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The Housing Decision. Chapter 8. Your Personal Housing Requirements. Where do you want to live? Lifestyle: leisure and work activities Commuting distance/time Taxes Vary across different states & local communities Public services Health care, police/fire protection, parks, etc. Schools

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your personal housing requirements
Your Personal Housing Requirements
  • Where do you want to live?
    • Lifestyle: leisure and work activities
    • Commuting distance/time
    • Taxes
      • Vary across different states & local communities
    • Public services
      • Health care, police/fire protection, parks, etc.
    • Schools
      • Some believe good system helps maintain property values, but may pay higher property taxes
your financial resources
Your Financial Resources
  • Experts suggest that you spend no more than one-third of your monthly take-home pay on housing
  • Decline in mortgage interest in 1990s let more people afford houses
  • Amount required for down payment is usually more of a hurdle than the monthly payment
    • While there are ways to reduce the needed down payment, you should plan on paying at least 10% of purchase price in a down payment (plus closing costs, which can easily reach 2.5%)
the kind of home you want and need
The Kind of Home You Want and Need
  • Important to do a needs vs. wants analysis
  • Housing needs change over the life cycle
    • Single person versus family with children versus retired couple
major housing options
Major Housing Options
  • Single-family homes
    • About 2/3 of American households are of this type
    • Typically about 2,100 square feet, 3 bedrooms, 2.5 baths
    • Typically sells for $180,000
      • Varies widely throughout the country
    • More than 90% are bought via financing with the property serving as collateral (mortgage)
major housing options6
Major Housing Options
  • Condominiums and co-ops
    • Condo buyers receive title to unit plus joint ownership in all common areas
      • Owners belong to a homeowners association
    • Co-op dwellers own shares in a corporation that owns the building
      • Resident leases unit from corporation
major housing options7
Major Housing Options
  • Manufactured homes
    • 95% are permanent structures
    • Much cheaper than site-built houses
    • If built after June 1976, must conform to national building code
  • Rental option
    • Most rentals are unfurnished
    • Average rental in U.S. is $800/month
      • Varies substantially based upon
        • Type of unit
        • Location
    • Lease defines rights and obligations of landlord and tenant
the buy versus rent decision
The Buy-Versus-Rent Decision
  • Advantages of renting
    • Mobility (no need to be concerned with selling house, although length of lease is a consideration)
    • No large up-front costs involved
    • Little or no repair and maintenance costs
  • Advantages of buying
    • ‘Pride of ownership’
    • Ability to decorate to your satisfaction
    • Potential price appreciation (but depreciation can occur)
    • Tax savings (itemize deduction for mortgage interest)
    • Build up equity
      • The current value of the house minus the loan balance
the buy versus rent decision9
The Buy-Versus-Rent Decision
  • In many areas of the country, buying is cheaper than renting even if appreciation in value is not considered
  • This could change if interest rates rise or mortgage interest deduction is eliminated
financing the purchase of a home
Financing the Purchase of a Home
  • Determine how much you can afford in terms of the total purchase price
    • Dependent upon your income, down payment, interest rates
  • Lenders don’t want monthly mortgage payment, real estate taxes, and homeowners insurance to exceed 28% of your gross monthly income
  • Also, make sure you can afford the monthly upkeep
    • Utilities, repairs, maintenance
the down payment
The Down Payment
  • One of the most critical home-financing factors is the down payment
    • First-time buyers usually pay about 12%
    • Average down payment is  25% for all buyers
      • If you have a lower loan-to-value ratio, you may get a better interest rate on mortgage
    • If you purchase private mortgage insurance (PMI), you may be able to reduce the size of your down payment
      • Expensive, but can be canceled after a point
the monthly payment
The Monthly Payment
  • Most mortgages are fully amortized
    • Each payment goes partly to principal reduction and partly to interest
    • Over life of loan, principal is reduced to zero
    • Initially most of monthly payment goes toward interest but this decreases (slowly) over the life of the loan
closing costs
Closing Costs
  • Include fees involved with the transfer of ownership (such as loan origination fee, credit report, etc.)
    • Most are paid at the closing meeting
    • Points
      • Fees paid (usually by buyer) to lender (AKA as a loan origination fee or loan discount)
        • Typically considered interest and are tax deductible
        • Stated as a % of the loan amount
closing costs16
Closing Costs
  • Prepaid interest
    • Generally, over a month passes before your first mortgage payment is due
    • However, your mortgage is accruing interest charges during that time
      • If mortgage closed on June 15 and first payment was due July 30th, it would cover interest from June 30th to July 30th, but not June 15th to June 29th
  • Sales commission
    • Usually paid by seller
    • Compensates real estate agents for their services
      • Quite expensive (about 6 or 7% of purchase price)
  • Title Charges
    • Normally split between buyer and seller
sources of mortgage loans
Sources of Mortgage Loans
  • Can be obtained through
    • Commercial banks
    • Savings banks
    • Mortgage companies
    • Some credit unions
  • Shop around
    • Mortgage broker will search for best loan to meet your needs
    • Check the Internet
  • Lender doesn’t have to be local
  • Loan application is rather detailed
  • May have the option of locking in the current mortgage rate
types of mortgages
Types of Mortgages
  • Fixed-rate loans – interest rate remains constant over the life of the loan
    • 30-year
      • 360 identical payments are made, generally once a month
    • 15-year
      • Are about 33% of all new mortgage loans
      • Interest rates are slightly less than a 30-year mortgage
      • Monthly payment is larger than 30-year mortgage
types of mortgages19
Types of Mortgages
  • Adjustable-rate mortgages (ARMs)
    • Interest rate changes at preset intervals, depending on whether interest rates have increased or decreased
      • Tied to a specific index
      • Limits (caps) to how much the interest rate can change per period and over the life of the loan
    • The initial (teaser) rate is far below the rate of fixed-rate loans
types of mortgages20
Types of Mortgages
  • Choosing between an ARM and fixed-rate loan
    • Many consumers dislike ARMs because interest rate can change—adds uncertainty
    • However, may be a good choice for some consumers
      • The shorter the amount of time you plan to keep the house, the more attractive an ARM
types of mortgages21
Types of Mortgages
  • FHA mortgages
    • Federally insured mortgages made by private lenders
      • Down payment is usually quite low (because buyer receives insurance via federal government)
      • Buyer pays an FHA insurance premium each month
      • Ceilings on the amount of money that can be borrowed
        • Exactly what the ceiling is depends on geographic location
types of mortgages22
Types of Mortgages
  • VA mortgages
    • Guaranteed by the Veterans Administration and loans are made through private lenders
    • Only available to veterans
    • Guarantees 100% of the loan amount
      • Subject to ceilings which vary by region
    • Limits on closing costs
    • Low down payments (sometimes as low as 0%)
types of mortgages23
Types of Mortgages
  • Conventional mortgages
    • One that is not FHA or VA insured
    • If you borrow more than 80% of purchase price, most lenders require PMI
    • If property is sold for less than the loan balance, borrower is still obligated to pay the rest
refinancing a mortgage
Refinancing a Mortgage
  • Involves taking out a new loan while paying off the old loan
  • Costs associated with refinancing
    • Closing costs
    • Are there prepayment penalties on your current loan?
      • Will there be prepayment penalties on new loan?
    • Generally, if interest rates have dropped to 2% or more from your current rate, it makes sense to refinance but depends on time you plan to remain in house
second mortgages
Second Mortgages
  • Tax Reform Act of 1986 eliminated interest deductions on car loans, credit cards, etc.
  • May make sense to obtain a second mortgage on your house to finance car purchases, make home improvements, pay for college costs, etc.
    • Interest is tax-deductible
  • Similar to home equity loans, except home equity loans are basically a credit limit
    • An amount up to which you can borrow without reapplying each time
      • Interest is tax deductible
second mortgages26
Second Mortgages
  • Warning
    • Even if you pay your primary mortgage payments on time, you can lose your house if you fail to pay your second mortgage payments on time
    • If your house drops in value, the amount you owe stays the same
  • 125 loans
    • Loans up to 125% of the market value of the house
      • Risky!
finding the right house to buy
Finding the Right House to Buy
  • Recommend that you prequalify for mortgage before you start looking
    • Know the max you can afford so you won’t waste time
    • Lets you quickly arrange financing once you find the house you want
using a real estate agent
Using a Real Estate Agent
  • You can either find houses yourself that you are interested in or
  • Tell an agent what you’re interested in and have them contact you with a list of prospects
  • Once you’ve selected a house, agent will help you make a formal offer
    • Prepare a contract stating offer price, desired closing date, etc.
    • Seller will either accept offer, make counteroffer, or reject offer
    • You’ll have to put up earnest money
      • A security deposit (which you’ll probably lose if you recant offer)
home inspections
Home Inspections
  • You’ll definitely want the house inspected before you buy it, even if it is brand new
  • You can ask seller to fix things that are found during the house inspection, or lower the purchase price to adjust for these items
  • Expect to pay $150–$500 for a home inspection
home warranties
Home Warranties
  • Most new homes come with a one-year warranty
  • For an older home, you could either buy a warranty (for about $350) that covers certain items (water heater, stove, etc.)
  • Some sellers now buy these warranties and offer as a sales incentive
selling a home
Selling a Home
  • Should you use a real estate agent?
    • Agents charge between 6 and 7% of selling price
    • If you don’t use a real estate agent, you have to advertise the house, arrange for viewing, negotiate with buyer, etc.
      • About 80% of houses are sold via an agent
  • Setting the asking price
    • Agent will help establish this
  • Selling costs
    • May include real estate commission, title insurance, real estate taxes
fixing up your home
Fixing Up Your Home
  • Why do home improvements?
    • Satisfy you
    • Increase potential selling price
  • Bathroom/kitchen improvements tend to recover the best
  • Don’t improve your home too much
    • If the value is more than 10–15% of average home price in your neighborhood, you probably won’t get that much for it
  • Shop around
taxes and the sale of your home
Taxes and the Sale of Your Home
  • Most homeowners will never pay federal taxes on the sale of their home
  • However, it is important to keep good records