Making Housing Decisions

1. Making Housing Decisions #5

2. Meeting Housing Needs Single family home Most popular type Offers more privacy and property control

3. Condominium Form of ownership for apartments, townhouses, or cluster housing Title to unit and jointly own common areas Monthly homeowner’s fee in addition to mortgage payments

4. Cooperative Apartment “Co-op” • Tenants own shares in nonprofit corporation that owns building • - lease units from corporation • Assessed fees based on space occupied • - Coversservice, maintenance, taxes, and mortgage on entire building

5. Rental Unit Appropriate for those: without a down payment unsettled in job or family status who do not want home ownership responsibilities who feel current conditions are unattractive for home ownership

6. The Rental Option Contract Protects lessor = owner lessee = one who leases Contract Specifies Monthly rent and due date penalties for late payment length of lease agreement deposit requirement renewal options Know your rights and responsibilities before signing!

7. Rent or Buy Analysis

8. Benefits of Owning a Home Personal satisfaction Tax shelter Inflation hedge

9. The Cost of Home Ownership Down payment Points and closing costs Mortgage payments Property taxes and insurance Maintenance and operatingexpenses

10. Down Payment Represents buyer’s equity Paid at time of closing Typically 5% to 20% of purchase price depending on lender's If less than 20%, lender may require private mortgage insurance (PMI) Protects lender of buyer defaults Loan to Value Ratio

11. Points… Premium paid for obtaining lower mortgage rate pay at closing One-time fee charged by lender increases effective rate of interest From 0–3 points assessed on mortgage 1 point = 1% of the loan amount

12. …and Closing Costs Expenses to close on a home may include Loan application, origination fees Points Title search, insurance Attorney fees Appraisal fees Costs, such as inspections, credit report, property survey, filing fees

13. P = Principal I = Interest T = Taxes I = Insurance Go to lender to repay mortgage Collected by lender and held in escrow account The Mortgage Payment (PITI)

14. Lender determines maximum monthly payment Typical Affordability Ratios The Mortgage Payment (PITI) Total of all monthly installment loan payments < 33–38% of monthly gross income Monthly mortgage payment < 25–30% of monthly gross income

15. Example: If your monthly gross income is $4500, what would your maximum monthly mortgage payment be if the lender's affordability ratios stipulate that your mortgage payment not exceed 25% nor your total installment payments exceed 33% of your monthly gross income? The Mortgage Payment (PITI)

16. Mortgage payment should not exceed: $4,500 x .25 = $1,125 Total installment payments should not exceed: $4,500 x .33 = $1,485 The Mortgage Payment (PITI)

17. Property Taxes & Insurance Each month lender collects 1/12 of annual amount and places in escrow account Homeowner may pay these directly provides more flexibility and opportunity to earn interest

18. Maintenance & Operating Expenses Consider upkeepexpenses Painting Repairs Lawn maintenance Consider operatingexpenses Utilities

19. Real Estate Short Sales Foreclosure - borrower cannot make mortgage payments so lender repossesses property Short sale - proceeds of the sale are less than balance owed on the mortgage

20. Using an Agent Most realtors belong to Multiple Listing Service (MLS) with access to a large part of the market Agents, usually employed by seller, are paid a commission if they make a sale may range from 5-6% of sales price

21. Prequalify and apply Present a sales contract Provide an earnest money deposit Contingency clause The Home-Buying Process

22. Real Estate Settlement Procedures Act (RESPA) Title check necessary to ensure title is clear, free of liens Closing statement provides details of costs for both buyer and seller Closing the Deal

23. Financing the Transaction Sources of mortgage loans Commercial banks Thrifts Mortgage banks Mortgage brokers

24. Types of Mortgage Loans Fixed Rate Mortgage Interest rate and monthly payments (PI) fixed for life of loan Taxes and insurance not fixed, so total payment (PITI) can increase

25. Types of Mortgage Loans Adjustable Rate Mortgage (ARM) Interest rate varies, so monthly payments vary May cause negativeamortization ARM Features Adjustment period Index rate Margin Interest rate caps Payment caps

26. Negative Amortization If monthly loan payment is lower than the monthly interest charged then principal balance will increase could result in a larger mortgage balance on the next loan anniversary than on previous one

27. Other Types of ARMs Convertible ARMs allow borrowers to convert to fixed-rate loan Two-step ARMs have two interest rates: one for initial 5-7 years Higher one for remaining loan period

28. Interest-only Graduated-payment Growing-equity Shared-appreciation Biweekly Buy-downs Other Mortgage Payment Options

29. Types of Mortgage Loans Conventional mortgage - lender assumes all risk of loss • Usually requires 20% down payment • If lower than 20% then PMI required

30. Types of Mortgage Loans FHA mortgage payments insured by Federal Housing Administration lower down payment, interest rates, closing costs VA loan payments guaranteed by Veterans Administration one-time loan with no down payment

31. Refinancing • New lower rate can reduce monthly payment • Can reduce total borrowing costs in home financing May pay closing costs on new loan!

32. Mortgage Refinancing Analysis

33. Protecting Your Property #10

34. Property Insurance Basics Property insurance protects real and personal property from losses from various perils Liability insurance protects against financial consequences from insured's responsibility to others

35. Types of Exposure Property loss - economic loss due to property that is damaged, destroyed, or stolen • Inventory property • Identify potential perils

36. Types of liability protection: Homeowner’s policy Automobile policy Umbrella policy Types of Exposure Liability- damage you cause others, either through your actions or negligence.

37. Principle of Indemnity Insured may not be compensated by insurance company an amount exceeding economic loss Most property and liability insurance contracts are based on this principle

38. Concepts Related to Indemnity Actual cash value value assigned to insured property Replacement cost less depreciation Right of Subrogation • Insurer’s right to request reimbursement from person who caused the loss or that person’s insurer

39. Insurance companies do not want you to profit from a loss Concepts Related to Indemnity • Other insurance clause - When multiple companies insure a property, together they will not pay more than the economic loss

40. Coinsurance Provision requiring policyholder to buy insurance in an amount equal to a certain percentage of replacement value of property Or, insurance company will not fully repay the loss You bear part of the loss as “co-insurer”

41. Homeowner's Insurance HO-1— Basic Form HO-2— Broad Form HO-3— Special Form HO-8— Modified Form HO-4— Renter's Form HO-6— Condominium Form Renters Homeowners

42. Policy states conditions (perils) under which it will pay Stipulate property covered and extent of coverage Peril—a cause of loss such as fire, lightning, windstorm Homeowner's Insurance

43. Type of structure Construction materials, style, age Location of home Crime rates, weather, proximity to fire hydrant Other factors Pool, trampoline, large dog Factors Affecting Home Insurance Costs

44. Section I – Loss to property, conditions under which it will be covered, extent of coverage Perils rarely covered: flood, earthquake, acts of war Section II – liability which may arise in connection to property, either through your actions or negligence Property Covered

45. Provides blanket or scheduled coverage of expensive personal property not adequately covered by standardized homeowner’s policy Personal Property Floater

46. Renter’s Insurance Personal furnishings and belongings are not covered although the building may be fully insured Purchase a special type of homeowners policy

47. Types of Losses Covered by Homeowner’s Policies Direct loss of property Indirect loss occurring as a result of loss of use of damaged property Additional expenses resulting from direct and indirect losses

48. Persons and Locations Covered • Policy states who is covered • Coverage for guests and students at college may be limited • Most homeowner’s policies offer coverage worldwide • Second home may be an exception

49. Limitations on Payments Policy limits placed on covered property and depend on amount of home coverage Replacement cost amount necessary to repair, replace, or rebuild an insured asset at today’s prices

50. Actual Cash Value - what property is worth today (its depreciated value) Replacement Cost – amount to repair, rebuild or replace at today’s price Inflation Protection Rider - automatically adjusts for inflation Internal Limits - apply to specific items such as jewelry, watercraft, or securities Limitations on Payments