7 Selecting and Financing Housing - PowerPoint PPT Presentation

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

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

7-3

• 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

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

Objective 2Implement the Home-Buying Process

7-6

• 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

• 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

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

• 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

• 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

• 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

• 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

• 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

• 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

• 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

• 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

• 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

• 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

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

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

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

• 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

• 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?