Presentation on theme: "Garman/Forgue Personal Finance Ninth Edition Chapter 9 Buying a Home."— Presentation transcript:
Garman/Forgue Personal Finance Ninth Edition Chapter 9 Buying a Home
9 | 2 Learning Objectives 1.Decide whether renting or owning 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 traditional and alternative ways of financing a home and list the advantages and disadvantages of each. 5.Identify the important aspects of selling a home.
9 | 3 Introduction Mortgage Loan: Loan to purchase real estate in which the property itself serves as collateral.
9 | 4 “Your Rental Rights” How to Get Your Security Deposit Back Make a list of all damages and defects before you move into the unit. Have the landlord sign this list. 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. 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 to request the return of your security deposit and to inform the landlord of your new address. Use small-claims court, if necessary, to obtain a court- ordered refund.
9 | 5 Evaluating Your Alternatives –What influences your choice of housing? Mobility vs. Permanence; Lifestyle Financial factors Guideline: monthly housing < 36% of gross monthly income Advantages of renting Fewer maintenance and repair responsibilities Easier to move Lower initial costs Disadvantages of renting No tax / financial benefits Limitations regarding remodeling Restrictions regarding pets and other activities Legal concerns of a lease Advantages of buying Pride of ownership Financial benefits Lifestyle flexibility Disadvantages of buying Financial commitment Higher expenses Limited mobility
9 | 6 Who Pays More? Short-term: renters win Long-term, when income taxes and appreciation are considered: homeowners win What does it cost to buy a home? Most up-front costs are due at the closing (PG 238) –Closing costs: 2-10% of loan –Down payment –Points –Attorney fees –Home inspection –Appraisal fee –… and many more!
9 | 7 Consider the tax consequences of buying your home… What 2 items are deductible on federal and (most) state income tax returns? Homes (normally) appreciate in value; capital gains (your profit) are not taxable in many cases. For first-time home buyers, money being saved to buy a home can be in a tax-sheltered account such as a Roth IRA. See page 237
9 | 8 Points –A way for homebuyers to “buy down” the interest rate on their loan –1 point = 1% of the total mortgage 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 | 9 Monthly Costs Include Principal & Interest PITI How are property taxes determined? (See page 241) Escrowing of property taxes & homeowners insurance PMI (See page 241)
9 | 10 Amortization Table for Fixed Rate Loans
9 | 11 Financing a Home: The mathematics of mortgage loans A mortgage is a collateralized loan –Lender has a lien on the real estate –Foreclosure if borrower defaults A mortgage is an amortized loan Equity: market value of home – loan balance How are monthly payments divided between P & I?
9 | 12 Factors Affecting the Monthly Payment The Amount Borrowed The Interest Rate –SHOP AROUND! Even tiny increments make a HUGE difference The Term of the Loan The Type of Mortgage –Conventional Fixed-Rate –ARMs (variable-rate loans) Teaser Rate Rate Caps <= where is the risk?
9 | 13 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? Hint: What does risk have to do with the interest rate borrowers pay? –Caps helps to reduce some risk –Considerations when evaluating Fixed vs. ARMs: –What’s the best choice for you? The Main Types of Mortgages
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9 | 15 Growing Equity Goal is to reduce interest costs by paying off loan early Bi-weekly mortgage option –Reverse Mortgage –Second Mortgage Home Equity Loan Home Equity Line of Credit “Eating one’s house” –Mortgage Refinancing Alternative Mortgages Traditional limit for HELs and HELOCs: 80% of MV less loan balance.
9 | 16 Steps in the Process of Buying a Home
9 | 17 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) –Should not exceed 33-41% of gross income –Most people base affordability on combined incomes –Why might this be a bad idea? –Prequalify for a mortgage by arranging financing