moneycounts: a financial literacy series

MoneyCounts: A Financial Literacy Series

Mortgages

The Financial Process of Owning a Home

Dr. Daad Rizk301 Outreach BuildingUniversity Park PA [email protected] 814-863-0214


Home Sweet Home !


Ways to improve your chances of getting a mortgage - first time home buyers

Create a budget (Housing < than 28%-30% of net income)

Types of rate-mortgages /fixed/variable

Components of a mortgage (PITI) & down payment, closing cost

Amortization schedule and strategy to meet monthly payments

Overall summary of the financial process of owning a home

Learning Objectives


What is a Mortgage ?

A loan used to purchase a home

A debt instrument that is secured by the collateral of specified real estate property and that the borrower is obliged to pay back with a predetermined set of payments.

Mortgages are used by individuals and businesses to make large purchases of real estate without paying the entire value of the purchase up front.

Mortgages are also known as "liens against property" or "claims on property."


Ways to improve your chances of getting a mortgage

Prepare a budget (housing is between 25% -30% of net income)

Income 100%

Saving 10%

Housing 30%

Utilities 5%

Car Expense 10%

Credit Cards 5%

Student Loans 10%

Food 20%

Miscellaneous 10%



Review your goals

Why do you want to buy?

Will you stay in one place for at least 5 years?

How secure/stable is your job?



How much house can you afford?

Compare to current rent payment

Can you afford maintenance?

Your total mortgage should not exceed 2.5% your total yearly net income Yearly net income is $60,000

Your mortgage should not exceed $150,000



• Improve your credit rating (FICO of 740 + will get you best interest rate)

• Check your credit reports, correct any errors

• Pay your balances in full and on time for at least 6-9 months before you start the process of buying a home

Equifax, Experian and TransUnion

https://www.Annualcreditreport.com/

Call 877-322-8228



Pay off debt, do NOT close accounts, you need the history of your credit

Save for down payment (20-25% down to be comfortable)

Get paperwork in order - employment, taxes, etc.,

Check with your Bank first

Pre-qualification and Pre-approval


Key Terms

Mortgage Closing Cost

Down payment Pre-payment penalties

Interest Escrow

Principal Truth in Lending Act

Interest rate Refinancing

Credit rating Delinquent

Fixed interest rate Variable interest rate

Equity

Amortization schedule

Foreclosure


Components of a Mortgage

P = Principal

I = Interest

T = Taxes

I = Insurance

Private Mortgage Insurance (PMI if < 20% down payment)

Tip: Some lenders allow you to pay your own property taxes and home insurance premiums, but they could also raise your interest rate to compensate! need to understand escrow arrangement!


Fixed Rate?

• A fixed-rate mortgage is a loan that charges a set rate of interest that does not change throughout the life of the loan. It is the traditional loan used to finance the purchase of a home and is what most people have in mind when they think about a mortgage.


Variable Rate?

A variable-rate mortgage, also commonly referred to as an adjustable-rate mortgage or a floating-rate mortgage, is a loan in which the rate of interest is subject to change. When such a change occurs, the monthly payment is "adjusted" to reflect the new interest rate. Over long periods of time, interest rates generally increase. An increase in interest rates will cause the monthly payment on a variable-rate mortgage to move higher.


Amortization Schedule

• Loan amount: $165,000

• Interest rate: 4.25%

• Mortgage term: 30 years

• Number of payments: 360

• Monthly payment: $811.70

• Total interest paid: $127,212.30

Date Interest Principal Balance• Jul, 2013 $584.38 $227.33 $164,772.67 • Aug, 2013 $583.57 $228.13 $164,544.54 • Sep, 2013 $582.76 $228.94 $164,315.60 • Oct, 2013 $581.95 $229.75 $164,085.85 • Nov, 2013 $581.14 $230.56 $163,855.29 • Dec, 2013 $580.32 $231.38 $163,623.91 • Jan, 2014 $579.50 $232.20 $163,391.71 • Feb, 2014 $578.68 $233.02 $163,158.69


First-time Home Buyer - The Search Process!

Define search parameters

Internet search

In person search

Type of home and neighborhood

How long should it take to buy your first home?

How long do you want to spend searching?

How many homes are you willing to see?

How do you decide this is the home?



Take pictures, take notes, check the surroundings, rate each home on a scale of 1 to 10 and pick top choices

Visit top choices again to re-evaluate with open eyes and mind

Research the real estate tax and required insurance

Do not allow real estate agents to pressure you

work with a real agent you trust and comfortable with or hire your own agent

Keep searching till you are satisfied with your top choice

Resist falling in love with the house!

Making the offer, negotiating the terms, price, closing cost

Sticking to your budget/price range



Tip: Make a list of what you are looking for including location, type of a home, features, age, school district, neighborhood, real estate tax, insurance requirements, etc., and adjust as needed...

Tip: Shop for a loan before you shop for a property! this will guide you to make sound financial decisions.


First-time Home Buyer - The Art of Negotiation!

Your offer is presented to the seller who could either accept it, reject it or counter offer it....

Now it is your turn to do the same... Negotiation can be rough and time sensitive, so stay calm, remain flexible within your budget, always do the math...

Consider what you are willing to accept and what a deal breaker is to you

Make a list of terms (pros & cons)

keep your list handy and re-evaluate throughout the process

Once an offer is accepted, an agreement is reached, the contract is signed.


First-time Home Buyer - Getting your "docs" in a row!

Application Fee ( cost of appraisal and credit report)

Sales contract signed by buyers and sellers

Social Security numbers of all applicants

Complete address for the past 2 years (Landlord info)

Employment information for past 2 years

W-2 for the last 2 years

Most recent year to date pay stub /current pay stub

Banking information, Saving accounts, checking accounts, for the last 3 months

Loans and LOC information

Family help and assistance (letter)

Tax information for the last 2 years


Things you must do throughout the process

Carefully review the good faith estimate

Get a house inspection

Understand any restrictive covenants or association rules

Do a final walk before you take possession to make sure no damage happened after closing date

Ask questions and do your own research for every step in the way


Overview of the Cost

Down payment (20% of purchase price)if not, expect .05% PMI

Closing cost (3%-5%)if not, negotiate with seller

Inspection of the house (varies)

Insurance (varies)

Taxes (varies)

Application fee for loan

Moving expense into the new houseSet a budget, avoid using credit cards

Tip: conduct a garage sale before you move into your new home to clean clutter and make extra money to help with the move


Budgeting Tips

Increase your emergency fund saving by at least 5% to allow for unexpected house maintenance cost (15% instead of recommended 10%)

Trim your spending budget to allow for the increase

Live in your home at least 6 month to a year before you start making any major changes to your house

Do not acquire credit card debt to accommodate additional spending on the new house


Budgeting Tips

Instead of making a monthly mortgage payment, send 1/2 of your mortgage payment every 2 weeks, you end up making 13 payments in the year instead of 12 payments. you reduce the life of your loan by 5 years

Prepare different scenarios of payment to accommodate your long term goal, use online mortgage calculators to help you decide the best payment option for you and your family

http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx


Budgeting Tips

Tip: Pursue a 30 year mortgage, but make your own plans to pay it in 15 years (run your own amortization schedule)

This approach guarantees you a lower monthly payment just in case life throws you a surprise.

This takes discipline and a commitment to meet the goal of owning your home in less than 30 years.


Worksheet


Thank You!

Comments and Questions

Dr. Daad RizkMoneyCounts: A Financial Literacy Series301 Outreach BuildingUniversity Park PA [email protected] 814-863-0214

moneycounts: a financial literacy series

Documents

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financial literacy serieswhat

financial process

total mortgage

mortgage piti

payment tip

property taxes

home insurance premiums