Buying a Home Unit Two—Budgeting Financial Literacy Standard 4 Mrs. Morrey

Objective: Understand the process and costs involved with buying a home.  Compare the pros and cons of renting vs. buying  Understand mortgages  Types of mortgages  Qualifying for a mortgage  Costs associated with a mortgage

Comparing RENTING & BUYING  Advantages of RENTING  Ease of mobility  Fewer responsibilities  Lower initial costs  Disadvantages of RENTING  Few financial benefits (cannot deduct interest paid as tax deductions)  Restricted lifestyles  Decorating  Pets  Lifestyle  No opportunity to earn ownership or “equity”

Comparing RENTING & BUYING  Advantages of BUYING  Tax savings  Pride of ownership  Potential economic gain--home “equity”  Disadvantages of BUYING  Financial risks related to having down payment funds, obtaining a mortgage, fluctuating property values and mortgage interest rates  Limited mobility if home is difficult to sell  Higher living costs due to home repair and maintenance

Five Basics Steps of Buying a Home Step One—Determine Home-ownership Needs 0 What type of housing should I buy? 0 Condominium 0 Town Home 0 Traditional Home 0 How much property do I need? 0 How much can I afford to spend? Step Two—Locate and Evaluate a Home 0 Where do I want to live? 0 Proximity to schools, shopping, transportation/freeways 0 Should I build or buy an existing home? 0 New construction costs? 0 Existing home costs?

Five Basics Steps of Buying a Home Step Three—Price of the Property 0 Is the home reasonably priced? 0 What have other homes in the area recently sold for? 0 Can I negotiate the price of the home? Step Four—Obtaining Financing 0 How much of a down payment can I afford to make? 0 What are the current mortgage interest rates? 0 Can I qualify for a mortgage? 0 What type of a mortgage should I get? Step Five—Closing Costs 0 How much money will I need to have to complete all necessary paper work for a mortgage?

Qualifying for a Mortgage 0 Determine the estimated value of the home you would like to purchase. 0 Obtain funds for a down payment from savings or through gifts/loans from family members. 0 Reduce debt or improve your credit record if necessary. 0 Compare fees, services, and mortgage rates from different lenders. 0 Prepare a mortgage application Understanding a Mortgage

Can I get financing to buy a house? 0 Mortgage acceptance is based off of the following: 0 Your income 0 Housing cost should not exceed 30% of your net income 0 Your credit history 0 Credit history determines the amount of risk you pose to the lender—will you pay the loan back, will you not? 0 The amount available for a down payment 0 Down payments are not refundable if you default on your loan 0 Most lenders require a 3% down payment to obtain a mortgage 0 Mortgage interest rates

Types of Mortgages 0 Fixed Rate—Fixed Payments 0 Conventional Loan 0 Interest rates to not fluctuate during the life of the loan— payments stay regular and “fixed”. 0 Adjustable Rate—Variable Payments 0 ARM—Adjustable Rate Mortgage 0 Interest rates fluctuate during the life of the loan—payments can change are are “variable”.

Closing Costs 0 Closing Costs: Fees paid at the closing of a real estate transaction—when a home is purchased and financing is obtained from a lender. 0 Title Search Fee— Title Insurance— Appraisal Fee— Recording Fees— Credit Report— Origination Fee—2% of the loan amount 0 Prepaid Home Owner’s Insurance and Property Taxes 0 Prepaid Loan Interest

Total Cost of a Mortgage o $350,000 Mortgage o 4% Interest Rate o Period/Terms 30 Years o Total Cost per Month= $1,655 o Home Owner’s Insurance and Property Tax NOT included o Total Cost of the Loan=$595,800

Amortization Schedule In the early years of paying off a mortgage, most of the payment goes to paying off the interest with a smaller part reducing the principle, or the amount borrowed. As you near the end of the mortgage, it switches so that you are paying off more of the principle, and less interest.