Chapter 9 The Housing Decision: Factors and Finances

Chapter 9 Learning Objectives Evaluate available housing alternatives Analyze the costs and benefits associated with renting Implement the home-buying process Calculate the costs associated with purchasing a home Develop a strategy for selling a home

Housing Alternatives Objective 1: Evaluate available housing alternatives Your lifestyle and your choice of housing How you spend your time and money, affects your housing choice. Personal preferences are modified by financial factors. Traditional financial guidelines suggest you spend no more than 25-33% of take-home pay on housing, or no more than 2 1/2 times your annual income.

Housing Alternatives (continued) Opportunity costs of housing choices Interest earnings lost on money used for a down payment or the interest on a security deposit for an apartment Time and cost of commuting to live in an area that offers less costly housing or more space Renters lose tax advantages and equity growth Time and money you spend to repair and improve a lower-priced home Time and effort when you have a home built to your personal specifications

Renting your Residence Objective 2: Analyze the costs and benefits associated with renting The search Select an area and rental cost for your needs Compare costs and facilities between units Talk to current and past residents Advantages of renting Easier to move Fewer maintenance and repair responsibilities Lower initial costs

Renting your Residence (continued) Disadvantages of renting No tax benefits Restrictions regarding pets and other activities Legal concerns of a lease Costs including a security deposit, utilities and renter’s insurance

Renting your Residence (continued) LEGAL DETAILS OF A LEASE Description and address of property Name and address of the owner/landlord (lessor) Name of tenant (lessee) Effective date and length of the lease Amount of security deposit Amount and due date of rent

Renting your Residence (continued) Location where rent is due Date and amount for late rent payments List of included utilities, appliances Restrictions on certain activities The right to sublet the unit Conditions where landlord may enter rental unit

Home Buying Process Objective 3: Implement the home-buying process Step 1: DETERMINE THE HOMEOWNERSHIP NEEDS Benefits of Home Ownership Pride of ownership “American dream” Financial benefits Deduct property taxes and mortgage interest Potential increase in value of your home Building equity in your home Lifestyle flexibility - express your individuality

Home Buying Process (continued) Drawbacks of Homeownership Financial uncertainty Obtaining money for the down payment Obtaining mortgage financing Home values could drop Limited mobility Can take time to sell your home Higher living costs Home improvements Rising real estate taxes

Home Buying Process (continued) Assess Types of Housing Available Single-family dwelling Multi-unit dwelling Duplex, townhomes Condominium You own your unit in a building of units It is not a type of building structure, but rather a form of homeownership Cooperative housing Non-profit organization - members own shares and rent a unit in a building with multiple units

Home Buying Process (continued) Manufactured homes Fully or partially assembled in a factory, and then moved to the housing site Prefabricated type has components built in the factory and assembled at the site Mass production under factory conditions keeps costs lower than site built homes Mobile homes A type of manufactured home, often <1,000 sq. ft. Offer same features as a conventional house Safety is debated and they tend to depreciate

Home Buying Process (continued) Building a home 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?

Home Buying Process (continued) What delays will be considered legitimate? Is the contractor licensed and insured? Are there any complaints about this contractor? Contract should have a time schedule, cost estimates, description of work, and a payment schedule.

Home Buying Process (continued) Determine how much you can afford Price and down payment – income, current living expenses, mortgage rate, tax, insurance Size and quality – get what you can afford

Home Buying Process (continued) Step 2: FIND AND EVALUATE A PROPERTY TO PURCHASE Selecting a Location Be aware of zoning laws Assess the school system if you have children. Using a real estate agent They present your offer, negotiate the price, assist you in obtaining financing, and represent you at the closing Conduct a home inspection or hire an inspector Mortgage company will want an appraisal

Home Buying Process (continued) Step 3: PRICING THE PROPERTY Determine the Home Price Price is affected by whether it is a seller’s or a buyer’s market. Negotiating the Purchase Price Counteroffers are common Earnest money Contingency clauses, such as... Buyer must be able to obtain financing Sale contingent on the sale of the buyer’s current home

The Finances of Home Buying Objective 4: Calculate the costs associated with purchasing a home Step 4: OBTAIN FINANCING Determine the amount of the down payment Private Mortgage insurance (PMI) if less than 20% down Mortgage: a long term loan on a specific piece of property such as a home or other real estate.

The Finances of Home Buying (continued) Qualifying for a mortgage includes your income, debts, credit history, down payment amount, length of the loan, and current mortgage rates The application process -- meeting between lender and borrower -- lender verifies information of borrower -- make the decision

The Finances of Home Buying (continued) FIXED-RATE, FIXED-PAYMENT MORTGAGES Conventional Fixed rate, fixed payment, amortized 5%, 10% or 20% down 15, 20 or 30 years of fixed payments

The Finances of Home Buying (continued) Government financing programs Veterans Administration Federal Housing Authority Lower down payment than conventional Balloon Fixed monthly payments plus one large payment, usually after 3, 5 or 7 years

The Finances of Home Buying (continued) ADJUSTABLE-RATE, VARIABLE-PAYMENT MORTGAGES Adjustable rate mortgages During the life of the loan the interest rate varies with the prime rate, but has a rate cap Growing-equity Increases in payments to allow the loan to be paid off more quickly

The Finances of Home Buying (continued) OTHER FINANCING METHODS Buy-Downs Interest subsidy from a home builder or a real estate developer that reduces the mortgage payments for the first few years Second mortgage Home is collateral and interest may be tax deductible. Home equity loans are an example Reverse mortgages Provides elderly with tax-free income based on the home equity Refinance if interest rate drops at 2-3%

The Finances of Home Buying (continued) Step 5: CLOSE THE PURCHASE TRANSACTION Documents signed; meeting of buyer, seller, and lender Closing costs include... Title insurance and search fee Attorney’s and appraisers fees Property survey; Pest inspection Deed recording fees; Transfer taxes Credit report; Lender’s origination fee Escrow account for tax and insurance reserve Pre-paid interest; Real estate commission

Selling Your Home Objective 5: Develop a strategy for selling Preparing your home Repair, repaint, and clean When showing home turn on lights and open drapes. Bake bread or make coffee for a welcoming smell Determining the selling price Appraiser estimates the current value Real estate agent markets your home If “for sale by owner,” use a lawyer or Title Company Listing with a real estate agent for services

Comparison of 15 and 30 Year Mortgages $100,000 6% loan for 30 years: Payment of $600 per month; 360 months X $600 = $216,000 $100,000 6% loan for 15 years: Payment of $843 per month: 180 months X $843 = $151,740 Savings of $64,260 with shorter loan

Comparison of Different Rates $100,000 loan for 30 years at 6%; payment of $600 per month X 360 months = $216,000 $100,000 loan for 30 years at 7%; payment of $665 per month X 360 months = $239,400 Savings of $23,400 by lowering the rate by 1%.

Online Activity Go to www.bankrate.com to determine the best mortgage rates in your area. Would you prefer a fixed-rate or adjustable rate mortgage? Why?