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Chapter 9
The Housing Decision:
Factors and Finances
Chapter 9
The Housing Decision:
Factors and Finances
Chapter 9Learning Objectives1. Evaluate available housing alternatives
2. Analyze the costs and benefits associated with renting
3. Implement the home-buying process
4. Calculate the costs associated with purchasing a home
5. Develop a strategy for selling a home
2
Housing AlternativesObjective 1: Evaluate available housing
alternatives
Your lifestyle and your choice of housing
– How you spend your time and money, affects your housing choice.
– Personal preferences are modified by financial factors.
Traditional financial guidelines suggest you spend no more than 25-33% of take-home pay on housing, or no more than 2 1/2 times your annual income.
3
Housing Alternatives (continued)
Opportunity costs of housing choices
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 offers less costly housing or more space
Renters lose tax advantages and equity growth
Time and money you spend to repair and improve a lower-priced home
Time and effort when you have a home built to your personal specifications 4
Renting your ResidenceObjective 2: Analyze the costs and
benefits associated with renting
The searchSelect an area and rental cost for your needs
Compare costs and facilities between units
Talk to current and past residents
Advantages of renting Easier to moveFewer maintenance and repair
responsibilitiesLower initial costs
5
Renting your Residence (continued)
Disadvantages of renting
No tax benefits
Restrictions regarding pets and other activities
Legal concerns of a lease
Costs including a security deposit, utilities and renter’s insurance
6
Renting your Residence (continued)
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 rent7
Renting your Residence (continued)
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 where landlord may enter rental unit
8
Home Buying ProcessObjective 3: Implement the home-buying
process
Step 1: DETERMINE THE HOMEOWNERSHIP NEEDS
Benefits of Home Ownership Pride of ownership
“American dream”
Financial benefits Deduct property taxes and mortgage interest Potential increase in value of your home Building equity in your home
Lifestyle flexibility - express your individuality9
Home Buying Process (continued)
Drawbacks of HomeownershipFinancial uncertainty
Obtaining money for the down payment Obtaining mortgage financing Home values could drop
Limited mobility Can take time to sell your home
Higher living costs Home improvements Rising real estate taxes
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Home Buying Process (continued)
Assess Types of Housing Available Single-family dwelling
Multi-unit dwelling Duplex, townhomes
Condominium You own your unit in a building of units It is not a type of building structure, but rather a
form of homeownership
Cooperative housing Non-profit organization - members own shares
and rent a unit in a building with multiple units
11
Home Buying Process (continued)
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 Mass production under factory conditions keeps
costs lower than site built homes
Mobile homes A type of manufactured home, often <1,000 sq. ft. Offer same features as a conventional house Safety is debated and they tend to depreciate
12
Home Buying Process (continued)
Building a home
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?13
Home Buying Process (continued)
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, costestimates, description of work, and a payment schedule.
14
Home Buying Process (continued)
Determine how much you can afford
Price and down payment – income, current
living expenses, mortgage rate, tax,
insurance
Size and quality – get what you can afford
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Home Buying Process (continued)
Step 2: FIND AND EVALUATE A PROPERTY TO PURCHASE
Selecting a LocationBe aware of zoning lawsAssess the school system if you have children.
Using a real estate agentThey present your offer, negotiate the price,
assist you in obtaining financing, and represent you at the closing
Conduct a home inspection or hire an inspector
Mortgage company will want an appraisal
16
Home Buying Process (continued)
Step 3: PRICING THE PROPERTY
Determine the Home PricePrice is affected by whether it is a seller’s or a
buyer’s market.
Negotiating the Purchase PriceCounteroffers are commonEarnest moneyContingency clauses, such as...
Buyer must be able to obtain financing Sale contingent on the sale of the buyer’s current
home
17
The Finances of Home BuyingObjective 4: Calculate the costs
associated with purchasing a home
Step 4: OBTAIN FINANCING
Determine the amount of the down paymentPrivate Mortgage insurance (PMI) if less than
20% down
Mortgage: a long term loan on a specific piece of property such as a home or other real estate.
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The Finances of Home Buying (continued)
Qualifying for a mortgage includes your income, debts, credit history,
down payment amount, length of the loan, and current mortgage rates
The application process -- meeting between lender and borrower -- lender verifies information of borrower -- make the decision
19
The Finances of Home Buying (continued)
FIXED-RATE, FIXED-PAYMENT MORTGAGES
Conventional
Fixed rate, fixed payment, amortized
5%, 10% or 20% down
15, 20 or 30 years of fixed payments
20
The Finances of Home Buying (continued)
Government financing programsVeterans Administration
Federal Housing Authority
Lower down payment than conventional
BalloonFixed monthly payments plus one large
payment, usually after 3, 5 or 7 years
21
The Finances of Home Buying (continued)
ADJUSTABLE-RATE, VARIABLE-PAYMENT MORTGAGES
Adjustable rate mortgagesDuring the life of the loan the interest rate
varies with the prime rate, but has a rate cap
Growing-equityIncreases in payments to allow the loan to be
paid off more quickly
22
The Finances of Home Buying (continued)
OTHER FINANCING METHODS
Buy-DownsInterest subsidy from a home builder or a real
estate developer that reduces the mortgage payments for the first few years
Second mortgageHome is collateral and interest may be tax
deductible. Home equity loans are an example
Reverse mortgagesProvides elderly with tax-free income based on
the home equity
Refinance if interest rate drops at 2-3%23
Step 5: CLOSE THE PURCHASE TRANSACTION
Documents signed; meeting of buyer, seller, and lender
Closing costs include...Title insurance and search feeAttorney’s and appraisers feesProperty survey; Pest inspectionDeed recording fees; Transfer taxesCredit report; Lender’s origination feeEscrow account for tax and insurance reservePre-paid interest; Real estate commission
24
The Finances of Home Buying (continued)
Selling Your HomeObjective 5: Develop a strategy for selling
Preparing your homeRepair, repaint, and cleanWhen showing home turn on lights and open
drapes. Bake bread or make coffee for a welcoming smell
Determining the selling priceAppraiser estimates the current valueReal estate agent markets your home
If “for sale by owner,” use a lawyer or Title Company
Listing with a real estate agent for services
25
Comparison of 15 and 30 Year Mortgages
$100,000 6% loan for 30 years: Payment of $600 per month; 360 months X $600 = $216,000
$100,000 6% loan for 15 years: Payment of $843 per month: 180 months X $843 = $151,740
Savings of $64,260 with shorter loan
26
Comparison of Different Rates
$100,000 loan for 30 years at 6%; payment of $600 per month X 360 months = $216,000
$100,000 loan for 30 years at 7%; payment of $665 per month X 360 months = $239,400
Savings of $23,400 by lowering the rate by 1%.
27
Online ActivityGo to www.bankrate.com to determine
the best mortgage rates in your area.
Would you prefer a fixed-rate or adjustable rate mortgage? Why?
28