1. Chapter 9 The Housing Decision: Factors and Finances

2. 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

3. 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.

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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?

14. 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.

15. 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

16. 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

17. 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

18. 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.

19. 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

20. 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

21. 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

22. 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

23. 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%

24. 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

25. 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

26. 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

27. 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%.

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