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.
3Mortgage: a real estate loan IntroductionMortgage: a real estate loan(the property itself serves as collateral)
4Why the recent explosion in mortgage foreclosures? Facts & Figures:90% of young people rent80% of people own homesHousing values typically increase less than 4% annuallySince 2006, home prices have declined 20-50% in most marketsIs a home an investmentor just a place to live?CONSIDERWhy the recent explosion in mortgage foreclosures?
5Short-term: renters win, based on initial upfront costs Should you rent or buy?Short-term: renters win, based on initial upfront costsRentDamage/security depositLease contractPeriodic tenancyTenancy for specific timeSubleasingYour rights w/o a lease (pg 250)
6Equity and Appreciation Deductibility of items on taxes Long-term: homeowners win, when income taxes and appreciation are consideredEquity and AppreciationDeductibility of items on taxesReal estate taxesMortgage interestBeware of flippingBeing “upside down” (under water)ForeclosureStrategic default (pg 253)
7What does it cost to buy a home? Most up-front costs are due at the closing (PG 255)** Closing costs can range 2-10% of loan **Down paymentAttorney feesTitle search/insuranceHome inspectionAppraisal feePoints… and many more!
8When does it make sense for a buyer to do this? PointsHomebuyers can “buy down” the interest rate on their loan1 point = 1% of 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?
9Important Terms to Understand Monthly payments include principle & interestProperty taxes & homeowners insurance may be ESCROWED: PITILoan-to-value ratio (LTV) (Lenders expect 80%)Ex: $80,000 mortgage ÷ $100,000 home value = 80%PMI if LTV is too high (pg 257)Protects who? Paid for by who?The New Realities of Home Buying (pg 258)Historically Low Interest RatesTougher Lending StandardsA Buyer’s MarketLarger Down Payments
10How are property taxes determined? (pg 259) ADVICE: Based on the ASSESSED VALUE of buildings and landMany people appeal their assessed value… and win!How does NY compare?ADVICE:Decide Based on ALL Costs!(Average 30-40% added to loan payment for all other housing costs)
12Get your finances in order Clean up your credit! Use Internet to Estimate Housing CostsPrequalify for Loan (Determine 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) compared to gross incomeShould not exceed 33-41% of gross incomeSearch for home online and in person
13Agree to terms with seller (NEGOTIATE!) Make offer; counterofferSpecify conditions (contingency clauses)Sign purchase contractFormally apply for Mortgage LoanGood faith estimateMortgage lock-in ratePrepare for closingHire your own inspectorHire your own attorneyClosing Day! Uniform Settlement Statement
14Financing a Home The mathematics of mortgage loans A mortgage is a collateralized loanLender has a lien on the real estateA mortgage is an amortized loan (pg 269)How are monthly payments divided between P & I?See chart page 268Equity = Market Value of Home - Loan BalanceSome people made additional payments on loanAffect of this?
183 Factors Affect the Mortgage Payment The Amount Borrowed (see chart pg 270)The Interest RateSHOP AROUND! Even tiny increments make a HUGE differenceThe Length of the LoanConventional Fixed-RateARMs (variable-rate loans)Teaser RateRate CapsTypes of Mortgages<= where is the risk?
19The Main Types of Mortgages What’s the best choice for you? 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?Caps helps to reduce some riskConsiderations when evaluating Fixed vs. ARMsWhat’s the best choice for you?Locale rates
21Alternative Mortgages Growing EquityGoal is to reduce interest costs by paying off loan earlyBi-weekly mortgage optionReverse MortgageSecond MortgageHome Equity Loan or Home Equity Line of CreditRates slightly higher than first mortgages“Eating one’s house”Fin PP pg 276Mortgage RefinancingTraditional limit for HELs and HELOCs:80% of MV less loan balance (pg 274).