Chapter 9: The Housing Expenditure

1
Chapter 9 The Housing Expenditure
2
Objectives

• Discuss the options available for rented and
  owned housing and whether renters or owners pay
  more for housing.
• Determine how much buyers can afford for
  housing.
• Discuss the various mechanisms for financing a
  home.

3
Objectives

• Identify the numerous costs of buying a home,
  including principle, interest, and closing
  costs.
• List and describe the steps in the home-buying
  process.
• Identify some important concerns in the process
  of selling a home.

4
Housing Decision

• Young Single
• Rental housing has limited maintenance and offers
  mobility.
• Purchase a home or a condominium for financial
  and tax benefits.

• Single Parent
• Rental housing can provide suitable environment
  for children and some degree of housing security.
• Purchase low-maintenance housing to meet
  financial and social needs of family.

• Young Couple, No Children
• Rental housing offers convenience and flexibility
  of lifestyle.
• Purchase housing for financial benefits and to
  build long-term financial security.

• Couple, Children No Longer At Home
• Rental housing for convenience, flexibility for
  changing needs and financial situation.
• Purchase housing that requires minimal
  maintenance and meets lifestyle needs.

• Couple, Young Children
• Rental housing can provide facilities for
  children in a family-oriented area.
• Purchase a home to meet financial and other
  family needs.

• Retired Person
• Rental housing meet financial, social, and
  physical needs.
• Purchase housing that requires minimal
  maintenance, offers convenience, and provides
  needed services.

5
Renting Your Residence

• Advantages
• Mobility
• Fewer responsibilities
• Lower costs initially
• More amenities
• Disadvantages
• Few financial benefits
• Restricted lifestyle
• Cost of renting - deposits
• Legal concerns of a lease

6
Advantages of Owning

• Pride of ownership
• American dream/norm
• Reduced income taxes
• deduct property taxes
• deduct mortgage interest

7
Advantages of Owning
(continued)

• Build an equity
• pay down the loan
• price appreciation
• Builds your credit rating
• Hedge against inflation
• Lifestyle flexibility
• can express your individuality

8
Disadvantages of Owning

• Financial risk
• need down payment
• home prices could drop
• Limited mobility
• can take time to sell
• Higher living costs
• maintenance
• repairs improvements
• utilities insurance
• real estate taxes

9
Renting vs. Owning Your Home

• WHO PAYS MORE

• Based on cash flow, renters appear to win
• After taxes and appreciation, owners usually win

10
Renting versus Buying Place of Residence
RENTAL COSTS EXAMPLE YOUR FIGURES
Annual Rent Payments 15,000
Renters Insurance 210
Interest Lost on Security Deposit (amount of security deposit times after-tax savings account rate) 36
Total annual cost of renting 15,246
Annual mortgage payments 15,168
Property taxes (annual) 4,800
Homeowners insurance (annual) 600
Estimated maintenance and repairs (1) 2,000
After-tax interest lost on down payment and closing costs 750
Less financial benefits of home ownership
Growth of equity (1,120)
Tax savings for mortgage interest (annual mortgage interest times tax rate) (3,048)
Tax savings for property taxes (annual property taxes times tax rate) (1,344)
Estimated annual appreciation (1.5) (3,000)
Total annual cost of buying 14,806
Comparing an apartment with 1,250 of monthly
rent and a home that cost 200,000. A 28 tax
rate is assumed.
11
Housing Options for Home Buyers

• Single-family dwelling
• tract housing
• built on speculation by builder
• built to your specifications
• previously lived in home
• manufactured home
• mobile home

12
Home Buying Process Step 4 Obtaining Financing

• Determine the amount of down payment
• mortgage insurance
• Qualifying for a mortgage
• can be pre-qualified based on income, assets,
  debts, credit history and length of loan
• purpose of points (prepaid interest)
• The home loan application process
• fixed or adjustable rate mortgage
• locking in an interest rate - search Web

13
Qualifying for a Mortgage

• Amount available for down payment
• Amount of income
• Amount of other debts
• Credit rating
• Current mortgage rates
• Length of loan desired

14
Home Buying Process Step 1 Determine Ownership
Needs

• How much you can afford
• down payment
• loan amount
• size and quality
• handymans special
• sweat equity

15
Home Buying Process Step 2 Finding and
Evaluating a Property to Purchase

• Select a location
• Zoning laws
• Covenants, codes and restrictions
• Using a real estate agent
• Property appraisal
• Conducting a home inspection

9-15
16
Home Buying Process Step 3 Pricing the Property

• Determining the price to offer
• Negotiating the purchase price
• sellers or buyers market
• earnest money
• Contingency clauses
• home passes structural inspection
• able to get a loan

17
Estimating Mortgage Loan Payments for Principal
and Interest
Estimating Mortgage Loan Payments for Principal
and Interest (Monthly Payment per 1,000
Borrowed)
  Payment Period (Years) Payment Period (Years) Payment Period (Years) Payment Period (Years) Payment Period (Years)
Interest Rate (5) Interest Rate (5) 15 20 25 30
4.5 4.5 7.6499 6.3265 5.5583 5.0669
5.0 5.0 7.9079 6.5996 5.8459 5.3682
5.5 5.5 8.1708 6.8789 6.1409 5.6779
6.0 6.0 8.4386 7.1643 6.4430 5.9955
6.5 6.5 8.7111 7.4557 6.7521 6.3207
7.0 7.0 8.9883 7.7530 7.0678 6.6530
7.5 7.5 9.2701 8.0559 7.3899 6.9921
8.0 8.0 9.5565 8.3644 7.7182 7.3376
8.5 8.5 9.8474 8.6782 8.0523 7.6891
9.0 9.0 10.1427 8.9973 8.3920 8.0462
9.5 9.5 10.4422 9.3213 8.7370 8.4085
10.0 10.0 10.7461 9.6502 9.0870 8.7757
Note To use this table to calculate a monthly
mortgage payment, divide the amount borrowed by
1,000 and multiply by the appropriate figure in
the table where the interest rate and the time
period for the loan intersect. For example, a
150,000 loan for 30 years at 9 percent would
require a payment of 1,206.93 (150.000/1,000)
x 8.0462 over 15 years it would require a
payment of 1,521.41.
18
Effect of Down Payment
Effect of Down Payment Size on Monthly Payment
for a 150,000 Home (7 Percent Mortgage Loan for
30 Years)
Down Payment Amount Of Loan Monthly Payment
5,000 145,000 964.69
10,000 140,000 931.42
15,000 135,000 898.16
20,000 130,000 864.89
25,000 125,000 831.63
19
Type of Mortgages

• Conventional
• fixed rate, amortized
• 5, 10 or 20 percent down
• 15, 20 or 30 years of fixed payments
• Government guaranteed
• Veterans Administration
• Federal Housing Administration
• Adjustable rate mortgages
• varies with the prime rate but has a rate cap

20
Type of Mortgages
(continued)

• Graduated payment
• payments start lower and go up
• for persons whose income will increase
• Balloon
• fixed monthly payments plus one large payment,
  usually after 3, 5 or 7 years
• Growing equity
• payment increases to allow loan to be paid off
  more quickly

21
Type of Mortgages
(continued)

• Shared appreciation
• borrower agrees to share appreciated value of the
  home with the lender
• Home equity loans
• a second mortgage
• home is collateral and interest may be tax
  deductible
• Reverse
• a loan based on the home equity
• Refinancing

22
Home Buying Process Step 5 Closing the Purchase
Transaction

• Title insurance and search fee
• Attorneys and appraisers fees
• Property survey
• Recording fees transfer taxes
• Credit report
• Termite inspection
• Lenders origination fee
• Tax and insurance reserves
• Pre-paid interest
• Real estate commission

Closing Costs
23
The Main Elements of Buying a Home

• Location
• Down payment
• Mortgage application
• Points
• Closing costs
• TIPI (taxes, insurance, principal, interest)
• Maintenance costs

24
Selling Your Home

• Preparing your home
• Determining the asking price
• Appraiser
• Realtor
• For sale by owner or use a broker
• Listing with a real estate agent

25
Make Sure Security Deposit Is Returned

• 1. List damages/defects before moving in unit.
• 2. Maintain unit and promptly notify landlord
  of any problems.
• 3. Give proper written notice of intent to move.
• 4. List all damages/defects after moving out of
  unit.
• 5. Use certified mail to request return of
  security deposit.
• 6. Use small claims court, if necessary.

26
Types of RealEstate Agents

• Listing agent
• Selling agent
• Buyers agent
• Dual agent