1. The Housing Decision: Factors and Finances
Chapter 09
The Housing Decision:
Factors and Finances

2. Chapter 9 Learning Objectives
LO9-1 Evaluate available housing alternatives. LO9-2 Analyze the costs and benefits associated with renting. LO9-3 Explain the home-buying process. LO9-4 Calculate the costs associated with purchasing a home. LO9-5 Develop a strategy for selling a home.
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3. Housing Alternatives LO9-1: Evaluate available housing alternatives.
YOUR LIFESTYLE AND YOUR CHOICE OF HOUSING
How you spend your time and money affects your housing choice
Personal preferences for housing are modified by financial factors
A budget and other financial records can help you determine an appropriate amount for your housing expenses
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4. Opportunity Costs of Housing Choices
Interest earnings lost on money used for a down payment on a home or the interest on a security deposit for an apartment
Time and cost of commuting to work when you live in an area that offers less expensive 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
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5. Housing for Different Life Situations
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6. Renting Your Residence
LO9-2:
Analyze the costs and benefits associated with renting.
SELECTING A RENTAL UNIT
An apartment is the most common rental
Consider location, building exterior, building interior, financial aspects, layout and facilities
If need more room, consider renting a house
Increased space will cost more
Responsible for some maintenance
Check newspaper and online ads, real estate offices, and people you know
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7. Housing Rental Activities
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8. Advantages of Renting Mobility: Moving is easier
Fewer Responsibilities
Renters usually do not have to be concerned with maintenance and repairs
Renters have fewer financial concerns and no expenses for property taxes, property insurance, and upkeep
Lower initial costs
Renters pay a security deposit which is much less than the down payment and closing costs required when buying
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9. Disadvantages and Costs of Renting
Few Financial Benefits
No tax deduction for mortgage interest and property taxes that buyers get
Restricted Lifestyle
Limits regarding remodeling, pets, sound
Legal Details
Lease is legal document that defines the conditions of the rental
Costs include a security deposit, utilities, and renter’s insurance
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10. Details of a Lease 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
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11. Details of a Lease (continued)
Location where rent is paid
Date and amount for late rent payments
List of included utilities and appliances
Restrictions on certain activities (pets, remodeling)
Tenant’s right to sublet the rental unit
Charges for damages or for moving out later (or earlier) than lease expiration date
Conditions where landlord may enter rental unit
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12. Explain the Home-Buying Process
LO9-3:
Explain the home-buying process.
STEP 1: DETERMINE HOME OWNERSHIP NEEDS
Benefits of Home Ownership
Pride of ownership
Stability of location
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 (decorating)
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13. The Home-Buying Process
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14. Drawbacks of Home Ownership
Financial uncertainty
Obtaining money for the down payment
Qualifying for mortgage financing
Changing property values
Limited mobility
May be difficult to sell your home quickly
Higher living costs
Home improvements, maintenance, repairs
Rising real estate taxes
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15. Assess Types of Housing Available
Single-family dwelling
Multiunit dwelling
Duplex, townhouse
Condominium
You own your individual unit in a building with several units
It is not a type of building structure but rather a legal form of home ownership
Cooperative housing
Non-profit organization — members own shares and rent a unit in a building with multiple units
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16. Assess Types of Housing Available (continued)
Manufactured homes
Fully or partially assembled in a factory and then moved to the housing site
Prefabricated home has components built in the factory and assembled at the housing site
Mass production under factory conditions keeps costs low
Mobile homes
A type of manufactured home; often has less than 1,000 square feet
Offers same features as a conventional house
Safety is debated and they tend to depreciate
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17. Building a Home 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 of materials?
What are the payment arrangements during construction?
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18. Building a Home (continued)
What delays in the construction process will be considered legitimate?
Is the contractor licensed and insured?
Is the contractor willing to provide names, addresses, and phone numbers of satisfied customers?
Are there any complaints about this contractor?
Written contract should have a time schedule, cost estimates, description of work, and a payment schedule
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19. How Much Can You Afford Price and Down Payment
Affected by down payment, income, and current living expenses
Consider mortgage rates and your ability to make monthly mortgage, tax, and insurance payments
Size and Quality
Purchase what you can afford
Your second or third home can include more desired features
Handyman’s special needs work but lower price

20. 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
Lenders may require an appraisal
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21. Conducting a Home Inspection
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22. Step 3: Price the Property
Determining the Home Price
Consider recent selling prices in the area, current demand for housing, the length of time the home has been on the market, the owner’s need to sell, financing options, and features of the home
Negotiating the Purchase Price
Counteroffer
Earnest money
Contingency clauses, such as...
Buyer must be able to obtain financing
Sale contingent on the sale of the buyer’s current home
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23. The Finances of Home Buying
LO9-4:
Calculate the costs associated with purchasing a home.
STEP 4: OBTAIN FINANCING
Determine Down Payment
Sources include personal savings, pension plan funds, sale of investments/assets, assistance from relatives
Private Mortgage Insurance (PMI) is required if down payment is less than 20%
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24. Qualifying for a Mortgage
Consider various terms
Sources include banks, savings and loan associations, credit unions, mortgage companies
Home is collateral for mortgage
Factors considered include your income, debts, credit history, down payment amount, length of the loan, job stability, assets, and current mortgage rates
Lenders use 33 and 38% of gross income as guidelines for affordability of housing costs
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25. Affordable Monthly Mortgage Payment
For Example,
Step 1: Determine your monthly gross income
$48,000 annual income / 12 = $4,000
Step 2: Multiply monthly gross income × 38%
(used by lenders when you have other debts, such as a car loan)
$4,000 × .38 = $1,520
Step 3: Subtract other debt payments:
car loan
estimated property taxes and
homeowners insurance
AFFORDABLE MONTHLY MORTGAGE AMT $840

26. Evaluating Points and Application Process
Points are prepaid interest charged by lender
Each discount point is equal to 1% of the loan amount and represents the premium you pay to obtain a lower mortgage rate
The Application Process
Prequalification
Fee payment and obtain commitment
Finding a property
Appraisal

27. Fixed-Rate, Fixed-Payment Mortgages
Conventional Mortgage
Fixed rate, fixed payment home loan
Equal payments over 10, 15, 20, 25, or 30 years
Loan is amortized which means balance owed is reduced with each payment
Government financing programs
Loans insured by Veterans Administration
Loans insured by Federal Housing Authority
Lower down payment and lower interest
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28. Adjustable-Rate, Variable-Payment Mortgages
Adjustable rate mortgages (ARM)
During the life of the loan, the interest rate increases or decreases due to market interest rates, but has a rate cap
A payment cap may limit the payment, resulting in negative amortization and extension of loan period
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29. Interest-Only Mortgage
Allows a homebuyer to have lower payments for the first few years of a loan
None of the mortgage payment goes toward the loan amount
Higher payments will occur later in the loan
Can be especially dangerous if the value of the property declines
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30. Should You Pay off Your Mortgage Early?
Considerations
Make sure mortgage does not have a prepayment penalty
You may lose tax deductions
You may lose earnings on the money you use to retire this debt
Before paying additional amounts on your mortgage, be sure to pay off your credit card balances and other high-interest debt
Be aware of organizations that promise to set up additional payments on your mortgage, which is something you can do
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31. Comparison of Terms
With a 15-year instead of a 30-year mortgage, a homebuyer borrowing $200,000 can save over $150,000 in interest over the life of the loan.
This faster equity growth and savings on interest will also occur if a homebuyer pays an additional amount toward principal each month.
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32. Other Financing Methods
Buy-Downs
Interest rate subsidy from a home builder or a real estate developer that reduces the mortgage payments for the first few years
Home price is often increased to cover the buy-down
Second mortgage
Allows homeowner to borrow on the paid-up value of the property
Home is collateral and interest may be tax deductible
Known as a home equity loan
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33. Other Financing Methods (continued)
Reverse mortgages
Provides elderly (62 years old or older) homeowners with tax-free income based on their home equity in the form of a loan that is paid back (with interest) when the home is sold or the homeowner dies
Known as Home Equity Conversion Mortgages
Refinancing
Obtain a new mortgage if interest rate drops at least 1%
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34. Step 5: Close the Purchase Transaction
Walk-through
Closing involves meeting of buyer, seller, lender, and signing of documents
Closing costs (settlement costs) include...
Title insurance and title search fee
Attorney’s and appraisal fee
Property survey; Termite inspection
Recording fees; transfer taxes
Lender’s origination fee
Escrow account for tax and insurance reserve
Pre-paid interest; Real estate commission
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35. The Main Elements of Buying a Home
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36. Selling Your Home LO9-5: Develop a strategy for selling a home.
PREPARING YOUR HOME FOR SELLING
Repair, repaint, and clean
Clear the garage
Keep the lawn cut
Keep kitchen and bathroom clean
When showing home, turn on lights and open drapes
Consider energy-saving light bulbs and water-saving faucets
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37. Selling Your Home (continued)
DETERMINING THE SELLING PRICE
Appraisal, an estimate of the current value of the property
Desirable improvements include energy-efficient features, remodeled kitchen or bathroom, etc.
SALE BY OWNER
Use a lawyer or title company to assist with contract and closing
LISTING WITH A REAL ESTATE AGENT
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