1. Chapter 9
Buying a Home

2. Learning Objectives
Decide whether renting or owning is better, both financially and personally.
Explain the up-front and monthly costs of buying a home.
Describe the steps in the home-buying process.
Distinguish among the traditional and alternative ways of financing a home and list the advantages and disadvantages of each.
Identify the important aspects of selling a home.

3. Mortgage: a real estate loan
Introduction
Mortgage: a real estate loan
(the property itself serves as collateral)

4. Why the recent explosion in mortgage foreclosures?
Facts & Figures:
90% of young people rent
80% of people own homes
Housing values typically increase less than 4% annually
Since 2006, home prices have declined 20-50% in most markets
Is a home an investment
or just a place to live?
CONSIDER
Why the recent explosion in mortgage foreclosures?

5. Short-term: renters win, based on initial upfront costs
Should you rent or buy?
Short-term: renters win, based on initial upfront costs
Rent
Damage/security deposit
Lease contract
Periodic tenancy
Tenancy for specific time
Subleasing
Your rights w/o a lease (pg 250)

6. Equity and Appreciation Deductibility of items on taxes
Long-term: homeowners win, when income taxes and appreciation are considered
Equity and Appreciation
Deductibility of items on taxes
Real estate taxes
Mortgage interest
Beware of flipping
Being “upside down” (under water)
Foreclosure
Strategic default (pg 253)

7. What does it cost to buy a home?
Most up-front costs are due at the closing (PG 255)
** Closing costs can range 2-10% of loan **
Down payment
Attorney fees
Title search/insurance
Home inspection
Appraisal fee
Points
… and many more!

8. When does it make sense for a buyer to do this?
Points
Homebuyers can “buy down” the interest rate on their loan
1 point = 1% of loan amount
Homebuyer pays for points at closing
Lender receives money upfront as compensation for offering a lower rate
When does it make sense for a buyer to do this?

9. Important Terms to Understand
Monthly payments include principle & interest
Property taxes & homeowners insurance may be ESCROWED: PITI
Loan-to-value ratio (LTV) (Lenders expect 80%)
Ex: $80,000 mortgage ÷ $100,000 home value = 80%
PMI if LTV is too high (pg 257)
Protects who? Paid for by who?
The New Realities of Home Buying (pg 258)
Historically Low Interest Rates
Tougher Lending Standards
A Buyer’s Market
Larger Down Payments

10. How are property taxes determined? (pg 259) ADVICE:
Based on the ASSESSED VALUE of buildings and land
Many people appeal their assessed value… and win!
How does NY compare?
ADVICE:
Decide Based on ALL Costs!
(Average 30-40% added to loan payment for all other housing costs)

11. Steps in Home Buying

12. Get your finances in order Clean up your credit!
Use Internet to Estimate Housing Costs
Prequalify for Loan (Determine your own affordability first!)
Front-end ratio: PITI compared to gross income
PITI should not exceed 25-29% of gross income
Back-end ratio: PITI + all other monthly debt (car, student loans, etc) compared to gross income
Should not exceed 33-41% of gross income
Search for home online and in person

13. Agree to terms with seller (NEGOTIATE!)
Make offer; counteroffer
Specify conditions (contingency clauses)
Sign purchase contract
Formally apply for Mortgage Loan
Good faith estimate
Mortgage lock-in rate
Prepare for closing
Hire your own inspector
Hire your own attorney
Closing Day! Uniform Settlement Statement

14. Financing a Home The mathematics of mortgage loans
A mortgage is a collateralized loan
Lender has a lien on the real estate
A mortgage is an amortized loan (pg 269)
How are monthly payments divided between P & I?
See chart page 268
Equity = Market Value of Home - Loan Balance
Some people made additional payments on loan
Affect of this?

15. Amortization Table for Fixed Rate Loans

18. 3 Factors Affect the Mortgage Payment
The Amount Borrowed (see chart pg 270)
The Interest Rate
SHOP AROUND! Even tiny increments make a HUGE difference
The Length of the Loan
Conventional Fixed-Rate
ARMs (variable-rate loans)
Teaser Rate
Rate Caps
Types of Mortgages
<= where is the risk?

19. The Main Types of Mortgages What’s the best choice for you?
Fixed-Rate, Fixed-Payment Mortgage
Various terms: 10, 15, 20 or 30 years
fixed interest rate, fixed monthly payment
Each payment consists partly of principle and interest
Payments made in early years mainly go toward interest, with very small reductions in loan principal
Adjustable-rate mortgages (ARMs)
Interest rate varies over life of the loan
Why are the initial interest rates typically lower than most fixed-rate mortgages to start?
Caps helps to reduce some risk
Considerations when evaluating Fixed vs. ARMs
What’s the best choice for you?
Locale rates

21. Alternative Mortgages
Growing Equity
Goal is to reduce interest costs by paying off loan early
Bi-weekly mortgage option
Reverse Mortgage
Second Mortgage
Home Equity Loan or Home Equity Line of Credit
Rates slightly higher than first mortgages
“Eating one’s house”
Fin PP pg 276
Mortgage Refinancing
Traditional limit for HELs and HELOCs:
80% of MV less loan balance (pg 274).