Home Buying

Why we need banks Many of us will want to buy a home later in life. Do you have the money to buy one? Many of us do NOT have $100,000 - $400,000 laying around to pay for a home.

Why we need banks Banks allow us to borrow money from them What would happen if we didn’t have banks to borrow from? Rental market would be through the roof!!! –(Pun was intended)

Mortgage What is a mortgage? When banks allow us to borrow money from them in order to buy a house, it’s called a mortgage.

Mortgage Definition of Mortgage: The pledging of property to a creditor as security for the payment of a debt. –This means if you don’t pay the loan back, the the lender/bank can have your house.

Mortgage This is called the “title theory.” –Lender holds the title to your house until the debt is completely paid off.

Mortgage BACK UP!!! If you haven’t paid of the whole house yet, did the seller get his/her money yet? Yes!

Mortgage Basic Steps 1) House for sale for $200,000 2) You tell the bank you’ll pay them back 3) Bank gives the seller $200,000 4) Now you owe the bank –You don’t just owe the bank $200,000 –You owe the bank that plus interest and fees

Buying A House To buy a house you first need what? Money –Down payment What is a down payment? Lump sum you pay up front. This reduces the amount you have to finance/borrow.

Down Payment Usually you MUST have at least 3 – 5 % of the purchase price as your down payment. Is there a limit on how much you CAN have as your down payment? NO –You can have 10%, 50%, 90% or ALL!

Down Payment Problems 1) $250,000 house with a 5% down payment –How much is your down payment? $12,500 How much are you really borrowing? $237,500

Problems 2) $475,000 House – 5% down – Borrow? 3) $199,000 House – 10% down – Borrow? 4) $1,200,000 House – 4% down – Borrow? 5) $250,000 House – 20% down – Borrow?

Excel???

The Mortgage Payment PITI!!! PRINCIPLE: This is the total amount you are borrowing from the lender/bank, AFTER you have made your down payment. –It is the amount you are financing.

The Mortgage Payment INTEREST: This is the money the lender charges you for the loan. –It is a percentage % of the total amount of money –It is where the majority of you money goes

The Mortgage Payment TAXES: When you buy a house you must pay for property taxes. INSURANCE: Several types of insurance will be taken into consideration. –Hazard = covers fire, storms, theft etc…

The Mortgage Payment Insurance continued: Another insurance you might have to pay for is PRIVATE MORTGAGE INSURANCE, or PMI If you DO NOT own at least 20% of your house, you will have to pay this insurance.

Private Mortgage Insurance Example: House costs $100,000 Your down payment was $10,000 or 10% You have to pay insurance for PMI until you pay off another $10,000 on the house.

Private Mortgage Insurance Why is there such a thing as PMI? It’s a safety net for the bank. PMI helps you get into the house you want by allowing you to pay less than the typical 20% down payment.

PMI PMI is insurance that pays the mortgage in the event that you can’t. Banks figured out there is a correlation between large down payments and small down payments. Those with smaller tend to default on their loan more often.

Other Mortgages 30 year 20 year 15 year Adjustable-rate Mortgages

Other Mortgages What’s the difference between the 30, 20, and 15 besides their length?

30 year 1) With a 30, you get the BIGGEST tax advantage by having the greatest interest deduction. 2) You also make lower payments with the longer term

20 and 15 year 1) Usually get a lower interest rate with 20 year –T–This isn’t true for all banks so shop around 2) You’ll have larger monthly payments than 30 3) You will have more equity faster as you are paying more

Adjusted Rate Mortgage An Adjustable-rate mortgage (ARM) has an interest rate that changes based on changing market rates and economic trends.

Adjustable-Rate Mortgage PROS Offer initial interest rate 2 or 3 % less than fixed-rate mortgages CONS They don’t offer the stability or assurance of a known mortgage payment in years to come.

Adjustable-Rate Mortgage You can choose a 6-month arm, 1 year arm, 2 year arm, or some other term Example: 5/1 ARM –Initial interest stays the same for the first 5 years –Changes every year starting with the 6th

Adjustable-Rate Mortgage Example 2: 3/3 ARM –Initial interest would be the same for the first 3 years –Would adjust every 3 years beginning with the 4th

Adjustable-Rate Mortgage Why would anyone want an Adjustable- Rate Mortgage? Moving soon…

Qualifying for a Loan Most banks/lenders require that you have a debt-to-income ratio of 28/36 What does this mean?

28/36? 28 means that no more than 28% of your total monthly income (before taxes) can go toward housing 36 means that no more than 36% of your total monthly income can go toward you total monthly debt