BUYING A HOUSE 13.3

Affordability Guidelines The 2 most common guidelines for buying a house are:  Don’t pay more than 3 times your annual gross income.  Your maximum monthly housing expenses should be 25% of your gross monthly income.

Example 1 If your annual gross income is $60,000, what do the guidelines tell you about purchase price and monthly expenses for your potential home purchase?

Example 1, cont’d  The purchase price should be no more than 3($60,000) = $180,000.  The monthly expenses should be no more than.25(1/12)(60,000) = $1250

Affordability Guidelines, cont’d Some lenders allow monthly expenses up to 38% of the buyer’s monthly income.  We call the 25% level the low maximum monthly housing expense estimate.  We call the 38% level the high maximum monthly housing expense estimate.

Example 2 Andrew and Barbara each earn $24,000 a year, and they have no debts. What are the low and high estimates of how much they can afford to pay for monthly housing expenses?

Example 2, cont’d The low estimate is 25% of the total monthly income. .25(48,000/12) = $1,000 The high estimate is 38% of the total monthly income. .38(48,000/12) = $1,000

Question: If you make $28,000 per year, can you afford to buy a house for $83,000 with monthly housing expenses of $650?

Question: If you make $28,000 per year, can you afford to buy a house for $83,000 with monthly housing expenses of $650? No, $83,000 is less than 3 times annual income, but $650 is more than 25% of monthly income.

Mortgages Mortgage: a loan guaranteed by real estate. Fixed-Rate Mortgage: rate is set for the entire term. Adjustable-Rate Mortgage (ARM): interest rate that can change.

Mortgages, cont’d Closing: the finalizing of a house purchase Points: fees paid to the lender at the time of the closing.  1 point = 1% of loan  Loan origination fees  Discount charges Closing Costs: points and any other expenses paid at the time of closing

Example 3 You borrow $80,000 for a home at 6.5% interest on a 30-year fixed-rate mortgage. The loan involves a one-point loan origination fee and a one-point discount charge. What are your added costs?

Example 3, cont’d Each fee will cost you 1% of $80,000, or $800. Your total added fees are $1600.

Annual Percentage Rate Annual Percentage Rate (APR): helps borrowers compare the true cost of a loan. APR includes the annual interest rate, points, and any other loan processing or private mortgage insurance fees.

APR, cont’d APR is always greater than or equal to the stated annual interest rate.

Down Payment Down Payment: the amount of cash a buyer pays on a house at closing, minus any points and fees.  Traditionally, it is 20% of the value, but can be lower.  Another guideline for the maximum price you can afford: divide the amount you have for a down payment by the percent of the value of the house that amount represents.

Example 5 If you have $25,000 for a down payment, what is the highest-priced home you can afford if a 20% down payment is required?

Example 5, cont’d The maximum price you can afford to pay is the down payment divided by 20%.  25,000/.20 = $125,000  The most expensive house you can afford is one selling for $125,000.

Question: Suppose you have $5000 for a down payment on a house that is selling for $82,000. If the lender requires a 5% down payment for first-time homebuyers, is this house within your price range? a. Yesb. No

Question: Suppose you have $5000 for a down payment on a house that is selling for $82,000. If the lender requires a 5% down payment for first-time homebuyers, is this house within your price range? a. Yesb. No 5% of 82,000 is $4,100.

Homework Pg. 842  2, 6, 10, 16