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7 Selecting and Financing Housing . Evaluating Renting and Buying Alternatives Your lifestyle and your choice of housing How you spend your time and money Every buying decision = lifestyle statement Personal preferences vs. financial factors Traditional financial guidelines :

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7 selecting and financing housing
7 Selecting and Financing Housing

Evaluating Renting and Buying Alternatives

  • Your lifestyle and your choice of housing
    • How you spend your time and money
    • Every buying decision = lifestyle statement
  • Personal preferences vs. financial factors
  • Traditional financial guidelines:
    • Spend no more than 25-30% of take-home pay on housing, or
    • No more than 2 1/2 times your annual income
    • More difficult to do in inexpensive urban areas

7-1

objective1 assess costs and benefits of renting
Objective1Assess Costs and Benefits of Renting

Choice should be based on:

  • Lifestyle (do you like or want to do maintenance tasks?)
  • Financial factors (e.g., affordability, tax deductions, equity)
  • Mobility vs. permanence (are you able to “settle down”?)
  • Renting = less costly in short run (monthly payment)
  • Home ownership =long-term financial advantages (tax deductions and equity growth over time)

7-2

rental activities
Rental Activities
  • Selecting a rental unit
    • Apartment or house
  • Advantages of renting
    • Easier to move
    • Fewer maintenance responsibilities
    • Minimal financial commitments
  • Disadvantages of renting
    • No tax benefits
    • “Money down the drain” (not building equity)
    • Limitations regarding remodeling
    • Restrictions regarding pets and other activities

7-4

slide5

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
  • Date and amount for late rent payments
  • List of included utilities, appliances, etc.
  • Restrictions on certain activities (e.g., pets, remodeling)
  • The right to sublet the unit; transfer clause
  • Conditions under which landlord may enter unit

7-5

home buying activities step 1 determine homeownership needs
Home Buying ActivitiesStep 1: Determine Homeownership Needs
  • Evaluate Home Ownership
    • Stability of Residence
      • American dream/norm (personalized living location)
    • Financial Benefits
      • Deduct property taxes, mortgage interest
      • Potential increase in value of your home
      • Building equity in your home
    • Lifestyle Flexibility – Can Express Your Individuality
  • Drawbacks of Homeownership
    • Financial Uncertainty
      • Obtaining money for the down payment
      • Obtaining mortgage financing
      • Home values could drop; can go “underwater” and lose money
    • Limited Mobility
      • Can take time to sell your home
    • Higher Living Costs (Than Renting)
      • Maintenance, repainting, repairs, and home improvements
      • Rising real estate taxes

7-7

home buying activities types of housing available
Home Buying ActivitiesTypes of Housing Available
  • Single-Family Dwelling
  • Multi-Unit Dwelling
    • Duplex (two homes)
    • Townhouse (2, 4, or 6 units)
  • Condominium
    • Individual ownership of a unit in a building
    • “Condominium” ≠ a type of building structure
    • “Condominium” = a legal form of homeownership
  • Cooperative Housing
    • Units owned by a non-profit organization
    • Shareholders purchase stock for right to live in unit in building with multiple units
  • Manufactured Homes
    • Fully or partially assembled in a factory, and then moved to the housing site
    • Prefabricated = components factory-built and assembled at the site
    • Mass production under factory conditions keeps costs lower than site-built homes

7-8

home buying activities types of housing available9
Home Buying ActivitiesTypes of Housing Available

Mobile Homes

  • Type of manufactured home, often <1,000 sq. ft.
  • Same basic features as a conventional house
  • Safety is debated
  • Tend to depreciate in value (like cars)
  • Owners must own the land or rent the “pad” on which mobile home is placed

7-9

home buying activities types of housing available10
Home Buying ActivitiesTypes of Housing Available
  • Building a Custom Home:
    • Does the contractor have needed experience?
    • Does contractor have a good working relationship with: - Architect?

- Suppliers?

- Electricians?

- Plumbers ?

- Carpenters?

    • What assurance do you have about quality?
    • What are payment arrangements?
    • 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

7-10

home buying activities determine what you can afford
Home Buying ActivitiesDetermine What You Can Afford
  • Consider both price and quality
  • Look at your income, your current living expenses, and how much you have for a down payment
  • Have a loan officer prequalify you
    • Front-End Ratio- monthly payment for PITI should not exceed 25% to 29% of gross income
    • Back-end Ratio- monthly payment for PITI plus ALL CONSUMER DEBTS should not exceed 33% to 41% of gross income
  • Purchase what you can afford NOW - you can always move up
  • Buy a “fixer-upper” at a lower price ONLY if you have the time, skills, and money to fix it up

7-11

home buying activities step 2 find and evaluate a home
Home Buying Activities Step 2: Find and Evaluate a Home
  • Select a location, location, location
    • Be aware of zoning laws
    • Assess the school system-if you have children OR not
  • Services of real estate agents
    • Will show homes that meet your needs, present your offer, negotiate the price, assist in obtaining financing, and represent you at the closing
    • Commission paid by seller; built into price
    • Seller’s agent, Dual agent, or Buyer’s agent
  • The Home Inspection
    • Conduct a home inspection or hire an inspector
    • Mortgage company will require an appraisal

7-12

home buying activities step 3 price the property
HomeBuying Activities Step 3: Price the Property
  • Determine the Home Price
    • Price affected by selling prices in the area
    • Current demand for housing
    • Time home has been on the market
    • Owner’s need to sell
    • Financing options
    • Features and condition of the home
  • Negotiate the Purchase Price
    • Counteroffers are common
    • Earnest money
      • Portion of the price deposited as evidence of good faith
    • Contingency clause
      • Offer dependent on certain events:
        • Obtaining financing
        • Sale of current home

7-13

objective 3 determine costs associated with purchasing a home
Objective 3Determine Costs Associated with Purchasing a Home
  • The Finances of Home Buying: The Downpayment and The Mortgage

Step 4: Obtain Financing

  • Determine down payment amount
    • Large (> 20%) downpayment makes the process easier
  • Mortgage insurance if < 20% down (PMI)
  • Automatic PMI termination when equity =>22%
    • Required by Homeowners Protection Act
  • Feature of a mortgage: LEVERAGE (using other people’s money; magnifies a home’s gain or loss)

7-14

home buying activities the mortgage
Home Buying ActivitiesThe Mortgage
  • Long-term loan on a specific piece of property (e.g., primary home or other real estate)
  • Usually 10, 15, 20, 25, or 30 years
  • Three main phases
    • Complete application and meet with lender to provide evidence of qualification
    • Lender obtains credit report and verifies application
    • Mortgage is approved or denied
      • Lender commits to make loan for a set period; check lender’s interest-rate lock-in rules

7-15

home buying activities the mortgage16
Home Buying ActivitiesThe Mortgage
  • Qualifying for a mortgage includes:
    • Income
    • Debts
    • Credit history (700+ score)
    • Down payment amount
    • Length of the loan
    • Current mortgage rates
  • “Points” = prepaid interest as a % of loan amount
    • Each point =1% of the loan amount
    • Premium paid to obtain a lower mortgage rate

7-16

home buying activities the mortgage17
Home Buying ActivitiesThe Mortgage
  • Loan for which you qualify will be greater when rates are lower
  • Calculating the monthly principal and interest payment:
    • Exhibit 7-7 = Mortgage payment factors (page 230)
    • Example:
      • 30-year, 7%, $223,000 mortgage
      • Monthly payment = 223 X $6.65 = $1,482.95
      • Payment = Principal repayment + interest
      • PITI = payment + taxes + insurance
  • Fixed-Rate, Fixed-Payment Mortgage
    • Fixed rate, fixed payment, amortized
    • 5%, 10% or 20% down
    • 15, 20 or 30 years of fixed payments
  • Government-Guaranteed Financing Programs
    • Veterans Administration (VA)
    • Federal Housing Authority (FHA)
    • Lower down payment than conventional

7-17

home buying activities types of mortgages
Home Buying ActivitiesTypes of Mortgages
  • Adjustable Rate Mortgage (ARM)
    • Flexible-rate or variable-rate mortgage
    • Interest rate varies over the life of the loan
    • Rate cap restricts amount of change in rate
    • Payment cap restricts amount of change in payment
      • Can result in negative amortization
  • Convertible ARM
    • Allows conversion to a fixed rate during a certain period
  • Balloon Mortgage
    • Fixed monthly payments
    • Large final payment after 3, 5, or 7 years
  • Growing-Equity Mortgage (GEM)
    • Payments increase to allow loan to be paid off more quickly
  • Interest-Only Mortgage
    • Lower payments for the first few years
    • Payments go towards interest only

7-18

home buying activities other financing options
Home Buying ActivitiesOther Financing Options
  • Shared Appreciation Mortgage (SAM)
    • Borrower gets a lower interest rate
    • Agrees to share appreciated value of home with the lender
  • Second Mortgage
    • Home equity loan (fixed payments) or HE Line of credit to tap
    • Home = collateral
    • Interest may be tax deductible
  • Reverse mortgages
    • Home equity conversion mortgage
    • Provides homeowners who are 62+ with tax-free income based on home equity; high up-front costs

Mortgage Repayment Strategies

  • Refinancing
    • Consider costs of refinancing in decision
  • Making extra payments
    • Reduces payoff time & interest paid

7-19

slide20

Home Buying Activities

Step 5: Close the Purchase Transaction

  • Make arrangements for a walk through
    • Last-minute items for negotiation
  • Closing
    • Meeting including buyer, seller, lawyers (if any) and sometimes lender
    • Document signing
    • Last-minute details settled; expense payments
    • Closing costs = settlement costs
    • Real Estate Settlement Procedures Act
      • Requires buyers be given closing costs estimate before the closing

7-20

slide21

Home Buying Activities

Closing Costs

  • Title insurance and search fee
  • Attorney’s and appraisers fees
  • Property survey
  • Pest inspection
  • Recording fees
  • Transfer taxes
  • Credit report
  • Lender’s origination fee
  • Escrow account for tax and insurance reserve
  • Pre-paid interest
  • Real estate broker’s commission
  • Title Insurance
    • Title company defines boundaries of property
    • Title search to insure property is free of claims
    • Protects against future defects in title
  • Deed
    • Document that transfers ownership
    • Warranty deed guarantees the title is good
      • Seller is true owner with right to sell the property
      • No outstanding claims against the title
  • Escrow Account
    • Money deposited with lending institution for payment of taxes and insurance

7-21

objective 4 develop a strategy for selling a home
Objective 4Develop a Strategy for Selling a Home

Preparing your home

  • Repair, repaint, clean, reduce clutter
  • When showing home, “Stage It”:
    • Turn on lights
    • Open draperies
    • Bake bread or make coffee for welcoming smell
    • “Curb appeal”
      • Lawn and landscaping
      • Outdoor clutter
      • Exterior paint

7-22

selling your home
Selling Your Home
  • Determining the selling price
    • Appraisal = estimate of the current value
  • “For Sale by Owner”
    • Use a lawyer or title company
    • Time consuming for seller
  • Listing with a Real Estate Agent
    • Consider agent’s knowledge of the community
    • Various services and marketing efforts
    • Screens potential buyers

7-23

wrap up
Wrap Up
  • Chapter Quiz
  • Concept Check 7-1- Rent or Buy?
  • Concept Check 7-2- Quality of School for Childless Home Buyers?
  • Concept Check 7-3- Main Sources of Money for Downpayment? and Type of Home Financing Action?
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