2 ObjectivesDiscuss the options available for rented and owned housing and whether renters or owners pay more for housing.Determine how much buyers can afford for housing.Discuss the various mechanisms for financing a home.
3 ObjectivesIdentify the numerous costs of buying a home, including principle, interest, and closing costs.List and describe the steps in the home-buying process.Identify some important concerns in the process of selling a home.
4 Young Couple, No Children Couple, Children No Longer At Home Housing DecisionYoung SingleRental housing has limited maintenance and offers mobility.Purchase a home or a condominium for financial and tax benefits.Single ParentRental housing can provide suitable environment for children and some degree of housing security.Purchase low-maintenance housing to meet financial and social needs of family.Young Couple, No ChildrenRental housing offers convenience and flexibility of lifestyle.Purchase housing for financial benefits and to build long-term financial security.Couple, Children No Longer At HomeRental housing for convenience, flexibility for changing needs and financial situation.Purchase housing that requires minimal maintenance and meets lifestyle needs.Couple, Young ChildrenRental housing can provide facilities for children in a family-oriented area.Purchase a home to meet financial and other family needs.Retired PersonRental housing meet financial, social, and physical needs.Purchase housing that requires minimal maintenance, offers convenience, and provides needed services.
5 Renting Your Residence AdvantagesMobilityFewer responsibilitiesLower costs initiallyMore amenitiesDisadvantagesFew financial benefitsRestricted lifestyleCost of renting - depositsLegal concerns of a lease
6 Largest Physical Capital Investment Made by a Family is a HOUSE. Home Ownership rates 2012:US = 65.4% (lowest since 1997)Utah = 71.5%Since 1900, home ownership has been in excess of 40% in the U.S.
7 The Percentage of Families Owning Homes Over Time %
8 Housing Prices are determined by Supply & Demand Average household size downAverage income upAvailability of substitutes downLife cycle stage of housingChildhood home, apartment, starter home, family home, empty nest home, retirement home, institutionalization or back to family, burial vaultSupplyBusiness cycle
9 Advantages of Owning Pride of ownership American dream/norm Reduced income taxesdeduct property taxesdeduct mortgage interest
10 Advantages of Owning Build an equity pay down the loan (continued)Build an equitypay down the loanprice appreciationBuilds your credit ratingForced savings-portion of mortgage payment goes toward building up equity.Hedge against inflationLifestyle flexibilitycan express your individuality
11 Disadvantages of Owning Financial riskneed down paymenthome prices could dropOpportunity cost of money tied up in purchase.Limited mobilitycan take time to sellHigher living costsmaintenancerepairs & improvementsutilities & insurancereal estate taxes
12 Renting vs. Owning Your Home WHO PAYS MORE:Based on cash flow, renters appear to winAfter taxes and appreciation, owners usually win
13 Renting versus Buying Place of Residence RENTAL COSTSEXAMPLEYOUR FIGURESAnnual Rent Payments$15,000Renter’s Insurance210Interest Lost on Security Deposit (amount of security deposit times after-tax savings account rate)36Total annual cost of renting$15,246Annual mortgage payments$15,168Property taxes (annual)4,800Homeowner’s insurance (annual)600Estimated maintenance and repairs (1%)2,000After-tax interest lost on down payment and closing costs750Less financial benefits of home ownershipGrowth of equity(1,120)Tax savings for mortgage interest (annual mortgage interest times tax rate)(3,048)Tax savings for property taxes (annual property taxes times tax rate)(1,344)Estimated annual appreciation (1.5%)(3,000)Total annual cost of buying$14,806Comparing an apartment with $1,250 of monthly rent and a home that cost $200,000. A 28% tax rate is assumed.
14 Housing Options for Home Buyers Single-family dwellingtract housingbuilt on speculation by builderbuilt to your specificationspreviously lived in homemanufactured homemobile home
15 Home Buying Process Step 1: Determine Ownership Needs How much you can afforddown paymentloan amountsize and qualityhandyman’s specialsweat equity
16 Home Buying Process Step 2: Finding and Evaluating a Property to Purchase Select a locationZoning lawsCovenants, codes and restrictionsUsing a real estate agentProperty appraisalConducting a home inspection9-15
17 Home Buying Process Step 3: Pricing the Property Determining the price to offerNegotiating the purchase priceseller’s or buyer’s marketearnest moneyContingency clauseshome passes structural inspectionable to get a loan
18 Estimating Mortgage Loan Payments for Principal and Interest (Monthly Payment per $1,000 Borrowed)Payment Period (Years)InterestRate (5)152025304.5$7.6499$6.3265$5.5583$5.06695.07.90796.59965.84595.36825.58.17086.87896.14095.67796.08.43867.16436.44305.99556.58.71117.45576.75216.32077.08.98837.75307.06786.65307.59.27018.05597.38996.99218.09.55658.36447.71827.33768.59.84748.67828.05237.68919.08.99738.39208.04629.59.32138.73708.408510.09.65029.08708.7757Note: To use this table to calculate a monthly mortgage payment, divide the amount borrowed by 1,000 and multiply by the appropriate figure in the table where the interest rate and the time period for the loan intersect. For example, a $150,000 loan for 30 years at 9 percent would require a payment of $1, [($ /1,000) x ]; over 15 years it would require a payment of $1,
19 Effect of Down Payment Down Payment Amount Of Loan Monthly $5,000 Effect of Down Payment Size on Monthly Payment for a $150,000 Home(7 Percent Mortgage Loan for 30 Years)DownPaymentAmountOf LoanMonthly$5,000$145,000$964.6910,000140,000931.4215,000135,000898.1620,000130,000864.8925,000125,000831.63
20 How do households finance the purchase of a house? Down paymenttypically 10% of selling price, but 20% is the magic numberMortgageloan to pay the seller the difference between the purchase price and the down paymentMortgage choices impact the economic cost of a home
21 Type of Mortgages Conventional fixed rate, amortized 5, 10 or 20 percent down15, 20 or 30 years of fixed paymentsGovernment guaranteedVeterans AdministrationFederal Housing AdministrationAdjustable rate mortgagesvaries with the prime rate but has a rate cap
22 Type of Mortgages Graduated payment payments start lower and go up (continued)Graduated paymentpayments start lower and go upfor persons whose income will increaseBalloonfixed monthly payments plus one large payment, usually after 3, 5 or 7 yearsGrowing equitypayment increases to allow loan to be paid off more quickly
23 Type of Mortgages Shared appreciation (continued)Shared appreciationborrower agrees to share appreciated value of the home with the lenderHome equity loansa second mortgagehome is collateral and interest may be tax deductibleReversea loan based on the home equityRefinancing
24 Economic Advantages and Disadvantages of Fixed Rate Mortgage? future housing costs are known with relative certainty (only possible changes are property taxes, insurance, and utilities)can choose 15-year, 20-year, 25-year, 30-year, 40-year, or 50-year loan timeinterest deductions from income taxes are high during the early years of the loan
25 Economic Advantages and Disadvantages of Fixed Rate Mortgage? more difficult for young households (with lower incomes) to qualifyLocked in to the fixed rate.Tax advantages lessen over time (typically at the point where household income and the marginal tax rate are both rising)
26 Fixed rate FHA or VA mortgage Federally insured mortgagesIf the borrower defaults, the lender still gets the money.Advantages:interest rates frequently lower on FHA or VA mortgages than on conventional mortgagesqualifying is typically easierFHA/VA loans are assumabledown payment requirements are typically lower
27 Fixed rate FHA or VA mortgage Disadvantages:loan limits (2008 = $729,750 in SLC, Summit, and Tooele Counties; $323,750 in Utah County; $271,050 most everywhere else)insurance fees (1.5% upfront, % per year of the loan amount – can be financed)typically pay additional points (one-time, fixed costs)Rates on 10/30/0830 year fixed is 6.46%, with 0.7 points15 year fixed is 6.19%, with 0.7 pointsMay take longer to process
28 Self-amortizing, Adjustable Rate Mortgage (ARM) Interest rate and monthly payment are both variable (e.g., adjustable).Example:loan amount = $200,000interest rate = 6.0% initiallytime period = 30 yearsinitial monthly payment: $
29 More about the ARM interest rate Index - market interest rate that is not directly controlled by the lender. It is used to initially set and periodically adjust the interest rate on the loanSpread - the amount that is added to the index to arrive at the the ARM interest rate.
30 More about the ARM interest rate Frequency of rate change - how often the lending institution can change the ARM interest rate.Rate cap - limitations on either the increase or the decrease in the ARM interest rate that can occur at a point in time.Frequency of payment change - how often monthly payments can change (typically the same as frequency of rate change -- if not, there is the possibility of negative amortization)
31 Economic Advantages and Disadvantages of an Adjustable Rate Mortgage? Initial interest rates are typically lowerIf you are buying when mortgage rates are high, but expected to fall in the futureDisadvantages:Greater uncertainty about what future mortgage payments will be
32 Graduated Payment Mortgage (GPM) Interest rate is fixed but the monthly payment rises over time -- supposedly as the household’s income rises.Example:loan amount = $200,000interest rate = 7.0%time period = 30 yearsmonthly payment at first is $800 (rather than $ )After 2 years, payment goes to $1000After another 2 years, payment goes to $1200Then payment is $ for the rest of the loan (24 years)
33 Interest Payments on a Graduated Payment Mortgage Month 1:payment = $800.00interest owed: $200,000(.07/12) = $loan increased by: $ $800 = $366.67Month 2:interest owed: $200,366.67(.07/12) = $loan increased by: $ $800 = $368.81This is an example of negative amortization
34 Economic Advantages and Disadvantages of a Graduated Payment Mortgage? Easier to qualify for lower income householdslower monthly payments early in the mortgageDisadvantages:Loan amount is larger than with a conventional, fixed rate mortgagePayments will be higher in the later stages of the loan (must be confident that income will rise or else this may present a problem)
35 Reverse Equity Mortgages (REM) A reverse mortgage is a loan against your home that you do not have to pay back for as long as you live there.It can be paid to you all at once, as a regular monthly advance, or at times and in amounts that you choose.You pay the money back plus interest when you die, sell your home, or permanently move out of your home.Reverse mortgage loans typically require no repayment for as long as you live in your home.Your house must be paid off (or close to it)You must be over 62
36 REMs Advantages: Disadvantages: Way to access your home equity without having the burden of repaymentCreates incomeDisadvantages:Reduces the value of your estateYour home must be sold after your death to repay the REM, if liquid assets are not available to pay off the REM
37 Interest Only Your payment only covers the interest owed on the loan Then you have a balloon payment after a specified # of years (e.g. 7 or 12) with the principal balance dueOr your loan will amortize over a shorter amount of timeE.g. 40 yr IO – pay IO for 10 years, and then amortized over 30 yrsAdvantages:Lower monthly paymentsMaybe good for rental properties and/or high-equity growth areasDisadvantages:Negative amortization may occurNo gain in equity from principal reductionVery risky
38 Life cycle stage Business cycle stage Risk tolerance Liquidity needs Summary: Economic Costs and Economic Benefits of Various Mortgage Instruments Depend Upon...Life cycle stageBusiness cycle stageRisk toleranceLiquidity needs
39 How do those mortgages stack up? Loan TypeInterest RateMonthly PmtCompared to a 30-yrr pd in 5 yrsEquity created in 5 yrs5/1 Interest Only6.29%$1,572.50($367.32)$94,350$015-yr fixed6.32%$2,583.73$643.91$84,415$70,60930-yr fixed6.72%$1,939.82$97,922$18,46740-yr fixed6.97%$1,857.76($82.06)$103,220$8,24550-yr fixed$1,798.18($141.64)$103,908$3,983
40 How to reduce the amount of interest paid on your mortgage Pay extra principal every monthPay next month’s principal this monthPays off a 30-year mortgage in about 15 years and 8 monthsPay bi-weeklyPay 26 half payments a year, or 13 monthly paymentsCuts about 7 years off of 30 year mortgagePay semi-monthlyPay 24 half payments a yearCuts about 5 years off of 30 year mortgage, without ever paying extra
41 Is this a good deal?Currently 8 years left on a mortgage, paying 7.35% with a payment of $642Refinance to a 15 year mortgage at 5.25% with a payment of $450Answer = NOUnder current payment plan, will pay 642(8)(12) = $61,632 over next 8 yearsUnder refinance, will pay 450(15)(12) = $81,000 over next 15 yearsMore out of pocket, and more opportunity costs
42 Home Buying Process Step 4: Obtaining Financing Determine the amount of down paymentmortgage insuranceQualifying for a mortgagecan be pre-qualified based on income, assets, debts, credit history and length of loanpurpose of “points” (prepaid interest)The home loan application processfixed or adjustable rate mortgagelocking in an interest rate - search Web
43 Qualifying for a Mortgage Amount available for down paymentAmount of incomeAmount of other debtsCredit ratingCurrent mortgage ratesLength of loan desired
44 Home Buying Process Step 5: Closing the Purchase TransactionTitle insurance and search feeAttorney’s and appraisers feesProperty surveyRecording fees; transfer taxesCredit reportTermite inspectionLender’s origination feeTax and insurance reservesPre-paid interestReal estate commissionClosing Costs
45 The Main Elements of Buying a Home LocationDown paymentMortgage applicationPointsClosing costsTIPI (taxes, insurance, principal, interest)Maintenance costs
46 Selling Your Home Preparing your home Determining the asking price AppraiserRealtorFor sale by owner or use a brokerListing with a real estate agent
47 Make Sure Security Deposit Is Returned 1. List damages/defects before moving in unit.2. Maintain unit and promptly notify landlord of any problems.3. Give proper written notice of intent to move.4. List all damages/defects after moving out of unit.5. Use certified mail to request return of security deposit.6. Use small claims court, if necessary.
48 Types of Real Estate Agents Listing agentSelling agentBuyer’s agentDual agent