Making housing decisions
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Making Housing Decisions. #5. Meeting Housing Needs. Single family home Most popular type Offers more privacy and property control. Condominium. Form of ownership for apartments, townhouses, or cluster housing Title to unit and jointly own common areas

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Meeting housing needs
Meeting Housing Needs

Single family home

Most popular type

Offers more privacy and property control


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

Cooperative apartment co op
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

Rental unit
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

The rental option
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!

Benefits of owning a home
Benefits of Owning a Home

Personal satisfaction

Tax shelter

Inflation hedge

The cost of home ownership
The Cost of Home Ownership

Down payment

Points and closing costs

Mortgage payments

Property taxes and insurance

Maintenance and operatingexpenses

Down payment
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


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

And closing costs
…and Closing Costs

Expenses to close on a home may include

Loan application, origination fees


Title search, insurance

Attorney fees

Appraisal fees

Costs, such as inspections, credit report, property survey, filing fees

The mortgage payment piti

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)

Making housing decisions

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

Making housing decisions


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)

Making housing decisions

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)

Property taxes insurance
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

Maintenance operating expenses
Maintenance & Operating Expenses

Consider upkeepexpenses



Lawn maintenance

Consider operatingexpenses


Real estate short sales
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

Using an agent
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

The home buying process

Prequalify and apply

Present a sales contract

Provide an earnest money deposit

Contingency clause

The Home-Buying Process

Closing the deal

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

Financing the transaction
Financing the Transaction

Sources of mortgage loans

Commercial banks


Mortgage banks

Mortgage brokers

Types of mortgage loans
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

Types of mortgage loans1
Types of Mortgage Loans

Adjustable Rate Mortgage (ARM)

Interest rate varies, so monthly payments vary

May cause negativeamortization

ARM Features

Adjustment period

Index rate


Interest rate caps

Payment caps

Negative amortization
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

Other types of arms
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

Making housing decisions







Other Mortgage Payment Options

Types of mortgage loans2
Types of Mortgage Loans

Conventional mortgage - lender assumes all risk of loss

  • Usually requires 20% down payment

    • If lower than 20% then PMI required

Types of mortgage loans3
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

Making housing decisions


  • New lower rate can reduce monthly payment

  • Can reduce total borrowing costs in home financing

May pay closing costs on new loan!

Property insurance basics
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

Types of exposure
Types of Exposure

Property loss - economic loss due to property that is damaged, destroyed, or stolen

  • Inventory property

  • Identify potential perils

Types of exposure1

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.

Principle of indemnity
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

Concepts related to indemnity
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

Concepts related to indemnity1

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


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”

Homeowner s insurance
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



Homeowner s insurance1

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

Factors affecting home insurance costs

Type of structure (perils) under which it will pay

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

Making housing decisions

Section I – (perils) under which it will pay

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

Making housing decisions

Provides blanket or scheduled coverage of expensive personal property not adequately covered by standardized homeowner’s policy

Personal Property Floater

Renter s insurance
Renter’s Insurance personal property not adequately covered by standardized homeowner’s policy

Personal furnishings and belongings are not covered although the building may be fully insured

Purchase a special type of homeowners policy

Types of losses covered by homeowner s policies
Types of Losses Covered by Homeowner’s Policies personal property not adequately covered by standardized homeowner’s policy

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

Making housing decisions

Persons and Locations Covered personal property not adequately covered by standardized homeowner’s policy

  • 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

Limitations on payments
Limitations on Payments personal property not adequately covered by standardized homeowner’s policy

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

Limitations on payments1

Actual Cash Value personal property not adequately covered by standardized homeowner’s policy - 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


Deductibles keep insurance costs personal property not adequately covered by standardized homeowner’s policydown by eliminating frequent small loss claims that are proportionately more expensive to administer


Deductible - amount paid out of pocket on covered losses

Homeowner premiums
Homeowner Premiums personal property not adequately covered by standardized homeowner’s policy

Differ from company to company

Depend on structure type, property location, or property hazards

Discounts offered


security systems

Supplemental property insurance coverage
Supplemental Property Insurance Coverage personal property not adequately covered by standardized homeowner’s policy

Earthquake & flood - not included in standard homeowner's policies

Other forms of transportation - mobile homes, RVs, boats, etc.

Personal liability umbrella - additional liability coverage for homeowner and auto insurance

Property and liability insurance agents
Property and Liability Insurance Agents personal property not adequately covered by standardized homeowner’s policy

Captive agent Represents one insurance company

Independent agent Represents multiple insurance companies

Before selecting

Review total property and liability exposures

Inventory property and identify exposures

Determine appropriate covered perils, limits, deductibles, and floater policies

Buying insurance and settling claims
Buying Insurance and Settling Claims personal property not adequately covered by standardized homeowner’s policy

names, addresses, phone numbers

driver's license, auto license, insurance policy numbers

vehicle description for all involved

get names, addresses, phone numbers of witnesses

contact police and insurance agent

Remember to --

After an accident be sure to get:

Do not leave the scene of the accident

Making housing decisions

Notice to insurance company personal property not adequately covered by standardized homeowner’s policy


Proof of loss

Claims adjustor will:

1. Evaluate claim

2. Recommend

settlement of amount requested

settlement of a lesser amount

denial of claim

Steps in Claim Settlement