Chapter 8 The Housing Decision

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Chapter 8The Housing Decision

• Where Do You Want to Live?
• Location is probably the main consideration in
  choosing a place to live. Usually people choose
  an area before they choose a house.
• Considerations for a certain area include
• Employment
• Commuting distance and time
• Taxes
• Public services
• Schools

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Chapter 8The Housing Decision

• Financial Resources
• Play perhaps the most important role in your
  personal housing decisions. Financial resources
  give you the ability to
• Pay monthly housing expenses
• Have enough cash to make the down payment on a
  home

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Chapter 8The Housing Decision

• The Kind of Home You Want and Need
• Most people want bigger, but bigger means more
  expensive
• Important to do a needs vs. want analysis
• Also important to consider the different needs at
  various stages of life
• a family with young children needs more space and
  other features (a yard) than a retired couple does

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Chapter 8The Housing Decision

• Major Housing Options
• One of the most basic decisions you must make is
  what type of home you want. Sometimes the area
  you prefer determines type of options available.
  Options include
• Single family attached or detached home
• A condominium (either high rise tower or garden
  apartment)
• A manufactured (mobile) home
• A rental apartment

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Chapter 8The Housing Decision

• Single-Family Homes
• Accounts for 60 of all American households.
• Buyer must obtain a mortgage (loan in which
  property is put up as collateral).
• Lender has right to foreclose (sell) property if
  borrower defaults.

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Chapter 8The Housing Decision

• Condominiums
• May include duplexes, row houses, high rise and
  garden apartments
• Refers to a type of ownership rather than a type
  of building
• Buyer receives title to unit plus ownership in
  all common areas (for example the pool area)
• Owner pays all costs of structure as well as
  proportional costs of maintaining facility

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Chapter 8The Housing Decision

• Manufactured (or Mobile) Homes
• Around 95 of units are permanent structures
• Much cheaper than site-built homes
• Owners rent home sites (around 150 to 250
  monthly)
• Homes must conform to building codes regulating
  things like design, construction, plumbing, and
  electrical systems.

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Chapter 8The Housing Decision

• Rental Units
• Units range from high-rise buildings, to garden
  apartments, and town houses
• Most unfurnished although some may be furnished
• Lease outlines rights and responsibilities of
  both tenants and landlords
• Uniform Residential Landlord and Tenant Act
  designed to protect tenants from landlord abuse

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Chapter 8The Housing Decision

• Advantages of Renting vs. Buying
• Liquidity -- No down payment required, so more
  funds available for investment purposes.
• Mobility -- Renter may pick up and move at will
  without worrying about selling home (only concern
  is penalty associated with breaking a lease, may
  be a fee or remaining balance)
• Certain cost savings -- Renter spared
  home-repair and maintenance expenses. Owner must
  bear these costs.

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Chapter 8The Housing Decision

• Advantages of Buying vs. Renting
• Psychological advantages
• sense of community and pride in ownership
• almost unrestricted freedom in choosing
  decorating styles
• Financial advantages
• Potential price appreciation
• Means of saving money
• Tax savings

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Chapter 8The Housing Decision

• Financial Advantages of Buying
• Means of Saving
• Part of mortgage payment pays interest and the
  remainder repays principal
• As years pass, equity (current value of house
  minus loan balance) increases
• Reducing amount owed on loan is same as saving
  same amount of money

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Chapter 8The Housing Decision

• Home Affordability
• Purchasing a home requires many types of
  payments
• 1. A down payment
• 2. A monthly payment
• 3. Closing costs (various kinds)

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Chapter 8The Housing Decision

• 1. Down Payment
• The down payment or initial investment is one of
  BIGGEST BARRIERS to purchasing a home.
• Lenders require up-front lump sum from buyers
• First-time buyers average less than 10 of
  purchase price for down payment other buyers
  average around 25 of purchase price due to
  equity build up.

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Chapter 8The Housing Decision

• 1. Down Payment
• The HIGHER the down payment, the LOWER the
  monthly payments
• The HIGHER the down payment, the MORE DESIRABLE
  THE BUYERS BUSINESS is from lenders
  perspective, often meaning a lower interest rate.

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Chapter 8The Housing Decision

• Down Payments and Private Mortgage Insurance
  (PMI)
• PMI usually required of buyer who obtains a
  conventional mortgage with less than 20 down
  payment
• Private mortgage insurance insures lender for the
  gap between the 20 and the lower down payment
• Can reduce amount of down payment to as low as
  2.5
• Premium (fairly expensive) added to cost of
  monthly payment

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Chapter 8The Housing Decision

• 2. The Monthly Payment
• Most mortgages fully amortize over life of loan
  (Payments in equal amounts with part going toward
  interest and remainder reducing principal)
• Initially, amortizing payment primarily pays for
  interest little principal is paid off. As time
  lengthens, payment primarily reduces principal

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Chapter 8The Housing Decision

• 3. Closing Costs
• Costs associated with transfer of ownership from
  the seller to the buyer
• Can easily amount to several thousand dollars
• Within three days after buyer applies for loan,
  lender must provide good faith estimate of
  closing costs
• Fall into two general categories
• Fees paid to the mortgage lender
• Fees paid to third parties

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Chapter 8The Housing Decision

• Points -- One of Many Closing Costs
• Fees paid (usually by buyer) to mortgage lender
• Also known as loan origination fees or loan
  discount
• One point 1 of mortgage amount on 100,000
  loan, two points would total 2,000
• Considered to be interest so deductible on tax
  returns

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Chapter 8The Housing Decision

• Prepaid Interest -- Another Closing Cost
• Covers the amount of the interest on the loan
  from closing date to beginning of period covered
  by first payment
• If close on April 15 and first payment due June 1
  (covering May interest due), you would be
  responsible to prepay interest from April 16
  until April 30th.
• Also deductible from taxes

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Chapter 8The Housing Decision

• More Closing Costs
• Sales Commission -- paid by seller to agents
  between 6 and 7 of purchase price
• Title Insurance
• Charges normally split between seller and buyer
• Lenders require purchase of title insurance to
  guard against defects in public record
• Title transferred at closing assures no known
  claims against the property

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Chapter 8The Housing Decision

• Sources of Mortgages
• FHA mortgages -- not government loans, but
  federally insured loans made by private lenders.
• Standards required for both property and buyers.
  May allow lower down payment since the loan is
  insured.

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Chapter 8The Housing Decision

• Sources of Mortgages
• VA mortgages -- Loan guarantees offered to
  veterans of armed services. Low down payments
  and limits on closing costs help veterans finance
  purchase of housing.
• Veterans Administration guarantees 100 of loan
  amount with maximum limits, depending on area of
  country.

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Chapter 8The Housing Decision

• Sources of Loans
• Conventional Mortgages -- a mortgage that is
  neither government insured or guaranteed.
  Comprises 75 of loans obtained by buyers.
• Lenders issue a note (indicates buyer responsible
  for debt) and mortgage (property pledged as
  collateral).
• Borrower must repay entire portion of debt, even
  if property is sold for less than amount of loan.

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Chapter 8The Housing Decision

• Types of Mortgages
• Fixed Rate
• 30-year, fixed rate (360 equal payments). Owner
  can make advance payments or additional principal
  payments
• 15-year, fixed rate (One-third of all new
  mortgage loans). Interest rate lower, but
  monthly payments higher total interest paid less

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Chapter 8The Housing Decision

• Types of Mortgages
• Adjustable-rate (ARM)
• Adjusted at pre-set intervals depending on what
  interest rates do (rate tied to a specified
  index, has cap over life of loan)
• Initial interest rate (teaser rate) below rate
  for fixed loans, but rises over life of loan

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Chapter 8The Housing Decision

• Fixed-Rate Loan versus ARM
• Consumers frequently avoid ARMs because of
  unpredictability of rates and consequent
  difficulty in long-term budgeting. BUT an ARM
  may make sense in certain situations
• 1. Buyer anticipates staying in present house
  for five years or less.
• 2. Buyer anticipates mortgage rates
• will drop in the next few years.

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Chapter 8The Housing Decision

• Refinancing a Mortgage
• Refinancing is paying off an old mortgage by
  replacing it with a new mortgage with different
  terms.
• As interest rates drop, refinancing becomes more
  attractive.

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Chapter 8The Housing Decision

• Second Mortgages
• Rates higher and for shorter terms (riskier for
  the lender)
• Can be used for any purchase the owner desires
  (home improvements, college education, etc.)
• May foreclose on house if default on payment

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Chapter 8The Housing Decision

• Home Equity Loan
• Allows owner to borrow up to maximum amount
  (based on equity in home) when needed without
  reapplying for loan each time
• Carries lower interest rates than other loans

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Chapter 8The Housing Decision

• Home Equity Loan
• Payments are tax deductible and made in regular
  installments
• Because lender has lien on property, may lose
  home if default on payments, EVEN if first
  mortgage payments made on time

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Chapter 8The Housing Decision

• Steps in Buying the Right House
• 1. Consider pre-qualifying for a mortgage before
  you look for a house -- You will know how large a
  mortgage you can receive and seller will know
  youre a serious buyer
• 2. Consider whether to hire a real estate agent
  -- Determine what length of time is acceptable
  to deal with one particular agent.

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Chapter 8The Housing Decision

• Steps in Buying the Right House
• 3. Consider how you will utilize the agent, once
  hired --
• Will you find the houses in areas you like and
  ask the realtor to show them to you?
• Will you give the agent specifications for a
  desirable house and let her come up with possible
  matches?

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Chapter 8The Housing Decision

• Steps in Buying the Right House
• 4. Make a formal offer once youve found the
  house you want
• Realtor will draw up contract and gives to seller
  who will either reject, accept, or counter offer.
  
• With a counter offer, you may reject, accept, or
  counter again.

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Chapter 8The Housing Decision

• Steps in Buying the Right House
• If price is agreed on, you will have to pay
  earnest money (a security deposit applied to
  purchase price at closing). If you back out of
  agreed- upon sale, you lose this money. Amounts
  vary, but a minimum is usually 1,000.

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Chapter 8The Housing Decision

• Steps in Buying the Right House
• 5. Home Inspections
• Real estate contract is subject to a home
  inspection by a professional who checks such
  things as
• plumbing
• roof
• foundation
• electrical system
• Quality and prices vary but normally inspections
  cost between 150 and 250.

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Chapter 8The Housing Decision

• Steps in Buying the Right House
• 6. Home Warranties
• Warranties provide additional protection for the
  buyer. Newly-constructed homes usually have at
  least one-year warranty.
• When buying existing home, seller required to
  verify condition of electrical and mechanical
  equipment.

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Chapter 8The Housing Decision

• Selling a Home
• One of first decisions is whether to sell
  yourself (FSBO) or list with an agent.
• Advantage of selling yourself -- no sales
  commission to real estate agent!

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Chapter 8The Housing Decision

• Advantages of Listing with Agent
• Agent can advertise to bring in buyers and have
  access to multiple listing services
• Verify that potential buyers are able to complete
  the purchase (Called Qualifying)
• Guide both buyer and seller through negotiations
  and closing