1.  2004 McGraw-Hill Ryerson Ltd. Kapoor Dlabay Hughes Ahmad Prepared by Cyndi Hornby, Fanshawe College Chapter 7 The Finances of Housing 7-1

2.  2004 McGraw-Hill Ryerson Ltd. Learning Objectives - Chapter 7 1.Evaluate available housing alternatives. 2.Analyze the costs and benefits associated with renting. 3.Implement the home buying process. 4.Calculate the costs associated with buying a home. 5.Develop a strategy for selling a home. 7-2

3.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 1 Evaluate available housing alternatives. 7-3

4.  2004 McGraw-Hill Ryerson Ltd. Evaluating Housing Alternatives Your lifestyle and your choice of housing. Your lifestyle, needs, desires and attitudes are reflected in your choice of a place to live Personal preferences are modified by financial factors. Traditional financial guidelines suggest you spend no more than 25-30% of take-home pay on housing, or no more than 2 1/2 times your annual income. 7-4

5.  2004 McGraw-Hill Ryerson Ltd. While the opportunity costs of your housing decision will vary, some common trade-offs include: 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 offer less costly housing or more space. Renters lose tax advantages and equity growth. Time and money to repair and improve a lower- priced home. Time and effort when you have a home built to your personal specifications. Evaluating Housing Alternatives 7-5

6.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 2 Analyze the costs and benefits associated with renting. 7-6

7.  2004 McGraw-Hill Ryerson Ltd. Renting vs. Buying Housing Advantages of renting. Mobility. Fewer maintenance responsibilities. Lower initial costs. Disadvantages of renting. Few financial benefits. Restricted lifestyle. Legal concerns of a lease. Costs including a security deposit, utilities and renter’s insurance. Renting rights 7-7

8.  2004 McGraw-Hill Ryerson Ltd. Housing Rental Activities The search. Select an area and rental cost for your needs. Compare costs of units. Talk to current and past residents. Before signing a lease. Make sure the lease dates, costs and facilities are clearly represented. Talk to a lawyer about unclear lease aspects. Note in writing, signed by the landlord, the condition of the rental unit. Either person who signs lease can be held responsible for the full rent. 7-8

9.  2004 McGraw-Hill Ryerson Ltd. Legal Details of a Lease Description and address of property. Name and address of the owner/landlord. Name of tenant. Effective date and length of the lease. Amount and due date of rent. 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 under which landlord may enter the rental unit. 7-9

10.  2004 McGraw-Hill Ryerson Ltd. Housing Rental Activities Living in rental property. Keep all appliances and facilities in good condition. Contact the owners regarding needed repairs. Respect the rights of others (stereo and parties). Obtain renter’s insurance. At the end of the lease. Clean and leave unit in same condition you got it. Provide landlord with new address for deposit. Require than any deductions from your deposit be documented. 7-10

11.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 3 Implement the home buying process. 7-11

12.  2004 McGraw-Hill Ryerson Ltd. STEP 1: Determine Home Ownership Needs Advantages of Owning Pride of ownership. Stability of residence Personalized living location Financial Benefits increase in value of property no capital gain on sale of principal residence borrowing against equity Lifestyle flexibility express your individuality. 7-12

13.  2004 McGraw-Hill Ryerson Ltd. Determine Home Ownership Needs Disadvantages of Owning Financial uncertainty. Get down payment and financing. Home values could drop. Limited mobility. Can take time to sell. Higher living costs. Maintenance. Repairs & improvements. Higher property taxes. 7-13

14.  2004 McGraw-Hill Ryerson Ltd. Assess Types of Housing Than Can be Purchased Single-family dwelling. Multi-unit dwelling. Duplex, townhouse. Condominium. You own your unit in a building of units. It is not a type of structure but a form of ownership. Co-ownership of common areas. Cooperative housing. Members own shares in and rent a unit in a building with multiple units. 7-14

15.  2004 McGraw-Hill Ryerson Ltd. Assess Types of Housing Than Can be Purchased 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. Lower cost than site built homes. Mobile homes. A type of manufactured home often less than 1,000 square feet. Offer same features as a conventional house. Safety is debated and they tend to depreciate. 7-15

16.  2004 McGraw-Hill Ryerson Ltd. If building a home, consider… 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? What delays will be considered legitimate? Is the contractor licensed and insured? Assess Types of Housing Than Can be Purchased 7-16

17.  2004 McGraw-Hill Ryerson Ltd. Determine Home Much You Can Afford Consider price, quality and size Price and down payment. Available funds for a down payment. Your income and living expenses. Your ability to make the payments. Get prequalified. Size and quality. Start with what you can afford and move up to the features you want Look at the condition of the home 7-17

18.  2004 McGraw-Hill Ryerson Ltd. STEP 2: Find & Evaluate a Property to Purchase Select a location. Compare your values and lifestyle with those of current residents. 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. Conducting a home inspection. Obtain an appraisal. 7-18

19.  2004 McGraw-Hill Ryerson Ltd. STEP 3: Price the Property Determining the Home Price Recent selling price of homes in area, demand for homes, length of time on market, features and condition Negotiating the purchase price. If offer is accepted it is a bonding contract counteroffer indicates willingness to negotiate earnest money is deposit evident of good faith Contingency clauses Buyer can obtain financing. Sale contingent on the sale of the buyer’s current home. 7-19

20.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 4 Calculate the costs associated with buying a home. 7-20

21.  2004 McGraw-Hill Ryerson Ltd. Determine the amount of the down payment. Can use of to $20,000 of RRSP for first time homebuyers Qualifying for a mortgage. Can be pre-qualified based on income, assets, debts, down payment, mortgage rate, and length of loan. Lenders generally use 30-40% of your gross monthly income for qualification application process involves verifying credit history, personal information, and evaluation of home STEP 4: Obtaining Financing 7-21

22.  2004 McGraw-Hill Ryerson Ltd. Conventional Mortgage Fixed rate, fixed payment Down payment of 25% or more of value of home Amortized over 15, 20 or 25 years Variable Rate Mortgage Interest rate changes during term due to changes in market Payments fixed – proportion paid against principal charges Split or Multi-Rate Mortgage Consider options for paying back your mortgage faster Type of Mortgages 7-22

23.  2004 McGraw-Hill Ryerson Ltd. Other Financing Methods Assume existing mortgage Vendor take-back mortgage seller extends loan Second mortgages loan against the equity in your home Reverse mortgages tax free income which is paid back, with interest, when the home is sold Refinance new mortgage at lower interest rate 7-23

24.  2004 McGraw-Hill Ryerson Ltd. Closing Costs are fees and charges paid when a real estate transaction is completed and include; Title insurance and search fee. Attorney’s and appraisers fees. Property survey. Land transfer taxes. Mortgage insurance Home Insurance Tax and utility adjustments Moving expenses Real estate commission. STEP 5: Close the Purchase Transaction 7-24

25.  2004 McGraw-Hill Ryerson Ltd. Important Closing Considerations Title Insurance Insurance the protected the owner or lender against financial loss resulting from defects in the title, during the mortgage term Deed or Title A document that transfers ownership of property from one party to another Escrow Account Money deposited with lending institution for payment of property taxes and homeowners insurance 7-25

26.  2004 McGraw-Hill Ryerson Ltd. The Main Elements of Buying a Home Location. Down payment. Mortgage application. Closing costs. PIT (principal, interest, and taxes) Maintenance costs. 7-26

27.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 5 Develop a strategy for selling a home. 7-27

28.  2004 McGraw-Hill Ryerson Ltd. Selling Your Home Prepare your home for showing to prospective purchasers Determining the selling price. Appraisal - estimate of current market value For sale by owner. Listing with a real estate agent. 7-28