1. Classroom Slides: The Home Decision I Updated 2017-02-09
Personal Finance: Another Perspective
Classroom Slides: The Home Decision I Updated

2. Objectives A. Understand the principles of home buying and ownership
B. Understand options in the housing decision: the advantages and disadvantages of renting, buying, building, and renovating
C. Understand the home buying process
D. Know how to compare different mortgage loans (different types of loans with different fees and points)
E. Understand my recommendations in the housing decision
F. Understand how to develop a home strategy

3. Your Personal Financial Plan (optional)
Section XVIII: Your Home Decision Plan
What is your current housing strategy? (use template TT01-15 Education, Mission, Home Auto Template)
Where do you currently live?
What expenses and fees are you paying, including rent, mortgage, maintenance, utilities, gas, repair and insurance?
Action Plan:
What is your home strategy?
This may include: how often you will move, down payment strategy, negotiation strategies, strategies for warranties, how long you will stay in the house, etc.

4. Principles of Home Buying and Ownership
Is a house important?
It’s likely the largest single purchase you will ever make
What does it provide:
A good location for raising children, teaching them to work, good neighbors, etc.
A convenient location to minimize travel time
A place to reflect your personal tastes
What are the risks?

5. Principles of Home Ownership (continued)
Risks in home ownership:
You buy a house you can’t afford
Your other financial goals are not attained
You buy a fixer-upper without the necessary skills
It stays a fixer upper
You buy the wrong type of house for your lifestyle
You must pay others to keep it up
You buy a house without the necessary inspections
You pay dearly for your mistakes
You are too far in debt and you lose your job
You lose the house and your self-respect

6. Principles of Home Ownership (continued)
What are the Principles of Home Ownership?
1. Understand yourself (your VMVS, goals, and budget) and your current and future housing needs. Determine your needs. Make sure it is the right type of house and right time for your lifestyle and budget
2. Be wise in your spending. Spend wisely and carefully. Use the recommended 25-40% of take-home for all housing expenses. Get the necessary inspections (even if its new). Finance it wisely and pay it off before retirement or sooner
3. Understand the process (of finding, buying, and funding a home). Know how to get the best deal on your mortgage, which is the lowest Effective Interest Rate (EIR) calculation that includes all costs, fees, and estimated time in the home
4. Be a good steward (over all your blessings). Don’t just live in it—keep it up. Plan 1-2% of the cost per year for upkeep and keep it clean and attractive

7. Principles of Home Ownership (continued)
President James E. Faust stated:
Over the years the wise counsel of our leaders has been to avoid debt except for the purchase of a home or to pay for an education. I have not heard any of the prophets change this counsel (“Doing the Best Things in the Worst Times,” Ensign, August 1984, 41).

8. Principles of Home Ownership (continued)
President Gordon B. Hinckley commented:
We have been counseled again and again concerning self-reliance, concerning debt, concerning thrift. When I was a young man, my father counseled me to build a modest home, sufficient for the needs of my family, and make it beautiful and attractive and pleasant and secure. He counseled me to pay off the mortgage as quickly as I could so that, come what may, there would be a roof over the heads of my wife and children. I was reared on that kind of doctrine. (Gordon B. Hinckley, “The Times in Which We Live,” Ensign, Nov. 2001, 72.)

9. Principles of Home Ownership (continued)
He further counseled:
I recognize that it may be necessary to borrow to get a home, of course. But let us buy a home that we can afford and thus ease the payments which will constantly hang over our heads without mercy or respite for as long as 30 years. … I urge you to be modest in your expenditures; discipline yourselves in your purchases to avoid debt to the extent possible. Pay off debt as quickly as you can. … That’s all I have to say about it, but I wish to say it with all the emphasis of which I am capable” (Gordon B. Hinckley, “To the Boys and to the Men,” Ensign, Nov. 1998, 51).

10. Principles of Home Ownership (continued)
Finally, President J. Reuben Clark said:
Let every head of every household aim to own his own home, free from mortgage. Let every man who has a garden spot, garden it; every man who owns a farm, farm it (Conference Report, April 1937, p. 26).
The challenge then becomes one to determine what is a modest home.
In the Handbook for Families, it recommends:
Avoid spending more than 25 to 40 percent of your take-home pay for the total house payment, including insurance, taxes, and maintenance costs (“Preparing for Emergencies,” Ensign, Dec. 1990, 59).

11. Questions
Do you understand how a house fits into your financial plan and the principles of home ownership?

12. Understand Your Options in the Housing Decision
Renting
Advantages
High mobility – can move with minimal costs
No repairs and maintenance
Minimal financial commitment
Lower initial costs
Easier budgeting

13. Renting (continued) Disadvantages
Lack of permanence & pride of ownership
Rents may increase unexpectedly
Possible restrictions
No tax benefits
No potential for property appreciation
No equity buildup

14. Buying Advantages Permanence & pride of ownership
You get what you see (usually)
Tax benefits
Generally a fixed monthly mortgage payment
Leverage
Can build equity and can borrow against it
Minimal time commitment relative to building
Mature landscaping & neighborhood
Few surprises in terms of neighborhood, schools, shopping, etc.
Can negotiate favorable price and terms

15. Buying (continued) Disadvantages
Low mobility—Low liquidity so difficult to sell if needed (must make 6-7% just to break even after realtor fees)
Significant upfront costs
Higher living expenses
Large financial commitment
Possible decrease in value
Possible mortgage default

16. Building Advantages Can build exactly what you want
Sometimes cheaper to build than buy (depending upon market conditions)
New appliances and housing systems
Can pick the location

17. Building (continued) Disadvantages
Interpreting building plans (size of rooms, etc.) can cause difficulty if you are unused to it
Often over budget and delays
Unanticipated additional expense for yard and fencing
Combined construction loan interest and rental expense
High monitoring costs!!!
High Stress!!
High Risk!!

18. Renovating Advantages May get what you want faster than building
Can see what you want generally
May be cheaper to buy and renovate than build, particularly if you can do much of the work yourself (sweat equity)
There may not be available lots in a desired area

19. Renovating (continued)
Disadvantages
May be more expensive than to build it new
Often over budget and delays. The rule of thumb is to double you budget and then double that again
Unanticipated additional expenses for yard and fencing depending on what was renovated
Combined construction loan interest and rental expense
May have other major problems not noted before
High monitoring costs!!! It will take you significant amounts of time to make decisions
High Stress and High Risk!!

20. Questions
Any questions on your options in the housing decision?

21. Understand the Home Buying Process
Purchasing a house is a four-step process:
Step 1. Understand your limits
Know yourself, what you can afford and what you need now and in the future
Step 2. Find your home
Know what you want, and go and find it
Step 3. Find, fund and service your loan
Know what lenders need and want, so you can be ready to get the best loan for you, and
Step 4. Enjoy home ownership
Realize you are a steward over all God has blessed you with. Take good care of your home

22. Step 1. Understand your Limits
Understand yourself and your limits relates to 8 areas:
a. Know your budget and how much you can afford
b. Know your credit score
c. Calculate your front and back-end bank ratios
d. Calculate your bank ratios for LDS
e. Choose your preferred loan type and term
f. Know what you need for a down payment and upfront costs
g. Have two years of copies of taxes
h. Get pre-approved

23. 1.a. Know Your Budget (What Can You Afford?)
You must develop and live on a Budget
President Spencer W. Kimball said: “Every family should have a budget” (in Marvin J. Ashton, “One for the Money”, Intellectual Reserve, 1992, inside cover).
Know your lifestyle
Make sure your budget is representative of your lifestyle
Take into account likely lifestyle changes, i.e., taxes, babies, new job, new city

24. Budgeting: The Old Way Personal Goals Income Tithing Expenses
Available for Savings
Personal Goals

25. Budgeting: The Better Way
Income
Pay the
Lord
Pay
Yourself
Expenses
Other
Savings
Personal Goals

26. 1b. Know Your Credit Score
Know your Credit History
Review your credit history every year from all three agencies
Three major credit reporting agencies
Experian ( Equifax ( and Transunion (
You can get a free copy of your credit report from each agency each year by going to:
Fill out the info and you can get a copy online
Make sure it is correct

27. Your Credit Score (continued)
Get your Credit Score
After checking your credit report for errors, order a copy of your credit score. I recommend a FICO score. You can order it directly from FICO at for $19.95 (less with coupons)
What determines your Credit Score or lending risk?
Payment History: What is your payment record?
Amounts Owed as % of Limit: How much do you owe as a percent of your available limit?
Length of Credit: How long have you had credit?
New Credit: Are you taking on more debt?
Types of Credit Use: Is it a healthy mix?

28. 1c. Know your Affordability Ratios: Front-end and Back-end
Know the rules for lenders—your affordability ratios
Take into account your savings and tithing when you calculate these ratios
Ratio 1: Housing Expenses or Front-end Ratio
This ratio calculates what percent of an your income is used to make mortgage payments.
Housing expenses should be less than 28% of your monthly gross income. The formula is:
Monthly PITI* <28%
Monthly Gross Income
PITI = mortgage principle, mortgage interest, property taxes, and property insurance

29. Affordability Ratios (continued)
Ratio 2: Debt Obligations or Back-end Ratio
This ratio calculates what percent of your income is used for housing expenses plus debt obligations.
It should not exceed 36% of your monthly gross income. The formula is:
Monthly PITI* and other debt obligations < 36%
Monthly Gross Income
Debt obligations include mortgage payments, credit card, student loan, car, and other loan payments
*PITI = Principal, interest, property taxes, and property insurance

30. 1d. Calculate Your LDS Ratios (if LDS)
As members of the Church, we have other important obligations that we also pay, i.e., tithing and paying ourselves, i.e., saving
As such, should have smaller houses (at least less expensive), because we pay the Lord first and ourselves second.
For a spreadsheet that takes into account the fact that we pay the Lord first and ourselves second within this front-end and back-end ratio framework, see:
Teaching Tool 11: Maximum Monthly Mortgage Payments for LDS Spreadsheet (from the website)

31. 1e. Choose your Preferred Loan Type and Term
The best type of loan takes into account your:
Goals, budget, income stream, down payment, and view on risk
There are a number of different types of mortgage loans available. These include:
Fixed Rate (FRMs) - RECOMMENDED
Variable or Adjustable Rate (ARMs)
Interest Only Options: Variable or Fixed Interest
There are also special loans (if you can get them)
FHA (best for students) or VA (if military)

32. Recommended Loan Term (continued)
Choose your loan term
Generally, I recommend a 30 year fixed rate loan
However, I recommend you make additional payments on principal to pay off the loan sooner if possible after you have 3-6 months income in your emergency fund

33. 1f. Determine Down Payment and Upfront Costs
Know what you will need for a down payment and upfront costs, and begin saving for it
Down payments:
You will need a larger down payment to get into your home now versus two years ago
Begin saving for that now
Conventional loans – 20 % recommended, but you can get in with 5%
FHA loans – 3.5%
VA loans – 0% down payment required
Once you realize how hard it is to save, it will help you not to spend too much

34. Up-front Costs (continued)
Upfront costs include closing costs and points
Down payment (3-20 percent of the loan amount)
Closing costs including points (3-7 percent)
Closing costs include:
Title insurance
Attorney’s fee
Property survey
Recording fees
Lender’s origination fee
Appraisal
Credit report
Termite inspection
Prepaids (property insurance & taxes, mortgage interest)
Points

35. Up-front Costs (continued)
Know your impound/escrow/reserve accounts
These accounts are that portion of a the monthly payments held by the lender or servicer to pay for:
Taxes
Hazard insurance
Mortgage insurance
Lease payments, and
Other items as they become due
These are for payments for items above which are over and above your monthly mortgage payments of principle and interest. Plan for them!
These may or may not be required

36. Up-front Costs (continued)
What are points?
One percent or one hundred basis points of the loan
This money is pre-paid interest, money paid to the mortgage broker (not the lender). It is deducted from the loan proceeds (you still must pay it back), and is essentially another fee for helping you arrange the loan (minimize points)
Why do lenders charge points?
To recover costs associated with lending, to increase their profit, and provide for negotiating flexibility
Do I have to pay points?
Origination points (likely), buy-down points (no)

37. 1g. Have Copies of Two Years of Tax Returns
Lenders want confirmation that you can pay back the loan. As such, they generally want to see two years of tax records
Have copies of your last two years of tax records, even though you were a student
If you have a confirmed job letter with salary, that may also be helpful as well

38. 1h. Get Pre-approved—Not Pre-qualified
Get pre-approved for your loan by a number of lenders (with mortgage loans, you can have multiple loans requested within a 90 period and its counted as one loan request)
Pre-approved means that lenders have pulled your credit score, looked at your tax records and approved you for a specific amount of a loan
You can borrow up to this pre-approved amount without a problem
I recommend you check with multiple lenders
Remember however that you do not need to borrow that amount
I recommend you borrow less than that amount

39. Step 2. Find Your Home
There is a five step process to finding your home
a. Determine what is important to you
b. Develop a plan for finding a home
c. Once you are serious about a home, get a home inspection (you can make offers contingent on the home inspection results)
d. Determine any CCRs/fees for potential homes
e. Negotiate the home price

40. 2a. Determine What is Important To You
Determine what is important to you in a home and what you will and will not do without!
This may include:
Location
Home style and layout
Number of bedrooms, garages, fireplaces, etc.
Future plans, i.e., kids, work, schools, etc.
Realize that you will probably move within five to seven years (if you are like the average US family)

41. 2b. Develop a Plan and Build Your Team
Establish a Plan for finding your home
Once you know your limits, what you can afford, where you want to be, and what you want (your Plan):
Start driving around
Start looking in earnest
But keep to your Plan
Use Zillow.com or other resources to find reference home values in areas you may be interested in

42. Develop a Plan (continued)
Be Patient and take your time
Estimate the time you will be in the house
If it is less than 3-5 years, look into renting
You must make 6-7% on your house price just to break even when you sell it (realtor fees are 6-7%)
You will be in the house for years—don’t make the decision to quickly
It will likely be your largest financial commitment you will make for a long time
Often renting a luxury apartment for 6 months will give you time to search thoroughly

43. Develop a Plan (continued)
Do your homework and footwork
Get a good realtor--one who knows the ins and outs of the areas you are interested in looking at
While realtors are working for sellers, it may be wise to have a buyer’s broker that works for you
Take matters into your own hands
Be proactive—talk with friends and others
Use the internet and other tools that may help
Stay true to your Plan and have patience
Be liquid and ready to react quickly
Be creative if necessary

44. Develop a Plan (continued)
Use a team approach—get lots of good help
Get others to help
Buyers broker
Appraiser
Attorney
Don’t become emotionally attached to a potential house
Be willing to walk away
That is often your best negotiating tactic

45. 2c. Have a Home Inspection
Once you have found the home you like, can afford, and is where you want to live, have a home inspection
This may alert you to potential problems with the home
Many of these problems should be fixed by the seller prior to purchase
Don’t buy someone’s problems

46. 2d. Determine any CCRs, Fees and Other Costs
Look to potential homes and potential costs
Look through all Covenants, Conditions and Restrictions (CCRs) for a potential home
These can be quite restrictive as to what you can and cannot do with your home
If you cannot live with the CCRs, don’t buy there
There also may be lane or other monthly fees
For condos or town homes, determine the amount of the transfer/setup fees
Understand any other homeowners/association fees for potential homes and what they include

47. Fees and Other Costs (continued)
Ask to see records of utility costs and other monthly expenses
Compare these to your current costs
Remember that these costs will vary depending on the season
Make sure these costs are consistent with your budget

48. 2e. Negotiate the Price of the Home
Use the best available resources to negotiate a price for the home
Use wisdom and judgment in determining what you can and should pay for the home
Realize your best negotiating technique is walking away
This is a negotiation process—do not be afraid to haggle
Realize that closing costs, things that need to be fixed from your home inspection report, and other things can all be part of the negotiated price
Most things are negotiable

49. Step 3. Find, Fund and Service the Loan
Find, fund and service the loan—this is the final part of the process. It is a five-step process
a. Understand the lending process
b. Choose multiple lenders to compete for your business and get Good Faith Estimates from each of your lenders
c. Take the various loan offers from the lenders to calculate your lowest Effective Interest Rate
d. Negotiate with your best lender the best rate and get the loan funded
e. Try to pay off the loan early to reduce interest costs

50. 3a. Understand the Lending Process
1. You’ve found a home that suites your lifestyle and budget, using resources such as a realtor
8. Lender sends out the documents to escrow for signing
7. Broker, Title, Escrow, and Lender work to fill all conditions
6. Lender takes the loan package, structures the loan and conditions for any additional information they need to close the deal.
9. Lender audits the documents, verifies all conditions are filled, and funds the loan!
2. The realtor refers you to a mortgage broker
3. The broker pulls credit, determines your needs and tries to find lenders among the competition to meet those needs
4. Each lender has unique programs. Lender and broker negotiate points, rates, prepayment penalties, fees, and other features of the loan
5. Broker recommends the best loan to the consumer, reviewing the features agreed upon. You make the final decision after comparing various offers

51. The Lending Process (continued)
The Underwriting Process
From on 7Oct08

52. 3b. Choose Multiple Lenders and get GFEs
You will get a lower interest rate when lenders compete for your business
Work with multiple lenders
Talk with friends and others who have gone through the process for their favorite brokers
Hold brokers accountable for what they say
Get Good Faith Estimates (GFE) from each lender (not just a Summary)
These are the costs you will likely pay
Compare GFEs from each lender

53. 3c. Calculate your Effective Interest Rate
Estimate how long you will be in the home
This is important as it helps determine over what period you can allocate points and other costs
Calculate your effective interest rate for each loan
Your effective interest rate is the interest rate you will pay after all your points, costs, and fees are taken into account
Get your best rate
Your lowest effective interest rate is the best indicator that you got a good rate on your loan

54. 3d. Negotiate with Your Favorite Lender
The key now is to find the lowest rate
Once you have multiple offers from multiple lenders, then you have bargaining power
Determine your lowest rate, which includes points, fees, and the loan APR after evaluating each of the offers from the various lenders
You can take that offer if you want
Or, you can that offer to your favorite lender
Then ask them to beat it by 1/8 to 1/4 percent and you will go with them

55. 3e. Pay off the loan early and save
The key now is to service the loan consistently
Make sure payments are on time
Set up procedures to ensure you do not miss payments
Strive to pay off the loan early
Set a goal to pay it off after a certain number of years
This increases the money you can save for your personal and family goals
This brings freedom from worry when you own the home

56. Step 4. Enjoy Home Ownership
Maintain it well
Take care of your purchase and it will take care of you
Generally it will take roughly 1-2% of the home’s value annually for upkeep.
Put this amount into your annual budget
A professional cleaning a few times a year can help retain a home’s value
Now keep the value of your home up!

57. D. How to Compare Different Mortgage Loans
The cost of a mortgage loan is based on points, up-front costs and expenses, escrow costs, and principle and interest costs
It is critical that you understand each of these areas
Understand these costs, and you can calculate a comparable rate on loans with different points, fee structures and up-front fees
It will save you lots of money overall

58. Comparing Different Loans (continued)
What are points?
One percent or one hundred basis points of the loan
Why do lenders charge points?
To recover costs associated with lending.
To increase the effective interest rate
To provide for negotiating flexibility (in a market where interest rates fluctuate), or to adjust for differences in risk between loans
Note that origination points are not tax deductible (line 801). Discount points, however, are all tax deductible in the year of the purchase

59. Comparing Different Loans (continued)
What is the relationship between borrowing costs and mortgage choice?
Lenders offer many choices on interest rates and points
Your challenge is to minimize your effective cost of borrowing and get the least expensive loan
How do you differentiate between different loans?
Remember, the broker retains the amount attributed to points when distributing the loan proceeds; however, the monthly payment will be based on the entire loan amount

60. Comparing Different Loans (continued)
What is a good faith estimate (GFE)?
It is a document provided by the mortgage lender or broker which includes an itemized list of all up-front fees and costs associated with your loan.
Fees include loan fees, fees paid in advance, reserves (escrow), title charges, government charges, and additional charges.
Why is a GFE important?
It is used to compare different offers or quotes from different lenders and brokers
What does a GFE look like?

61. A Good Faith Estimate – First Half

62. A Good Faith Estimate – Second Half

63. Comparing Different Loans (continued)
What is the difference between the Annual Percentage Rate (APR) and the Effective Interest Rate (EIR)? (Note: this is different from the effective annual interest rate!)
The APR is a rate that is generated from a precise calculation specified in Regulation Z
The EIR is the precise interest rate the borrower is paying after all fees and costs are taken into account. We assume all costs come out of the loan or are paid back by the loan
If no prepayment or other costs, the EIR = APR
It is important as it will allow you to quickly compare rates from various lenders

64. Comparing Different Loans (continued)
This is the effective rate to the borrower after all costs and fees are taken into account
The broker retains the amount from points while the payment is based on the entire loan amount.
Note that the borrower pays many additional fees and costs (out-of-pocket) over and above costs that are included in the loan documents
How do you account for these additional out-of-pocket costs in your calculations?

65. Comparing Different Loans (continued)
The Effective Interest Rate calculation takes into account all costs, both out-of-pocket and loan costs
How is it calculated?
1. Calculate the payments on the total amount you will be repaying, i.e. the amount borrowed = PMT
2. Calculate the amount of money you actually received, i.e., the total loan less all costs = - PV
3. Set PMT, PV = - what you actually received, N = years, and solve for your interest rate. This is the rate you are actually getting.
It takes into account all your fees, including explicit and out-of-pocket costs and fees
Where do you find your costs and fees?

66. Comparing Different Loans (continued)
What is prepayment?
Prepayment is when you repay the loan early
How do you calculate your effective interest rate when you plan to prepay the loan before maturity?
The process is similar, except that you must calculate your balance remaining as of the prepayment date, i.e. the balloon payment
To get your balance remaining or balloon amount, take your payment as PMT, N as the number of years remaining after your prepayment, and your interest rate as I, and solve for your Present Value. The PV is the present value of all the payments you will eliminate

67. Comparing Different Loans (continued)
With expected prepayment:
1. Calculate your payment = PMT
2. Calculate your amount received = -PV
3. Calculate your balance remaining after you prepay (the balloon amount). This balance remaining will be your FV
4. Set your number of years before prepayment as your = N, your balance remaining as your FV, amount received as your –PV, and solve for I = your effective interest rate

68. Questions
Any questions on how to compare loans from different lenders with different APRs, points, and fees?

69. D. Developing a Housing Strategy
Before you begin looking for a home
Spend a significant amount of time trying to understand your needs and requirements
What is important to you, spouse, and children?
How important are schools, shopping, work?
How long are you willing to commute each day?
Generally, this will require you to rent for a period of time. Use this time wisely.
Try to rent in your preferred area first
Check into rental houses. They can be a good intermediary between renting and buying.

70. Housing Strategy (continued)
When planning to buy:
Calculate how much you can afford to spend
Don’t spend so much on this goal that you are crimped in your other personal goals
Calculate into your spending the fact that you will be paying tithes and offerings and saving % each month for savings
Don’t buy a “fixer-upper” unless you have the time and the inclination to do it
Remember your first priority is to do well at work
Having a beautiful house may not advance your career (although your spouse may love it)

71. Housing Strategy (continued)
Once you have decided on a home:
Don’t scrimp on home inspections—they are good investments
Don’t let the current owners discourage you from doing inspections
Beware of the hidden costs of home ownership.
Keep room in your budget for these
Get pre-approved for your loan
Don’t spend your maximum amount.
Keep good records of improvements
These can increase the cost basis of your home and reduce taxes when you sell

72. Housing Strategy (continued)
If you decide to build:
The key decision is your contractor. He will either make it extremely easy or difficult for you
Choose wisely. Interview his past clients, and check their financial condition and licenses
Ensure permit repairs have final inspections
Know what you want and put it on the plans
Changes are four times as expensive after plans are completed.
Work with the contractor (but a penalty clause for completion may be useful).
Keep back 5% until all problems are fixed

73. Housing Strategy (continued)
If you decide to renovate:
Make sure you have your vision of the house, and make sure that vision is on paper (plans)
For every change, ensure a change order is drawn
Keep a running tally of all past, current, and estimated costs to complete the project. Review this weekly with the contractor
You might even put in a clause that if the contractor goes over the planned amount, he makes no new money on the excess over the planned amount
Be aware of the large time commitment necessary to renovate

74. Housing Strategy (continued)
Developing a housing strategy is part of planning and stewardship
If you plan how you will pursue the home decision, you can make better decisions that will benefit you throughout your life.
What is the maximum amount you will borrow?
How soon will you have your house paid off?
At what age do you want it to be paid off?
Strategies can be applied to the four key areas:
Understanding your limits, Finding your home,
Finding, negotiating, and funding the loan, and Enjoying home ownership

75. Housing Strategy (continued)
A. Understand your limits
I will buy a home consistent with the front- and back-end ratios and keep housing expenses (PITI and utilities costs) at less than __% (40% maximum). I will not buy too big a house
I will make sure my home fits my budget, not my budget fits my home
I will save 5-20% for my first home down payment and pay 20% down on each future home
I won’t buy a home on two incomes when I know you will go to one income in the future

76. Housing Strategy (continued)
B. Find your home
I will do my homework before buying/renting to ensure that I am in the best place for myself and my family
I will do my homework to ensure that the schools are the best for my children and the neighborhood save for my spouse
I will understand my “must haves” for my home and the “would like to haves” as well
I will not buy the largest home in a neighborhood as I know that the highest priced home generally does not sell for more than 10% above the median for a neighborhood

77. Housing Strategy (continued)
C. Find, fund and service the loan
I will get a minimum of three realtors to bid for my business to ensure that I get the best loan for myself and family
I will get the lowest EIR for the loans provided given my expectations of how long I will be in the home
I will make additional payments each month to pay off the loan in __ Years (i.e., 15 years)

78. Housing Strategy (continued)
D. Enjoy home ownership
I will ensure that I keep up the value of the home by budgeting ___% for home maintenance and repair (recommended 1-2% of the value of the home)
I will keep up the appearance of the home by taking care of yard, interior and structure as a good steward
I will have my house paid off in full by age ___.

79. Housing Strategy (continued)
Housing strategy example
Vision: Our home will be a modest and comfortable place in a good neighborhood to live and raise our family. We will live within budget guidelines, will pay off the house by age 50, and will take care of the home so it appreciates in value.
Goal: We will find a modest home in a good neighborhood, will take care of it, pay it off, and enjoy it with our family.
Plans: We will take good care of the home as wise stewards, budgeting 2% annually for upkeep, 2 hours each week on yardwork, and taking care of all needed systems and yard.
Constraints: We will teach our children to work through doing all our own yardwork. Children will work 2 hours each week on home repair and maintenance.
Communication: Spouse and family will help with the process of selecting, maintaining, and cleaning the house.

80. Review
A. Do you understand the principles of home buying and ownership?
B. Do you understand your options in the housing decision: the advantages and disadvantages of renting, buying, building, and renovating?
C. Do you understand the home buying process?
D. Do you know how to compare different mortgage loans (different types of loans with different fees and points)?
E. Do you understand how to develop a housing strategy?

81. Case Study #1
Data
Bill and Brenda make $60,000 per year. They decided that they have outgrown their small house, and found the house they want for $225,000. They agree to a 30-year fixed rate loan at 6.5%, and estimate property taxes and insurance costs will be $200 per month. They have a car loan of $270 per month and student loan of $50 per month.
Calculations
Calculate their front-end ratio and back-end ratio (28% and 36%, respectively)
Application
What is the amount that most banks will lend?

82. Salary $60,000, $225,000 house, 6.5% interest rate, Property taxes and insurance $200/month, car loan of $270/month + student loan of $50 / month. Calculate the front end (28%) and back-end ratios (36%)

83. Case Study #1 Answers
Calculations: 1. Front-end Ratio Calculations at 6.5% Gross Income / 12 = Monthly Income $5,000 times 0.28% 1,400 Less real estate tax (T) and insurance (I) Maximum Monthly Mortgage Payment of Principle (P) and Interest (I) 1,200 Set 6.5% = I, Pmt = 1200, N=30, PV = ? Maximum Amount Bank will lend: $189,853

84. Case Study #1 Answers (continued)
2. Back-end Ratio Calculations at 6.5% (PITI+ Debt expenses) / Gross Income Monthly Income $5,000 Times 36% to give total amount available 1,800 Real estate tax (T) and insurance (I) Monthly debt payments: Car payment Student Loan - 50 Maximum Monthly Principle (P) and Interest (I) 1,280 Set 6.5% = I, Pmt = 1280, N=30, PV Maximum Amount Bank will lend: $202,510

85. Case Study #1 Answers (continued)
Applications:
Since the bank will generally lend the lesser of the two ratios, they would likely be allowed $189,853.

86. Case Study #2
Data
Trent and Jen, both 24, have decided on their dream house (well, at least their first house). In discussions with their mortgage broker, they have the choice between two $200,000 fixed rate loans, both which are amortized over 30 years. Loan A is for 6.0% with no points or loan origination fees, and loan B is for 5.75% with a $1,500 loan fee and 1 point.
Calculations
Assuming Trent and Jen plan to stay in the house for 30 years, which loan is more advantageous based on the Effective Interest Rate (EIR) and assuming annual payments?

87. Loan A $200,000 6. 0% no points, no fees, 30 years. Loan B $200,000 5
Loan A $200, % no points, no fees, 30 years Loan B $200, % 1 points, $1,500 fees , 30 years

88. Case Study #2 Answers
Note: Loan A has an EIR of 6% as there are no fees and costs
1. Calculate payment for loan B
N=30, I=5.75%, PV = -$200,000 PMT = ?
PMT = $14,143.25
2. Calculate the amount you received after all fees
$200,000 – 1 point ($2,000 * 1) - 1,500 = ?
$196,500
3. Calculate your effective interest rate
Set your PMT= $14,143.25, N = 30, PV = -$196,500, Solve for I
I = 5.91% Loan B is the cheaper loan

89. Case Study #3
Data
Jen thinks they will only be in the home for 6 years. Trent compromises, and estimates that they will be in the home for 12 years. Review their choice between the two $200,000 fixed rate loans, amortized over 30 years, but which will be paid back in 12 years. Loan A is for the same 6.0% with no points or fees, and loan B is for 5.75% with a $1,500 loan fee and 1 point.
Calculations
Calculate the EIR for both loans with prepayments
Application
Which loan is more advantageous using the EIR?

90. Prepay after 12 years: Loan A $200,000 6
Prepay after 12 years: Loan A $200, % no points, no fees, 30 years Loan B $200, % 1 point, $1,500 fees

91. Case Study #3 Answers 1. Calculate payment for loan B
N=30, I=5.75%, PV = -$200,000 PMT = $14,143.25
2. Set PV = to the amount you receive after all costs
$200,000 – 1 point ($2,000 * 1) - 1,500 = $196,500
3. Solve for your balloon payment at year 12
N = 18, PMT = $ 14,143.25, I = 5.75, PV = $156,054.03
4. Solve for their effective rate
PMT = $ 14,143.25, PV is -$196,500, N = 12, FV = $156,054.03, solve for I
I = 5.98% Loan B is still cheaper (barely)

92. Case Study #4
Data
Jen’s broker has said that for 1 more “buy down” point (for a total of 2 points with the same $1,500 fees), he can give her loan C with an interest rate of 5.50%.
Calculations
Calculate the EIR for Loan C. How much did that extra point save Jen in terms of the effective interest rate over Loan A and Loan B?
Application
Assuming the same 12 year prepayment plan, which loan should Trent and Jen take?

93. Prepay after 12 years: Loan C $200,000 5
Prepay after 12 years: Loan C $200, %, 2 points, $1,500 fees , 30 years. How much did the 2nd point save?

94. Case Study #4 Answers 1. Calculate payment for loan C
N=30, I=5.5%, PV = -$200,000 PMT = $13,761.08
2. Calculate amount received after all fees (2 points)
$200,000 –2 points ($2,000 * 2) - 1,500 = $194,500
3. Calculate the balance owed after 12 years (18 years remaining) The PV of 18 years of the PMT is:
N=18, I=5.5%, PMT= -$13,761.08, PV = $154,758.11
4. Calculate effective interest rate to lender
Set your FV at year 12 to = $ 154,758.11, PMT= $ 13,761.08, N = 12, PV = -$194,500, Solve for I = ?
I = 5.85%
Loan C saves .15% and .13% over Loans A and B

95. Case Study #5 Data Application
Bill has taken a job that he expects to be at for 3-5 years until he goes back to graduate school. He and his wife are debating whether to rent or buy. She really wants to buy, and he is unsure. She has found a house in a nice neighborhood near your school that she thinks is perfect.
Application
Are there any other tools or sources of information that may be helpful to them to help in this decision?

96. Will live there 3-5 years until graduate school
Will live there 3-5 years until graduate school. Have found a nice house in a nice neighborhood. Any other tools to help in the decision making process?

97. Case Study #5 Answers
There are two additional pieces of information that may be useful as they “study it out in their mind” before they make a final decision may be:
1. Talk with a realtor about the neighborhood. Find the average “days on the market” (or DOM) for the area. If houses are selling quickly <30-45 DOM, the market is currently strong. If the DOM>90-120, it is difficult to sell homes now and may be difficult in the future.
2. Talk with a realtor and get the data on the average annual appreciation of the houses in that neighborhood. If they have continued to appreciate over the last few years, there may be support for continued appreciation in the future. If not, they may be more difficult to sell in the future.

98. Case Study #6
Data
From Case #2, Trent and Jen will need to get exactly $200,000 out of the loan. They have looked at Loan a for 6.0% and no points and fees, and Loan B is for 5.75% and $1,500 in fees. They are assuming to include the cost of points and fees in the loan.
Calculations
Assuming they go with Loan B, how much will they need to borrow above the $200,000 so when they take out the 1 point and $1,500 fees, they will have exactly the $200,000 needed for the home?

99. How much will Trent and Jen need to borrow above the $200,000 so when they take out the 1 point and $1,500 fees, they will have exactly the $200,000 needed for the home?

100. Case Study #6 Answers
The formula for calculating the amount needed before fees and points is:
[Amount Needed + Fees] / ((100 - # points)/100)
Trent and Jen need $200,000, they are paying 1 point and $1,500 in fees so the formula is:
[ $200,000 + $1,500 ] in fees = ?
((100 – 1 point)/100)
They will need: $203,535.35
As a check:
1% (1 point) of $203, = $2,035.35
Fees: ,500.00
Total Points and fees $3,535.35
Note that they will need this amount regardless of their interest rate

101. Teaching Tools
Please note that I have prepared three teaching tools which may be helpful as you work on buying a home. They are:
TT19 Home Loan Comparison with Prepayments (for 3 different loans), and
TT09 Debt Amortization and Prepayments
TT11 Maximum Mortgage Payments for LDS
For another good source of information, see

102. Suggestions from Students
Key is that effective interest rate. You have a good deal when your EIR is the lowest you can get, based on how long you will be in the home