1. Objective 2.03 Analyze financial and legal aspects of home ownership

2. So you want to buy a house… mortgage. In order to buy a home most people will need to borrow money. This is called a mortgage. A mortgage is a contract outlining the terms of a loan between the lender and the borrower

3. Fixed Rate Mortgages (interest rate and monthly payment are constant) 1.Conventional: 1.Conventional: borrower pays a fixed interest rate for the length of the loan 2.FHA-insured: 2.FHA-insured: guarantees mortgages made by the bank to people with low-medium credit – FHA = Federal Housing Administration 3.VA loan: 3.VA loan: buyers who serve or have served in the military may qualify for a loan guaranteed by the Veterans Administration 4.Terms of Loans: 4.Terms of Loans: loans are repaid monthly over a term of 15-30 years

4. Estimating What You Can Afford two-and-one-half times gross income Multiply two-and-one-half times your annual gross income (income before deductions) – Gross income X 2.5 = price of house you can afford down payment Buyers must also have a down payment of at least 5%. This is a part of the purchase price that must be paid in cash!

5. Down Payment Calculation Example: $72,000 with 10% down payment – Cost of house = $72,000 – 10% down payment = $7200 – Amount to finance = $64,800 Example: $72,000 with 20% down payment – Cost of house = $72,000 – 20% down payment = $14,400 – Amount to finance = $57,600 Larger the down payment, the smaller the mortgage!

6. Qualifying for a Loan 1.Housing to Income Ratio 1.Housing to Income Ratio: ALL of your housing costs should equal no more than 28% of your gross monthly income. – Includes mortgage payment, property taxes, insurance, utilities, repairs, maintenance 2.Debt to Income Ratio: 2.Debt to Income Ratio: Monthly housing costs plus other long-term debts should total no more than 36% of your gross monthly income. – Long-term debts are those that take longer than 10 months to repay 3.BOTH 3.BOTH ratios must be met to qualify for a loan!

7. The Purchasing Process 1.Agreement of sale: – Also called a purchase agreement, sales agreement, or contract of purchase – Legal agreement between the seller and the buyer – States all the conditions of the sale

8. 2.Earnest Money: – Deposit – Deposit a potential buyer pays to show that they are serious about buying a home – Money is held and applied to the cost of the house or refunded if the buyer cannot get a loan

9. 3.Abstract of title: title search – Also called a title search – A search of public records to make sure the seller is the true owner of the house – Makes sure there are no debts on the house 4.Survey: – Makes sure property lines are accurate

10. 5.Inspections: – General home inspection – General home inspection (roof, heating and cooling systems, structural problems, safety issues) – Termite inspection 6.Secure a mortgage – Now, most buyers will become for a mortgage – Now, most buyers will become pre- approved for a mortgage

11. 7.Closing: ownership of the property – Closing is when the buyer takes ownership of the property – It involves the seller, the buyer, lawyers, and real estate agents – Closing costs – Closing costs are paid during the closing. This is cash paid by the buyer to cover the legal and financial costs of purchasing a home

12. Closing costs Closing costs can include: – Origination fees – Origination fees: fee paid to the lender for processing the loan; usually 1% of mortgage – Appraisal fee: – Appraisal fee: fee paid for determining the value of the property – Other fees escrow – Other fees for lawyers, real estate agents, etc. Some of the money will be held in escrow - money held in trust by a third party until a specified time - usually for property taxes and insurance

13. One Advantage of Owning Usually a house will increase in value. equity. The difference between the market value of a house and the principle owed on the mortgage is called equity. – Market value – principle owed = equity

14. Equity Example equity. Mary used her equity as a down payment on a new home. Mary owns a house. She currently owes $90,000 on her mortgage. She has decided to sell her house and buy a new one. Mary’s real estate agent sells Mary’s house for $140,000 (market value). Mary paid off her mortgage of $90,000 and had $50,000 in equity. Mary used her equity as a down payment on a new home.

15. Advantages of Owning a Home Sense of freedom and independence Financial advantages: – Houses usually increase in value (equity) – Helps establish a good credit record in order to qualify for future loans – Interest and property taxes are deductible.

16. Disadvantages of Owning a Home Strain on finances- property taxes, insurance, and maintenance Uses up lots of your free time Foreclosure if you get behind on monthly payments Limited mobility.

17. WOULD YOU RATHER RENT OR OWN YOUR HOME? WHY?