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. Introduction
Mortgage Loan: Loan to purchase real estate in which the property itself serves as collateral.

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.

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

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!

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

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. Monthly Costs Include Principal & Interest
PITI
How are property taxes determined? (See page 241)
Escrowing of property taxes & homeowners insurance
PMI (See page 241)

10. Amortization Table for Fixed Rate Loans

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?

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?

13. The Main Types of Mortgages
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?

15. 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
Home Equity Line of Credit
“Eating one’s house”
Mortgage Refinancing
Traditional limit for HELs and HELOCs:
80% of MV less loan balance.

16. Steps in the Process of Buying a Home

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