Presentation on theme: "Buying and owning a home. 2 Before we begin… This content is provided as educational material only and is not intended to solicit you for any product."— Presentation transcript:
Buying and owning a home
2 Before we begin… This content is provided as educational material only and is not intended to solicit you for any product or service These materials are not a recommendation by HSBC for any product, service or financial strategy. The suggestions and recommendations contained within are general in nature, and may or may not apply to your particular circumstances Investments, annuity and insurance products: Are not a deposit or other obligation of the bank or any of its affiliates; not FDIC insured or insured by any federal government agency of the United States; not guaranteed by the bank or any of its affiliates; and subject to investment risk, including possible loss of principal invested. All decisions regarding the tax implications of your investments should be made in connection with your independent tax advisor Should you need further assistance, HSBC strongly recommends contacting an independent attorney, tax professional or financial consultant
3 Goals for today Today, we will answer some common questions about homeownership – What are the advantages and disadvantages of owning and renting? What are the steps in becoming a homeowner? What are the costs of homeownership? How do you maintain your home? What do you do if you are unable to make your mortgage payment?
Part I – Steps to homeownership
5 Benefits of homeownership According to the Federal Reserve System’s 2010 Survey of Consumer Finances Average net worth of homeowners is $174,500 Average net worth of renters is $5,100 Housing wealth (primary residence) accounts for 29.5% of total family assets in the survey
6 Benefits HomeownershipRenting Establish family traditions Being a part of the community May build equity and net worth Build your credit history Interest may be tax deductible Your monthly rent payment may be lower The security deposit is probably less than a down payment on a home No long-term commitment Landlord, not you, pays for repairs and maintenance on the building or yard
7 Disadvantages HomeownershipRenting Your decision to buy or rent will depend on your financial situation, as well as your lifestyle. Insurance and tax bills may increase over time You’ll have to pay for household repairs and maintenance Fixing a leaky faucet Replacing appliances May require home improvements Bedroom or bathroom addition for a growing family Landscaping You don’t have ownership and are not building equity in the property Your rent may increase over time Lack of stability (e.g., you may have to move if the building is sold)
8 Steps in the home buying process 1.Review your finances 2.Determine what size mortgage you can afford 3.Compare lenders and mortgages 4.Get pre-qualified or pre-approved 5.Begin house hunting 6.Make an offer/negotiate with seller 7.Arrange for inspections 8.Closing/settlement
9 The people in the process Real estate agent Mortgage broker Appraiser Home inspector Lender Servicer Investor Trustee W
10 How much do you need “up front”? Down payment: –Ranges from 3% up to 20% of a home’s purchase, required up front when you close on the home loan –On a $100,000 home, that means a $3,000 to $20,000 down payment Other costs: –One-time costs may include loan application fee, appraisal fee, title search, attorney fee, home inspection fee and other fees/charges
11 What factors influence total mortgage expense? Total interest expense is influenced by three factors: –Principal, or how much you borrow –Interest rate, or what you pay for borrowing –Term, or length of time you have to repay the loan Other on-going costs include property taxes, homeowners insurance and (potentially) flood insurance premiums
12 How does the mortgage term affect costs? TermMonthly Payments 15 years$ 1,110 30 years $ 716 TermTotal of Payments 15 years$ 199,716 30 years$ 257,804 Example based on a $150,000 mortgage and a 4.00% interest rate W
13 How do interest rates affect costs? Each lender determines the interest rate it charges on a loan The interest rate may be different, based on the time you get the mortgage TermMonthly Payments 4.00% interest rateMonthly Payments 6.00% interest rate 15 years$ 1,110$ 1,266 30 years$ 716$ 899 TermTotal of Payments 4.00% interest rateTotal of Payments 6.00% interest rate 15 years$ 199,716$ 227,841 30 years $ 257,804$ 323,757
14 Why are interest rates different among lenders, and at different times? Rates change to reflect the cost of borrowing in the economy as a whole When interest rates in general are low, lenders also pay lower rates on the money they have to borrow to lend to home buyers When rates in general are higher, the lenders’ costs to borrow money (to lend to home buyers) also are higher
15 How does credit history affect the interest rate offered to a borrower? Lenders want to be sure that the borrower is able to make monthly payments on time One factor lenders review is how a person has used credit in the past –This is expressed in their credit score from their credit report –The credit score is calculated based on many factors. Generally speaking, borrowers who have higher credit scores are offered lower interest rates If your credit score is low, it does not necessarily mean you won’t qualify for a mortgage, but you may be offered a higher interest rate than a person who has a higher credit score
16 What do lenders consider when evaluating you for a mortgage? Common debt ratios: –Front-end, or housing ratio of 28% –Back-end ratio of 36% You may be able to qualify for a mortgage with payments up to 28% of your gross income –That includes payments towards: Principal Interest Taxes Insurance No more than for mortgage 28% W
17 What do lenders consider when evaluating you for a mortgage? Lenders will also evaluate your total debt, or back- end ratio, when qualifying you for a mortgage Lenders will usually consider you qualified if you have a strong credit score and if your total debt payments, including mortgage payments, do not exceed 36% of your gross income No more than for debt 36%
18 Where do you find a mortgage? Start by inquiring at a financial institution you already have a relationship with Typical mortgage lenders include: –Banks –Savings and loans –Credit unions –Mortgage finance companies Some consumers choose to work with a mortgage broker who may represent more than one financial services organization.
19 What is pre-approval? You submit an application and go through the lender’s qualifying process before choosing a home If you’re approved, the lender guarantees (for a certain period of time) you can borrow up to a specific amount You enter the home-buying market knowing the amount you can afford You may have to pay an application processing fee
20 What is pre-qualification? Alternative to pre-approval Generally no fee; you are not applying for the loan at this time Lender gives you an idea of how much you can borrow –You can shop for a home within a well-defined price range Doesn’t guarantee you’ll be able to borrow that amount because a full application evaluation has not been completed
21 How does prepaying interest affect your mortgage payments? Sometimes lenders offer you the option to prepay some of the interest on your mortgage by paying discount points Each point is 1% of the principal, or amount you borrow Each discount point you pay typically reduces your interest rate by a fraction of a percentage point This means that you might have a lower monthly payment if you choose to “pay points”
22 What are APR, interest rate, and finance charge? Annual Percentage Rate (APR) A yearly rate of interest that includes fees and costs paid to acquire the loan Interest RateThe rate you are charged for the opportunity to borrow money Finance ChargeThe amount that you pay for the loan, expressed in dollars It is important to compare APR, in addition to interest rates, when comparing loan offers. W
23 What is a fixed interest rate mortgage? Your interest rate and monthly payments do not change over the term of the loan Your payments won’t increase even if interest rates in general go up If interest rates go down, your payments will remain the same Your interest rate and closing costs may be higher than they may be with an adjustable rate mortgage W
24 What is an adjustable rate mortgage (ARM)? A loan that is tied to the interest rate of a financial product, such as U.S. Treasury Bills The rate changes on a scheduled basis. The loan contract will describe exactly when the interest rate will change, and how ARMs typically have a lower initial rate than a fixed-rate mortgage If interest rates go down, your mortgage payments will probably drop. If interest rates go up, your payments will probably increase The changing monthly payments may make it difficult to budget for housing costs
25 What are hybrid mortgages? Have a fixed-term portion, which is typically 3, 5, or 7 years, then there is an adjustable schedule for the remainder of the term –Some may include a provision where you can convert to either a fixed or adjustable interest rate mortgage at some time during the loan term It may be easier to qualify for this type of mortgage, since your initial monthly payments will be lower When the fixed-rate period ends and the loan becomes an ARM, your payments will reflect current interest rates The changing payments may make it hard to budget for housing costs
26 What about interest-only or “balloon” mortgages? In some cases, for a fixed period of time, your entire payment is applied toward the interest only –In other words, none of your monthly payment is applied to the principal amount you owe on the loan The final payment will likely be much larger than any of the monthly payments you made In some cases, the entire principal is due, all at once, in the last payment, or “balloon payment”
27 What does it mean to “close” on the loan? You and the seller sign the documents that legalize the transfer of property You sign the mortgage (this allows the lender to record a lien on the property) and note and loan agreement (the agreement between you and the lender regarding how you’ll repay the loan) You pay for the balance of the selling price and the closing costs, some of which include: –Title searches and title insurance –Attorney fees –Property taxes to reimburse the seller for amounts that have already been paid –Transfer taxes –Prepayment of property taxes and homeowners insurance
28 How can you borrow against your home? Equity is the value of your home, less the mortgage you owe You may be able to borrow against the equity in your home by using a home equity loan or a home equity line-of-credit A home equity loan lets you borrow up to 80% (or more) of your home’s value (less existing liens), either at a variable or fixed rate of interest –For example, if you have a $100,000 home, and $60,000 remaining on your mortgage, you have $40,000 in equity. You may be able to borrow up to $20,000 or more ($100,000 * 80% = $80,000 - $60,000 = $20,000) –Your home is the collateral for the loan, and you make monthly payments over a fixed term You may also be able to borrow against your equity by using a home equity line of credit or HELOC –Similar to the credit limit on a credit card, but tied to the amount of home equity the lender establishes as your maximum
29 What is an escrow account? Escrow accounts are quite common and are typically set up by the lender Escrow accounts are created to hold the amounts collected for your property tax and homeowner insurance payments Monthly amounts are included in your monthly loan payment and are set aside to help pay for items such as property taxes, mortgage insurance payments, fire and hazard insurance premiums and other items Removes the risk of delinquent property taxes and unpaid homeowner’s insurance, which could lead to serious financial difficulties, such as: –Financial loss due to property damage not covered by insurance –Loss of property due to unpaid property taxes The use of escrow accounts is encouraged, but not all lenders require them – so be sure to check!
30 An overview of homeowners insurance Lenders require borrowers to insure the home Named perils policy offers limited protection to cover damage to your home’s structure and possessions that results from fire and theft – you may wish to ask about an open perils policy Every policy has a deductible, which is the amount you pay for a loss before the insurance company covers any of the remaining damage Smaller your deductible…Higher your premiums… Less you’ll have to pay after a loss Higher your deductible…Lower your premiums… More you’ll have to pay after a loss
31 What is PMI? PMI stands for private mortgage insurance Unlike homeowner’s insurance, PMI only benefits the lender, not the homeowner, when the borrower defaults Typically required for borrowers who make less than a 20% down payment Costs vary, but can range anywhere from 0.50% to 1% of total loan amount each year Cancelling PMI payments –Borrower can request PMI payments be stopped once LTV reaches 80% –It must automatically be cancelled once LTV reaches 78% (although there are some exceptions to mortgages considered high-risk) Ask about the need for PMI with potential lenders, as this will impact your monthly mortgage payment.
32 How much insurance? Insure your home for at least 80% of its replacement value, or what it would cost to rebuild your home in today’s dollars –Some insurers will cover the cost of replacing your current home –Others will cover the cost of building a home of the same size but not necessarily with the same features When you’re calculating your home’s value for insurance purposes, you usually don’t include the value of the land on which it’s built
Part II – Successful homeownership
34 The main cost of homeownership Your mortgage payment generally consists of… Principal – the amount you borrowed Interest you’re paying on the loan …and may also include escrow for… Taxes Insurance –Insurance – homeowner’s, flood, hazard, etc. –Private mortgage insurance (PMI) If your mortgage payment doesn’t include amounts for taxes and insurance, you need to plan and budget for these on your own!
35 What are some other costs of homeownership? Let’s take a closer look at “routine maintenance”… Utilities – gas, water, electric, fuel Municipal services – garbage removal Monthly assessments or association dues Routine maintenance
36 What are routine maintenance items? Roof and gutters Lawn care Heating/air conditioning Hot water heater Windows Siding, tuck pointing, painting Deck or patio Fences Appliances Garage door Fireplace chimney Safety items Annual home inspection
37 Budgeting for routine maintenance costs… Set aside from 1% to 3% of your home’s value for routine maintenance and periodic improvements each year Example: RegionHome Value (as of April, 2013) 1% of Home Value3% of Home Value Northeast$245,100$2,451 ($204/mo)$7,353 ($613/mo) Midwest$149,300$1,493 ($124/mo)$4,479 ($373/mo) South$168,700$1,687 ($141/mo)$5,061 ($422/mo) West$263,600$2,636 ($220/mo)$7,908 ($659/mo) Source: National Association of Realtors, May 22, 2013
38 Activity: T&J’s Budget Monthly Expenses: Mortgage$ 1,300 Auto loan550 Utilities125 Telephone25 Cell phone75 Cable TV60 Savings50 Personal care200 Dry cleaning50 Food550 Transportation80 Child care500 Sears50 J.C. Penney50 Target60 Macy’s50 Entertainment150 Clothing75 Total Expenses:$ 4,000 Monthly Income: T’s income:$ 3,250 J’s income:750 Total Income:$ 4,000 A
39 Activity 1: T&J’s Budget Update T&J recently attended a homeownership workshop and realize they should have been budgeting each month for home maintenance items After talking it over, T&J decide to make a commitment to begin budgeting and saving for home maintenance and improvements T&J’s home is currently valued at $150,000 Outline the steps T&J should take in order to meet their goal of budgeting for home maintenance expenses, including how much they should set aside each month A
40 Home improvements When choosing a contractor – Get multiple bids Check contractor’s references Use a licensed, insured and state registered contractor Check with the Better Business Bureau (www.bbb.org) or your state Attorney General’s officewww.bbb.org Read the contract carefully – understand what you’re signing Determine exactly how you will be paying If contractor offers financing, understand all costs and fees Be vigilant
41 What if problems happen? What may cause you to have problems making your monthly mortgage payment? Five Dreaded D’s 1 : Death Disability Disease Divorce Downsizing Note: 1Used with permission from Lynette Khalfani-Cox, The Money Coach – www.themoneycoach.net Others: Wrong mortgage product Insufficient income Unbalanced budget
42 Assessing your situation Review budget and cash flows Ask yourself… Are there ways to increase income? What ways are there to decrease expenses? W
43 Activity 2: T&J’s Mortgage Payment Troubles T&J have a fixed-rate mortgage with a payment of $1,300/month J, who recently had to leave her job because of medical reasons, contributed $750 each month to the family’s income. She will be out of a job for about one year T has tried to find additional part-time work to make-up for J’s lost income, but has been unsuccessful While the small emergency fund the couple had saved allowed them to make last month’s mortgage payment, T&J have no other savings What are some ways T&J can look to increase income, decrease expenses, or both? A
44 Stages of mortgage delinquency It’s never too early or too late to contact your lender and ask for assistance!
45 Help with solutions Contact your lender at the first sign of trouble Tell the whole story about your situation Respond to all communications CollectionsLoss Mitigation Short-range solutions, focused on early-stage delinquency Goal is to collect past due debt with “payment reminders”, and get customer to provide a “promise to pay” by a certain date Automated – use “auto dialers” to make initial contact with customer – i.e., machine dials, then transfers call to Collector when customer answers Longer-range solutions, focused on mid- to late- stage delinquency, up to and including foreclosure Goal is to help borrowers by crafting solutions to provide maximum payment relief over longer periods of time W
46 Activity 3: T&J’s Troubles Worsen It is now ten months later, and T loses hours at work, reducing the couple’s already lowered income by another $500 each month The lost income will not allow T&J to make any further mortgage payments, and they have already fallen behind by one month T&J have no savings left, and the money from the sale of their second car was used to make the previous months’ mortgage payments T&J’s lender has been sending letters and calling, but they have avoided all contact with their lender for fear of losing their home What should T&J do? A
47 Help with solutions (cont’d) If you are uncomfortable contacting your lender, contact a trusted, third-party mortgage or housing counselor – –Homeownership Preservation Foundation (HPF), 1-888-995-HOPE or www.995hope.org www.995hope.org –National Foundation for Credit Counseling (NFCC), 800-388-2227 or www.nfcc.orgwww.nfcc.org –NeighborWorks® America, www.nw.orgwww.nw.org Many organizations have housing counselors certified by the Department of Housing and Urban Development (HUD). Visit www.hud.gov for more information.www.hud.gov W
48 Help with solutions (cont’d) Whether you call your lender or a trusted, third-party, be: –Prepared with copies of your major bills, including your mortgage statement –Candid about your situation, explaining what happened, and when or if your situation may improve –Realistic about any opportunities which may or may not allow you to either keep your home, or minimize the damage done to your credit caused by a foreclosure
49 Some options which may be available Your lender or servicer may be able to offer one or more forms of hardship assistance to help you keep your home… Refinancing Forbearance Repayment Plan Loan Modification Stipulation agreement W
50 If keeping your home isn’t an option Sell your home Short sale Assumption Deed in lieu of foreclosure
51 Be aware of scams While sometimes referred to differently, watch out for scams such as… “Phantom help” – the rescuer charges high fees for basic paperwork and telephone calls the homeowner could have made on their own. Another form of this scam is when the rescuer promises to represent them, collects the fees, but doesn’t follow through. “Bailout” – involves the rescuer appearing to help the homeowner by getting rid of the house (bailing them out). The homeowner surrenders title to the house with the promise that they can rent it back once the problems are fixed. The scam ends with the homeowner not being able to buy the house back while the rescuer walks away with the equity. “Bait and switch” – the rescuer tells the homeowner they are signing for a new loan that will solve their foreclosure problems, but they are really signing forged documents, usually a deed of some sort, that will give the scammer ownership of the home. In the end the homeowner no longer owns the home but will still be liable for the existing valid mortgage. “Vanishing payment” – where you are convinced to make your mortgage payments to someone other than your lender.
52 Protect yourself Don’t provide any information to anyone with whom you did not initiate the contact Never sign any papers under duress Never sign agreements you don’t understand completely, or those with blank lines or spaces Don’t sign over your deed to a third-party or agree to any deal that lets you rent the property and buy it back later Don’t make your mortgage payment to anyone other than your lender or servicer Get it in writing When in doubt, call your mortgage company or an attorney
53 Recap Understand the benefits of homeownership An investment; a way to help increase net worth Place to start family traditions Sense of stability and community Know how to maintain and improve your home and property The importance of routine maintenance – to maintain and improve your home’s value Budgeting 1%-3% of your home’s value each year Understand what to do if trouble happens Call your lender or a trusted third-party counselor for available options How to protect yourself against scams Know all costs of homeownership Mortgage (principal, interest, taxes, insurance) Utilities, municipal services, and any monthly assessments or dues Successful Homeownership!
54 In Closing Despite challenges, homeownership provides many benefits – Over 2/3 of U.S. households are homeowners The majority of all homeowners make their mortgage payments on time and never risk foreclosure On average, the net worth of homeowners is substantially greater than that of a renter Homeownership can be a source of shelter and security for families, and helps create stability in communities
55 Wrap-up Homeownership can be both a rewarding experience and a good path to creating wealth Over the next 30 days – –Review the type of mortgage you have and whether or not your payment can go up –Fine-tune your budget, finding ways to save for routine home maintenance and improvement projects Talk with your lender or a trusted, third-party counselor if you are having any difficulty making your mortgage payment Visit www.YourMoneyCounts.comwww.YourMoneyCounts.com