Presentation on theme: "CHAPTER 7 Home, Sweet, Home! Selecting and Financing Housing Or"— Presentation transcript:
1 CHAPTER 7 Home, Sweet, Home! Selecting and Financing Housing Or A third of Americans now spend at least 30 percent of their income on housing − the federal definition of an “unaffordable” housing burden (The Washington Post)
2 Evaluating Housing Alternatives Your lifestyle and your choice of housingHow you spend your time and money, your lifestyle, affects your housing choicePersonal preferences are modified by financial factorsTraditional financial guidelines suggest you spend no more than 25-30% of take-home pay on housing, or no more than 2 1/2 times your annual income for a home“Ha! Ha! Ha! Ha! Ha! Ha!” The authors obviously don’t live in San Diego!!
3 Rent or Own? Evaluating Housing Alternatives Advantages of rentingMobilityFewer maintenance responsibilitiesLower initial costsDisadvantages of rentingFew financial benefits – “Not always true!”No growth of equityRestricted lifestyleLegal concerns of a leaseCosts including a security deposit, utilities & renter’s insuranceDon’t forget renter’s insurance!
4 Housing Rental Activities The searchSelect an area and rental cost for your needsCompare costs of unitsTalk to current and past residentsBefore signing a leaseMake sure the lease dates, costs and facilities are clearly representedTalk to a lawyer about unclear lease aspects (?)Note in writing, signed by the landlord, the condition of the rental unitEither person who signs lease can be held responsible for the full rent
5 Legal Details of a Lease Description and address of propertyName and address of the owner/landlordName of tenantEffective date and length of the leaseAmount of security depositAmount and due date of rentLocation where rent is dueDate and amount for late rent paymentsList of included utilities, appliancesRestrictions on certain activitiesThe right to sublet the unitConditions under which landlord may enter the rental unitThe lease exists to protect the Landlord!
6 Housing Rental Activities (continued)Living in rental propertyIf you can demonstrate that you are a good tenant, sometimes the landlord will keep your rent increases to a minimumA good tenant is worth the lower rent to a landlordAt the end of the leaseClean and leave unit in same condition you got itProvide landlord with new address for depositRequire than any deductions from your deposit be documented
7 Advantages of Owning Pride of ownership Reduced income taxes The American Dream (Dreams can turn into nightmares)Reduced income taxesDeduct mortgage interestDeduct property taxes & state income taxesBuild equity by paying down the loan and by price appreciationProtection against inflationBuilds your credit ratingLifestyle flexibility – express your individuality
8 Disadvantages of Owning Financial uncertaintyGet down payment and financingHome values could drop (“Yeah, right?” “Yeah, right!”)Limited mobilityCan take time to sellA home is not a liquid investmentZoning and CCR’sHigher living costsMaintenance, repairs & improvementsReal estate taxes
9 “But my house is the best investment I have ever made!” “Of course, it is pretty much the only investment that I have ever made,Except for that penny stock my brother-in-law, the ex-stockbroker, conned me into buying…But that is worthless nowAnd those gold coins I bought back when the first Gulf War started back in ’91What did I do with those things, anyway?”Bottom Line: A House is a Home First, an Investment Second
10 “But what about San Diego?!” Prices in San Diego have gone down in the pastThey seem to be still going down nowHow far they will drop is uncertainConsider: It is not as though San Diego is all of a sudden becoming an undesirable place to liveBut if you plan on staying here, by all means, buy whatever you can affordSan Ysidro and National City are two of the best values in the region, by the wayImperial Beach is also a great beach value
11 Speaking of inSane Diego… Do you own your own home?YesNo
12 Speaking of inSane Diego… Of those who do not own, do you plan on purchasing a home in San Diego?Yes, I am determined to do itMaybe, but not for many yearsNo, I will continue to rent here in San DiegoNo, I am moving to a cheaper area
13 Sign seen over a desk in a San Diego office, circa 1993 “Please, God, let there be another real estate boom and I promise I won’t piss it all away this time!”
14 The Main Elements of Buying a Home “Location, Location, Location”Down paymentParent, Grandparents – Equity Sharing?Mortgage applicationGet pre-approved at a credit union or brokerPoints – Each point is 1% of the loan amountClosing costsClose your eyes and signPITI (principal, interest, taxes, insurance)Escrow accountMaintenance costs
15 Assess Types of Housing Than Can be Purchased Single-family dwelling (SFR)Multi-unit dwellingDuplexTownhouseCondominiumYou own your unit in a building of unitsIt is not a type of structure but a form of ownershipCooperative housingMembers own shares in and rent a unit in a building with multiple unitsEast Coast
16 Assess Types of Housing Than Can be Purchased (continued)Manufactured homesFully or partially assembled in a factory and then moved to the housing sitePrefabricated type has components built in the factory and assembled at the siteLower cost than site built homesMobile homesA type of manufactured home often less than 1,000 square feetOffer same features as a conventional houseSafety is debated and they usually depreciate if you don’t own the land underneath the home
17 Assess Types of Housing Than Can be Purchased (continued)Tips for Mobile and Manufactured homesAvoid buying a “complete package”You will usually end up overpayingFind the site first – buy the land if you can afford toGet a warranty on the installation of the home as well as the manufacturing of the homeThe installation often is the most troublesome aspectIf dealer will not provide a warranty, walk awayArrange your own financingThis is where the dealers make the most money. They will want you to finance at a very high rate relative to the mortgage market. Credit union!
18 Assess Types of Housing Than Can be Purchased (continued)If building a home, consider…Does the contractor have needed experience?Does contractor have a good working relationship with architect, suppliers, electricians, plumbers, carpenters and others?What assurance do you have about quality?What are payment arrangements?What delays will be considered legitimate?Is the contractor licensed and insured?
19 Home Buying Process Step 1: Determine Homeownership Needs Determine how much you can affordConsider both price and qualityGet pre-qualifiedPrice and down paymentAvailable funds for a down paymentYour income and living expensesYour ability to make the paymentsSize and qualityAs you move to a second and third home you can include more of the features you wantLook at the condition of the home
20 Home Buying Process Step 2: Finding and Evaluating a Property to Purchase Select a locationBe aware of zoning laws (Can you park your RV?)Assess the school system if you have childrenUsing a real estate agentThey present your offer, negotiate the price, assist you in obtaining financing, represent you at the closing, and…Stab you in the back if you are not careful!Get a good referralObtain an appraisal (This will happen anyway)Conduct a home inspection
21 Home Buying Process Step 3: Pricing the Property Determining the home valueCheck the neighborhood & recent transactionsNegotiating the purchase priceBuyer agents(Normally, the agent works for the seller! Always keep this in mind.)Is it a Seller’s or a Buyer’s market?“Earnest money”Contingency clausesBuyer can obtain financingSale often contingent on the sale of the buyer’s current home
22 Home Buying Process Step 4: Obtaining Financing Determine the amount of the down paymentMortgage insurance (PMI) if less than 20%Apply and qualify for the mortgageIf you have not already pre-qualifiedCan be pre-qualified based on income, assets, debts, credit history, mortgage rate, and length of loanEvaluating points (prepaid interest)“Buy-down” a lower interest rateGood idea if you intend on living in the house for a long time
23 Private Mortgage Insurance (PMI) Private Mortgage Insurance protects the lender from financial loss due to default on the loanNotice that it protects the lender but the borrower pays for it – What a scam, uh… deal!Usually required if the homebuyer puts down less than 20% on the homeWhen the equity builds to 20%, it is supposed to end automaticallyBut do not wait for the lender to get around to stopping it – Get rid of it as soon as you can!Some borrowers avoided it by taking 2 loans80% fixed – 15% HELOC – 5% down
24 Types of Mortgages Conventional Adjustable rate mortgages Fixed rate, fixed payment, amortized5%, 10% or 20% down15, 20 or 30 years of fixed paymentsAdjustable rate mortgagesInterest rate varies but usually has a rate capInterest rate tied to prime rate or other industry rateSometimes come with a “negative amortization” provision – Beware the Option ARM!Government guaranteed financing programsVeterans AdministrationFederal Housing Authority
25 Types of Mortgages Graduated payments (continued)Graduated paymentsPayments start lower and go upFor persons whose income is expected to increaseTypical characteristic of Option ARM mortgagesInterest-only loans (a.k.a. IO, pronounced “eye-owe”)BalloonFixed monthly payments plus one large payment, usually after 3, 5 or 7 yearsAdvertised as…“30 due in 7” or “30/7”“30 due in 5” or “30/5”
26 Types of Mortgages A second mortgage Reverse mortgages (continued)A second mortgageHome is collateral and interest is normally tax deductible (Schedule A)Home equity loan is an exampleReverse mortgagesProvides elderly with tax-free income based on the home equity – Careful! Get a lawyer!Shared appreciation (a.k.a. equity sharing)Borrower agrees to share appreciated value of the home with the lender – Careful!Refinance – To getting a better interest rate
27 Financing & Mortgage Fees It used to be almost impossible to compare “apples-to-apples” when shopping for a loanA lower interest rate was usually a “come on” in exchange for being soaked with “garbage fees”Loan applicants often were not made aware of these extra fees until the day of the closing!It is much easier and safer nowNew rules forbid “bait ’n’ switch” maneuvers that used to be commonplaceIn 2003, there was an effort to create a standardized method for pricing home loans. The industry shot it down. But after the recent debacle in the home loan industry, the home loan reform advocates finally got their way.
28 Should I have a large down payment? Should I pay off my mortgage early?The two are really the same question“How much equity should I have in my house?”Real estate agent sez, “No, you should buy a new house every 4 or 5 years.”So she can make another commission…Financial representative sez, “No, you should invest the extra in a mutual fund.”So he can make another commission…I sez, “If you intend on staying in your house for more than a few years, YES!”“Make Love, Not Loan$!”
29 Should I refinance?When interest rates trend lower, many homeowners consider refinancing their mortgage and getter a lower interest ratePayments usually go down as a resultBut you can incur points and closing costs all over again as when you purchased the houseYou essentially sell your house back to yourselfThe rule of thumb is: “If you can get your rate down by 2%, then go ahead and refinance”BUT, if you can find a no-cost or low-cost refinance, as long as your rate goes down, even if not by much, it makes sense to refinance
30 Insist on a “walk-through” Home Buying Process Step 5:Closing the Purchase TransactionTitle insurance and search feeEscrow feeAttorney’s and appraiser’s feesProperty surveyRecording fees; transfer taxesCredit reportTermite inspectionLender’s origination feeTax and insurance reservePre-paid interestReal estate commissionClosing CostsInsist on a “walk-through”
31 Title Insurance Title insurance guarantees… That the seller owns the propertyThat the seller and buyer are who they say they areThat there are no liens or other encumbrances on the propertyIf your home was purchased or refinanced within the past few years, you can ask for (and should get) a discount on the title insurance policyIt definitely pays to shop around for title insurance. Do not assume the company your real estate agent suggests will give you the best price.
32 Selling Your Home Preparing your home – white picket fence Determining the selling priceAppraiser – $350Realtor – Free (???)Check the neighborhood for current pricesFor sale by ownerTo save $42,000, I will get my real estate agent’s license if I have to! (But I have sales experience…)Listing with a real estate agent – 6%Be careful – Keep your back to the wall!
33 Selling Your Home Tax consequences (continued)Tax consequencesSingle – $250,000 tax free capital gainsMarried – $500,000 tax free capital gainsOnce every two yearsSome folks are buying “fixer-uppers”Fixing them up in two years and selling them with no capital gains taxesNo capital losses on homes allowed
34 30-Year versus 15-Year Mortgage YrsRatePmt per $1,000$300,000 LoanNum PmtsTotal Amount303½%$4.490$1,347.00360$484,920153%$6.906$2,071.80180$372,924Extra each month:$724.80Less:$111,996On a $300,000 mortgage, you can spend $111,996 less with a 15-year loan.But that means coming up with an extra $ each month.
35 Mortgage Exercises Let’s do some more exercises. Don’t get too depressed…