C HAPTER 9

© The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.

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CHAPTER 9

Personal Finance

The Housing Decision: Factors and Finances

Kapoor Dlabay Hughes

6e

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Evaluating Housing Alternatives Your lifestyle and your choice of housing.

How you spend your time and money, your lifestyle, affects your housing choice.

Personal preferences are modified by financial factors.Traditional financial guidelines suggest you

spend no more than 25-30% of take-home pay on housing, or no more than 2 1/2 times your annual income.

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Opportunity cost of housing choices, includes common trade-offs. Interest earnings lost on money used for a down payment

or the interest on a security deposit for an apartment. Time and cost of commuting to live in an area that offer

less costly housing or more space. Renters lose tax advantages and equity growth. Time and money to repair and improve a lower-priced

home. Time and effort when you have a home built to your

personal specifications.

Evaluating Housing Alternatives

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Rent or Own: Evaluating Housing Alternatives

Advantages of renting. Mobility. Fewer maintenance responsibilities. Lower initial costs.

Disadvantages of renting. Few financial benefits. Restricted lifestyle. Legal concerns of a lease. Costs including a security deposit,

utilities and renter’s insurance.9-4


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Housing Rental Activities The search.

Select an area and rental cost for your needs. Compare costs of units. Talk to current and past residents.

Before signing a lease. Make sure the lease dates, costs and facilities are

clearly represented. Talk to a lawyer about unclear lease aspects. Note in writing, signed by the landlord, the condition

of the rental unit. Either person who signs lease can be held

responsible for the full rent. 9-5


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Legal Details of a Lease Description and address of property. Name and address of the owner/landlord. Name of tenant. Effective date and length of the lease. Amount of security deposit. Amount and due date of rent. Location where rent is due. Date and amount for late rent payments. List of included utilities, appliances. Restrictions on certain activities. The right to sublet the unit. Conditions under which landlord may enter the rental

unit.

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Housing Rental Activities (continued)

Living in rental property. Keep all appliances and facilities in good condition. Contact the owners regarding needed repairs. Respect the rights of others (stereo and parties). Obtain renter’s insurance.

At the end of the lease. Clean and leave unit in same condition you got it. Provide landlord with new address for deposit. Require than any deductions from your deposit be

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Advantages of Owning Pride of ownership.

American dream/norm. Reduced income taxes.

Deduct property taxes. Deduct mortgage interest.

Build an equity by paying down the loan or by price appreciation.

Builds your credit rating. Hedge against inflation. Lifestyle flexibility - express your individuality. 9-8


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Disadvantages of Owning Financial uncertainty.

Get down payment and financing. Home values could drop.

Limited mobility. Can take time to sell.

Higher living costs. Maintenance. Repairs & improvements. Real estate taxes.

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Assess Types of Housing Than Can be Purchased Single-family dwelling. Multi-unit dwelling.

Duplex. Townhouse.

Condominium. You own your unit in a building of units. It is not a type of structure but a form of

ownership. Cooperative housing. Members own shares in and rent a unit in a building

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Assess Types of Housing Than Can be Purchased Manufactured homes.

Fully or partially assembled in a factory and then moved to the housing site.

Prefabricated type has components built in the factory and assembled at the site.

Lower cost than site built homes. Mobile homes.

A type of manufactured home often less than 1,000 square feet.

Offer same features as a conventional house. Safety is debated and they tend to depreciate.

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If building a home, consider… Does the contractor have needed experience? Does contractor have a good working

relationship with architect, suppliers, electricians, plumbers, carpenters and others?

What assurance do you have about quality? What are payment arrangements? What delays will be considered legitimate? Is the contractor licensed and insured?

(continued)

Assess Types of Housing Than Can be Purchased

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Home Buying Process Step 1: Determine Homeownership Needs

Determine how much you can afford. Consider both price and quality.

Price and down payment. Available funds for a down payment. Your income and living expenses. Your ability to make the payments. Get prequalified.

Size and quality. As you move to a second and third home you can include more of

the features you want. Look at the condition of the home.

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Home Buying Process Step 2: Finding and Evaluating a Property to Purchase

Select a location. Be aware of zoning laws. Assess the school system

if you have children. Using a real estate agent.

They present your offer, negotiate the price, assist you in obtaining financing, and represent you at the closing.

Conducting a home inspection. Obtain an appraisal. 9-14


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Home Buying Process Step 3: Pricing the Property Determining the home price. Negotiating the purchase price.

Buyer-agents. Seller’s or buyer’s market. Earnest money.

Contingency clauses Buyer can obtain financing. Sale contingent on the sale of the

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Determine the amount of the down payment. Mortgage insurance if less than 20%.

Qualifying for a mortgage. Can be pre-qualified based on income,

assets, debts, credit history, mortgage rate, and length of loan.

Evaluating points (prepaid interest). The home loan application process. Fixed or adjustable rate mortgage.

Home Buying Process Step 4: Obtaining Financing

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Conventional. Fixed rate, fixed payment, amortized. 5%, 10% or 20% down. 15, 20 or 30 years of fixed payments.

Government guaranteed financing programs. Veterans Administration. Federal Housing Authority.

Adjustable rate mortgages. Interest rate varies with the prime rate but has a

rate cap.

Type of Mortgages

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Type of Mortgages

Graduated payment.Payments start lower and go up.For persons whose income will increase.

Balloon.Fixed monthly payments plus one large

payment, usually after 3, 5 or 7 years. Growing-equity.

Payment increases to allow loan to be paid off more quickly.

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Type of Mortgages Shared appreciation.

Borrower agrees to share appreciated value of the home with the lender.

A second mortgage. Home is collateral and interest may be tax

deductible. Home equity loans is an example.

Reverse mortgages. Provides elderly with tax-free income based

on the home equity. Refinancing.

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Title insurance and search fee. Attorney’s and appraisers fees. Property survey. Recording fees; transfer taxes. Credit report. Termite inspection. Lender’s origination fee. Tax and insurance reserve. Pre-paid interest. Real estate commission.

Home Buying Process Step 5: Closing the Purchase Transaction

Closing Costs

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The Main Elements of Buying a Home

Location. Down payment. Mortgage application. Points. Closing costs. PITI (principal, interest, taxes, insurance). Maintenance costs.

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Selling Your Home Preparing your home. Determining the selling price.

Appraiser.Realtor.

For sale by owner. Listing with a real estate agent.

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Documents

C HAPTER 9