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

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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.

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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

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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

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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

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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

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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

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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.

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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

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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

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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

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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

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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

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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%.

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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

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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

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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%25

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

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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

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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?

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