2Learning ObjectivesDecide 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.
3IntroductionMortgage 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.
5Evaluating Your Alternatives What influences your choice of housing?Mobility vs. Permanence; LifestyleFinancial factorsGuideline: monthly housing < 36% of gross monthly incomeAdvantages of rentingFewer maintenance and repair responsibilitiesEasier to moveLower initial costsDisadvantages of rentingNo tax / financial benefitsLimitations regarding remodelingRestrictions regarding pets and other activitiesLegal concerns of a leaseAdvantages of buyingPride of ownershipFinancial benefitsLifestyle flexibilityDisadvantages of buyingFinancial commitmentHigher expensesLimited mobility
6Who Pays More? Short-term: renters win Long-term, when income taxes and appreciation are considered: homeowners winWhat does it cost to buy a home? Most up-front costs are due at the closing (PG 238)Closing costs: 2-10% of loanDown paymentPointsAttorney feesHome inspectionAppraisal fee… and many more!
7Consider 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
8PointsA way for homebuyers to “buy down” the interest rate on their loan1 point = 1% of the total mortgage loan amountHomebuyer pays for points at closingLender receives money upfront as compensation for offering a lower rateWhen does it make sense for a buyer to do this?
9Monthly Costs Include Principal & Interest PITIHow are property taxes determined? (See page 241)Escrowing of property taxes & homeowners insurancePMI (See page 241)
11Financing a Home: The mathematics of mortgage loans A mortgage is a collateralized loanLender has a lien on the real estateForeclosure if borrower defaultsA mortgage is an amortized loanEquity: market value of home – loan balanceHow are monthly payments divided between P & I?
12Factors Affecting the Monthly Payment The Amount BorrowedThe Interest RateSHOP AROUND! Even tiny increments make a HUGE differenceThe Term of the LoanThe Type of MortgageConventional Fixed-RateARMs (variable-rate loans)Teaser RateRate Caps<= where is the risk?
13The Main Types of Mortgages Fixed-Rate, Fixed-Payment MortgageVarious terms: 10, 15, 20 or 30 yearsfixed interest rate, fixed monthly paymentEach payment consists partly of principle and interestPayments made in early years mainly go toward interest, with very small reductions in loan principalAdjustable-rate mortgages (ARMs)Interest rate varies over life of the loanWhy 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 riskConsiderations when evaluating Fixed vs. ARMs:What’s the best choice for you?
15Alternative Mortgages Growing EquityGoal is to reduce interest costs by paying off loan earlyBi-weekly mortgage optionReverse MortgageSecond MortgageHome Equity LoanHome Equity Line of Credit“Eating one’s house”Mortgage RefinancingTraditional limit for HELs and HELOCs:80% of MV less loan balance.
17Determine your own affordability first: Front-end ratio:PITI compared to gross incomePITI should not exceed 25-29% of gross incomeBack-end ratio:PITI + all other monthly debt (car, student loans, etc)Should not exceed 33-41% of gross incomeMost people base affordability on combined incomesWhy might this be a bad idea?Prequalify for a mortgage by arranging financing