The Housing Decision: Factors and Finances

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• Chapter 9
• The Housing Decision Factors and Finances

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Chapter 9Learning Objectives

1. 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 Alternatives

• Objective 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

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Renting your Residence

• Objective 2 Analyze the costs and benefits
  associated with renting
• The search
• Select 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 move
• Fewer maintenance and repair responsibilities
• Lower 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
  renters 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 rent

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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 Process

• Objective 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 individuality

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Home Buying Process (continued)

• Drawbacks of Homeownership
• Financial 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 lt1,000 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?

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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 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
• 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 Price
• Price is affected by whether it is a sellers or
  a buyers market.
• Negotiating the Purchase Price
• Counteroffers are common
• Earnest money
• Contingency clauses, such as...
• Buyer must be able to obtain financing
• Sale contingent on the sale of the buyers
  current home

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The Finances of Home Buying

• Objective 4 Calculate the costs associated with
  purchasing a home
• Step 4 OBTAIN FINANCING
• Determine the amount of the down payment
• Private 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 programs
• Veterans Administration
• Federal Housing Authority
• Lower down payment than conventional
• Balloon
• Fixed 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 mortgages
• During the life of the loan the interest rate
  varies with the prime rate, but has a rate cap
• Growing-equity
• Increases 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-Downs
• Interest subsidy from a home builder or a real
  estate developer that reduces the mortgage
  payments for the first few years
• Second mortgage
• Home is collateral and interest may be tax
  deductible. Home equity loans are an example
• Reverse mortgages
• Provides elderly with tax-free income based on
  the home equity
• Refinance if interest rate drops at 2-3

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The Finances of Home Buying (continued)

• Step 5 CLOSE THE PURCHASE TRANSACTION
• Documents signed meeting of buyer, seller, and
  lender
• Closing costs include...
• Title insurance and search fee
• Attorneys and appraisers fees
• Property survey Pest inspection
• Deed recording fees Transfer taxes
• Credit report Lenders origination fee
• Escrow account for tax and insurance reserve
• Pre-paid interest Real estate commission

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Selling Your Home

• Objective 5 Develop a strategy for selling
• Preparing your home
• Repair, repaint, and clean
• When showing home turn on lights and open drapes.
  Bake bread or make coffee for a welcoming smell
• Determining the selling price
• Appraiser estimates the current value
• Real 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 Activity

• Go to www.bankrate.com to determine the best
  mortgage rates in your area.
• Would you prefer a fixed-rate or adjustable rate
  mortgage? Why?