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Chapter 9 Obtaining Affordable Housing
Copyright © Houghton Mifflin Company. All rights reserved.9 | 2 Learning Objectives 1.Decide whether renting or owning your home is better both financially and personally. 2.Explain the up-front and monthly costs of buying a home. 3.Describe the steps in the home-buying process. 4.Distinguish among the conventional and alternative ways of financing a home and list the advantages and disadvantages of each. 5.Identify the key considerations when selling a home.
Copyright © Houghton Mifflin Company. All rights reserved.9 | 3 Introduction Mortgage Loan: Loan to purchase real estate in which the property itself serves as collateral.
Copyright © Houghton Mifflin Company. All rights reserved.9 | 4 Rented Housing Rent, deposit, and related expenses –Rent: Cost charged for using an apartment or other housing space. –Security Deposit: Ensures that a tenant does not move without paying the rent. Lease agreement and restrictions –Lease: Contract specifying both tenant and landlord legal responsibilities. –Periodic Tenancy: Lease agreement can be terminated by either party if they give proper notice in advance.
Copyright © Houghton Mifflin Company. All rights reserved.9 | 5 How to Get Your Security Deposit Back Make a list of all damages and defects when you first move into the unit. Have the landlord sign this list. Maintain the unit and keep it clean. Notify the landlord promptly (in writing, if necessary) of any maintenance problems and malfunctions. Give proper written notice of your intention to move out at least 30 days in advance of the lease expiration.
Copyright © Houghton Mifflin Company. All rights reserved.9 | 6 How to Get Your Security Deposit Back Make a written list of all damages and defects after moving out but prior to turning over the keys. Have the landlord sign this second list. Use certified mail (with a return receipt) to request the return of your security deposit and to inform the landlord of your new address. Use small-claims court (see Chapter 8), if necessary, to obtain a court-ordered refund.
Copyright © Houghton Mifflin Company. All rights reserved.9 | 7 Owned Housing Single-Family Dwelling: Housing unit that is detached from other units.
Copyright © Houghton Mifflin Company. All rights reserved.9 | 8 Owned Housing Condominiums and cooperatives –Condominium (or Condo) –Homeowner’s Association –Homeowner’s fee Manufactured housing and mobile homes
Copyright © Houghton Mifflin Company. All rights reserved.9 | 9 Renting vs. Buying Who pays more: Renters or Owners? –Based on cash flow, owners pay more –Based on total costs, renters pay more Taxes and interest expense are deductible Appreciation in value reduces ownership cost What does it cost to buy a home? –Down payment is a % of purchase price –Points are upfront payments as % of loan amount –Attorney fees – can be 0.5% of purchase price –Title and insurance fees –Miscellaneous appraisal, inspection and notary fees Consider the tax consequences of buying your home.
Copyright © Houghton Mifflin Company. All rights reserved.9 | 10 Class Discussion Question #1 Many of you rent or own a house, apartment, or condominium. What motivated you to either rent or own your home?
Copyright © Houghton Mifflin Company. All rights reserved.9 | 11 Up-Front Costs Most up-front costs are due at the closing. –Closing costs Down Payment: Portion of the purchase price that is not borrowed. Point (or Interest Point): Fee equal to 1 percent of the total mortgage loan amount. Attorney fees Title search and insurance Miscellaneous fees: Home inspection, appraisal fee, etc.
Copyright © Houghton Mifflin Company. All rights reserved.9 | 12 Illustrated Up- Front and Monthly Costs When Buying a Home
Copyright © Houghton Mifflin Company. All rights reserved.9 | 13 Monthly Costs Monthly costs include both principal and interest. Mortgage principal and interest. –PITI
Copyright © Houghton Mifflin Company. All rights reserved.9 | 14 Monthly Costs Loan-to-Value (or LTV) Ratio: –Target is 80% of Loan amount to Home Value –Results in 20% down payment Mortgage Insurance: –Private mortgage insurance (or PMI) required if LTV is more than 80% and varies between 0.25% and 2%. Protects lender against buyer default on loan. –Federal Housing Administration (FHA) offers mortgage insurance to creditworthy homeowners as alternative to a private company –Department of Veterans Affairs (VA) provides mortgage insurance to lender for military veterans Home warranty insurance – service contract covers home features such as mechanical and electrical equipment at time of sale
Copyright © Houghton Mifflin Company. All rights reserved.9 | 15 Misc. Fees Some fees are paid both up-front and then monthly: –Taxes (T) and Insurance (I) usually paid 6 months upfront and then monthly “impounded” by escrow account –Escrow account – A special reserve account at a financial institution in which funds are held until they are paid to a third party. Real estate property taxes – paid to local government and range between 1 – 4 % of the home value. Homeowner’s insurance – Required by lender as prepayment in case of fire or other disaster
Copyright © Houghton Mifflin Company. All rights reserved.9 | 16 The Steps of Home Buying Get your finances in order. –Check Credit Report and correct any errors –Estimate monthly housing costs –Adjust budget to fit the expected costs Prequalify for a mortgage. –Front-end ratio of 25-29% annual PITI to gross annual income –Back-end ratio of 33-41% total debt to gross annual income –Mortgage broker: Individual or company that acts as an intermediary between borrowers and lenders.
Copyright © Houghton Mifflin Company. All rights reserved.9 | 17 The Steps of Home Buying Search for a home online and in person. –Make a list of desired home features –Drive around neighborhood to identify noise –Bring a notepad to write down items discussed Agree to terms with the seller on Sale Make an offer to buy. –Purchase offer (or offer to purchase): Written offer to purchase real estate.
Copyright © Houghton Mifflin Company. All rights reserved.9 | 18 The Steps of Home Buying Respond to a counter offer. Negotiate and sign a purchase contract (or sales contract). Apply for a mortgage loan. –Good-faith estimate – Lender provides estimate of all costs associated with the loan such as APR, closing costs, application fees, etc. –Mortgage lock-in – Lender’s promise to hold a certain interest rate for a specified period of time such as 60 days. –Loan commitment (or loan preapproval) – Lender’s promise to grant a loan to the buyer
Copyright © Houghton Mifflin Company. All rights reserved.9 | 19 The Steps of Home Buying Prepare for the closing. –Change of Address Notice –Hire a moving company –Close utilities accounts Hire your own home inspector. –Inspects for termites, wood rot and heating/cooling functions Hire an attorney – may help negotiate closing costs Sign your name on closing day. –Uniform Settlement Statement: Lists all of the costs and fees to be paid at the closing.
Copyright © Houghton Mifflin Company. All rights reserved.9 | 20 Steps in the Process of Buying a Home
Copyright © Houghton Mifflin Company. All rights reserved.9 | 21 Financing a Home Items to consider: –The characteristics of mortgage loans Lien – legal right of lender to take property or sell it if borrower defaults on the loan Foreclosure – Process of lender suing the borrower and asking court to order property sale to pay the debt. Principal – amount borrowed as a loan balance –Amortization schedule – shows monthly payment breakdown of interest, principal and debt balance owed throughout loan period The amount borrowed – represents the loan issued by lender subject to interest expense on unpaid balance The interest rate – Percent of loan paid as compensation to lender for funds supplied to buyer for home purchase Length and maturity of the loan – Longer time period results in lower monthly payment but higher overall interest expense
Copyright © Houghton Mifflin Company. All rights reserved.9 | 22 Partial Amortization Schedule for a $160,000, 30 year Mortgage Loan at 6%
Copyright © Houghton Mifflin Company. All rights reserved.9 | 23 Financing a Home The conventional mortgage loan – Fixed rate, fixed term, fixed payment mortgage loan –Optimal when interest rates rise over time –Provides steady cash flow payment The adjustable-rate mortgage loan – Variable rate, variable term, variable payment mortgage loan –Rate based upon change in prime lending rate –Optimal when interest rates fall or borrower needs shorter term financing alternatives to achieve lower payment –Teaser Rate – Low introductory rate for limited time period, then gradually increases over time –Payment Caps – Limit the amount payment can vary as % of ARM –Negative Amortization – Occurs when monthly payments are smaller than needed to pay interest on the loan resulting in rising principal balance.
Copyright © Houghton Mifflin Company. All rights reserved.9 | 24 Income Needed to Qualify for a Mortgage Monthly payment includes principal, interest, taxes and insurance Assumes 28% front end ratio (PITI % gross income) Payment assumes 20% down payment for 30 year fixed rate
Copyright © Houghton Mifflin Company. All rights reserved.9 | 25 Financing a Home Alternative mortgage loans: –Interest-only mortgage –Graduated-payment mortgage –Lender buy-down mortgage –Rollover (renegotiable-rate) mortgage –Growing-equity mortgage –Assumable mortgage –Land contract (contract for deed) – title of ownership remains with seller until all payments occur or buyer forfeits money paid and any appreciation in value –Reverse mortgage (or home-equity conversion loan) – homeowner age 62+ borrows against equity and receives income payment for 5 to 15 years or for life.
Copyright © Houghton Mifflin Company. All rights reserved.9 | 26 Changes in Principal and Interest Components of a Monthly Payment
Copyright © Houghton Mifflin Company. All rights reserved.9 | 27 Your Credit Score Affects Your Mortgage Interest Rate Credit Score APR 760– % 700– % 680– % 660– % 640– % 620– % Below 620 subprime market only Mortgage lenders charge interest rates based on your credit score.
Copyright © Houghton Mifflin Company. All rights reserved.9 | 28 Selling a Home Should you list with a broker or sell a home yourself? –Fizbo: For sale by owner (FSBO) –Advertising and Marketing Costs –Challenge is to create awareness for Listing –Maybe time consuming Selling carries its own costs –Brokers Commission – 6% of sales price –Prepayment Fee – 1-3% of loan for early pay off Be wary of seller financing! – Referred to as “Carry” the buyer or seller provides financing to buyer.
Copyright © Houghton Mifflin Company. All rights reserved.9 | 29 The Top 3 Financial Missteps When Buying Housing People experience challenges when they do the following: 1.Fail to search for and negotiate for the lowest mortgage interest rate possible. 2.Fail to request that private mortgage insurance be canceled when their loan-to- value ratio drops to 80 percent. 3.Pay off a mortgage early when carrying credit card debt or not saving regularly through a qualified tax-sheltered retirement plan.
Copyright © Houghton Mifflin Company. All rights reserved.9 | 30 Good Money Habits in Buying Your Home Read your leases and all other real estate contracts before signing. Talk to family members or friends who have bought a home to obtain their insights into the process. Get your finances in order before shopping for a new home by reducing debt, budgeting better, and clearing up anything that keeps you from having a high credit score. Buy a home as soon as it fits your budget and lifestyle so you can take advantage of special income tax deductions and the likelihood of substantial price appreciation over time.
Copyright © Houghton Mifflin Company. All rights reserved.9 | 31 Good Money Habits in Buying Your Home Thoroughly explore mortgage loan sources and options to determine which one best fits your needs. If you make a down payment of less than 20 percent on a home, cancel private mortgage insurance as soon as the equity in your home pushes the loan-to-value ratio to 80 percent. Set a reasonable goal for a down payment amount and calculate how much you would have to save per month to reach it at /tool.fcs
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