well as

proportional costs of maintaining facility

Page 7: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Manufactured (or Mobile) Homes–Around 95% of units are permanent structures–Much cheaper than site-built homes–Owners rent home sites (around $150 to $250 monthly)–Homes must conform to building codes regulating things like design, construction, plumbing, and electrical systems.

Page 8: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Rental Units–Units range from high-rise buildings, to garden apartments, and town houses–Most unfurnished although some may be furnished–Lease outlines rights and responsibilities of both tenants and landlords–Uniform Residential Landlord and Tenant Act designed to protect tenants from landlord abuse

Page 9: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Advantages of Renting vs. Buying–Liquidity -- No down payment required, so more funds available for investment purposes.

–Mobility -- Renter may pick up and move at will without worrying about selling home (only concern is penalty associated with breaking a lease, may be a fee or remaining balance)–Certain cost savings -- Renter spared home-repair and maintenance expenses. Owner must bear these costs.

Page 10: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Advantages of Buying vs. Renting–Psychological advantages• sense of community and pride in ownership• almost unrestricted freedom in choosing

decorating styles

–Financial advantages• Potential price appreciation• Means of saving money• Tax savings

Page 11: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Financial Advantages of Buying–Means of Saving• Part of mortgage payment pays interest and

the remainder repays principal

• As years pass, equity (current value of house minus loan balance) increases

• Reducing amount owed on loan is same as saving same amount of money

Page 12: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Home Affordability

Purchasing a home requires many types of payments:

1. A down payment

2. A monthly payment

3. Closing costs (various kinds)

Page 13: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• 1. Down PaymentThe down payment or initial investment is one of BIGGEST BARRIERS to purchasing a home. • Lenders require up-front lump sum from buyers

• First-time buyers average less than 10% of purchase price for down payment; other buyers average around 25% of purchase price due to equity build up.

Page 14: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• 1. Down Payment–The HIGHER the down payment, the LOWER the monthly payments–The HIGHER the down payment, the MORE DESIRABLE THE BUYER’S BUSINESS is from lender’s perspective, often meaning a lower interest rate.

Page 15: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Down Payments and Private Mortgage Insurance (PMI)–PMI usually required of buyer who obtains a conventional mortgage with less than 20% down payment–Private mortgage insurance insures lender for the gap between the 20% and the lower down payment–Can reduce amount of down payment to as low as 2.5%–Premium (fairly expensive) added to cost of monthly payment

Page 16: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• 2. The Monthly PaymentMost mortgages fully amortize over life of loan (Payments in equal amounts with part going toward interest and remainder reducing principal)

Initially, amortizing payment primarily pays for interest; little principal is paid off. As time lengthens, payment primarily reduces principal

Page 17: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• 3. Closing Costs–Costs associated with transfer of ownership from the seller to the buyer–Can easily amount to several thousand dollars–Within three days after buyer applies for loan, lender must provide good faith estimate of closing costs–Fall into two general categories:• Fees paid to the mortgage lender• Fees paid to third parties

Page 18: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Points -- One of Many Closing Costs–Fees paid (usually by buyer) to mortgage lender–Also known as loan origination fees or loan discount–One point = 1% of mortgage amount; on $100,000 loan, two points would total $2,000–Considered to be interest so deductible on tax returns

Page 19: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Prepaid Interest -- Another Closing Cost–Covers the amount of the interest on the loan from closing date to beginning of period covered by first payment–If close on April 15 and first payment due June 1 (covering May interest due), you would be responsible to prepay interest from April 16 until April 30th.–Also deductible from taxes

Page 20: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• More Closing Costs –Sales Commission -- paid by seller to agents; between 6 and 7% of purchase price –Title Insurance• Charges normally split between seller and buyer• Lenders require purchase of title insurance to

guard against defects in public record • Title transferred at closing assures no known

claims against the property

Page 21: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Sources of MortgagesFHA mortgages -- not government loans, but federally insured loans made by private lenders. Standards required for both property and buyers. May allow lower down payment since the loan is insured.

Page 22: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Sources of Mortgages•VA mortgages -- Loan guarantees offered to veterans of armed services. Low down payments and limits on closing costs help veterans finance purchase of housing. •Veterans Administration guarantees 100% of loan amount with maximum limits, depending on area of country.

Page 23: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Sources of LoansConventional Mortgages -- a mortgage that is neither government insured or guaranteed. Comprises 75% of loans obtained by buyers.

Lenders issue a note (indicates buyer responsible for debt) and mortgage (property pledged as collateral).

Borrower must repay entire portion of debt, even if property is sold for less than amount of loan.

Page 24: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Types of Mortgages—–Fixed Rate• 30-year, fixed rate (360 equal payments). Owner

can make advance payments or additional principal payments

• 15-year, fixed rate (One-third of all new mortgage loans). Interest rate lower, but monthly payments higher; total interest paid less

Page 25: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Types of Mortgages—–Adjustable-rate (ARM)• Adjusted at pre-set intervals depending on

what interest rates do (rate tied to a specified index, has cap over life of loan)

• Initial interest rate (teaser rate) below rate for fixed loans, but rises over life of loan

Page 26: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Fixed-Rate Loan versus ARMConsumers frequently avoid ARMs because of unpredictability of rates and consequent difficulty in long-term budgeting. BUT an ARM may make sense in certain situations:

1. Buyer anticipates staying in present house for five years or less.2. Buyer anticipates mortgage rates will drop in the next few years.

Page 27: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Refinancing a MortgageRefinancing is paying off an old mortgage by replacing it with a new mortgage with different terms.

As interest rates drop, refinancing becomes more attractive.

Page 28: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Second Mortgages–Rates higher and for shorter terms (riskier for the lender)–Can be used for any purchase the owner desires (home improvements, college education, etc.)• May foreclose on house if default on

payment

Page 29: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Home Equity Loan–Allows owner to borrow up to maximum amount (based on equity in home) when needed without reapplying for loan each time

–Carries lower interest rates than other loans

Page 30: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Home Equity Loan–Payments are tax deductible and made in regular installments–Because lender has lien on property, may lose home if default on payments, EVEN if first mortgage payments made on time

Page 31: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Steps in Buying the Right House1. Consider pre-qualifying for a mortgage before you look for a house -- You will know how large a mortgage you can receive and seller will know you’re a serious buyer

2. Consider whether to hire a real estate agent -- Determine what length of time is acceptable to deal with one particular agent.

Page 32: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Steps in Buying the Right House3. Consider how you will utilize the agent,

once hired --• Will you find the houses in areas you like

and ask the realtor to show them to you? • Will you give the agent specifications for a

desirable house and let her come up with possible matches?

Page 33: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Steps in Buying the Right House4. Make a formal offer once you’ve found the house you want–Realtor will draw up contract and gives to seller who will either reject, accept, or counter offer.

–With a counter offer, you may reject, accept, or counter again.

Page 34: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Steps in Buying the Right HouseIf price is agreed on, you will have to pay earnest money (a security deposit applied to purchase price at closing). If you back out of agreed- upon sale, you lose this money. Amounts vary, but a minimum is usually $1,000.

Page 35: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Steps in Buying the Right House5. Home InspectionsReal estate contract is subject to a home inspection by a professional who checks such things as :• plumbing• roof• foundation• electrical system

Quality and prices vary but normally inspections cost between $150 and $250.

Page 36: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Steps in Buying the Right House6. Home Warranties

–Warranties provide additional protection for the buyer. Newly-constructed homes usually have at least one-year warranty.

–When buying existing home, seller required to verify condition of electrical and mechanical equipment.

Page 37: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Selling a HomeOne of first decisions is whether to sell

yourself (FSBO) or list with an agent.–Advantage of selling yourself -- no sales

commission to real estate agent!

Page 38: Chapter 8 The Housing Decision Where Do You Want to Live? Location is probably the main consideration in choosing a place to live. Usually people choose

Chapter 8The Housing Decision

• Advantages of Listing with Agent– Agent can advertise to bring in buyers and

have access to multiple listing services• Verify that potential buyers are able to

complete the purchase (Called Qualifying)

– Guide both buyer and seller through negotiations and closing