© South-Western Educational Publishing Buying a Home

GOALS © South-Western Educational Publishing Buying a Home  Discuss the advantages of home ownership  Describe the costs and responsibilities of home ownership  Describe the steps in the home-buying process  Discuss how to obtain financing and the closing process

© South-Western Educational Publishing Advantages of Home Ownership  Equity Increases  Market Value of a house is the highest price it would bring on the market (what it could be bought or sold for)  Property values are established by appraisals which are estimates of the value of a house by comparing it to other houses that have been sold in a particular area

© South-Western Educational Publishing Advantages of Home Ownership  Appraised value is used to establish selling prices as well as used by the bank in determining how much they will loan  Houses typically (but not always) go up in value over time. This creates a situation where one is gaining equity in their house. Equity – the difference between the market value of property and the amount owed on it

© South-Western Educational Publishing Advantages of Home Ownership  Equity Increases  Equity increases come from two things o Debt on loan is decreasing as we pay it off o Value of house is going up

© South-Western Educational Publishing Advantages of Home Ownership  Tax Savings  Interest paid on a home loan, along with property taxes are tax deductible. This make owning real estate a tax shelter

© South-Western Educational Publishing Advantages of Home Ownership  Quality of Life Advantages  Offers privacy and personal freedom not available to renters  As a homeowner you have free use of the facilities  Gives a sense of security and independence  Sense of stability and belonging to your community

© South-Western Educational Publishing Costs and Responsibilities of Home Ownership  Down Payment  Most conventional (not government backed) loans requires percent down payment  This requires saving a great deal of money

© South-Western Educational Publishing Costs and Responsibilities of Home Ownership  Mortgage  Mortgage – a loan to purchase real estate  Payments are typically made over an extended period of time (15 to 30 years)

© South-Western Educational Publishing Costs and Responsibilities of Home Ownership  Mortgage  Usually have to pay a finance charge called points, which is equal to a percent of the amount of the loan. Points are basically extra interest that must be paid at the time the loan is made. Points increase the cost of the loan and must be considered when comparing loan rates. o Most lenders will charge lower rates if you pay more points up front. Which is the better deal depends on how long you stay in the property

© South-Western Educational Publishing Costs and Responsibilities of Home Ownership  Closing Costs  Also called settlement costs  Expenses paid in transferring ownership from buyer to seller  Can be 3,000 to 5,000 dollars or more

© South-Western Educational Publishing Costs and Responsibilities of Home Ownership  Closing Costs  Includes o Title search o Credit report o Loan fees o Assumption fees o Closing fees o Recording fees o Part of taxes and interest owed o Property insurance

© South-Western Educational Publishing Costs and Responsibilities of Home Ownership  Property Taxes  Real estate property taxes is one of the major funding sources for local governments  Homeowners must pay property taxes based upon the assessed value of their property (not usually the same as market value)

© South-Western Educational Publishing Costs and Responsibilities of Home Ownership  Property Taxes  Tax amount is based on a certain amount per thousand of assessed value and is usually paid annually or semi-annually

© South-Western Educational Publishing Costs and Responsibilities of Home Ownership  Insurance  Homeowners must have insurance that covers the structure, as well as the contents of a house

© South-Western Educational Publishing Costs and Responsibilities of Home Ownership  Utilities  Electricity, water, garbage pickup, etc

© South-Western Educational Publishing Costs and Responsibilities of Home Ownership  Maintenance and Repairs  Many responsibilities that are usually not present when you rent o Painting (inside and out) o Mowing o Landscaping o Fixing things that break o Repair and or replace roof o Repair and or replace heating system/ cooling systems o Repair and or replace water heater o Etc.

© South-Western Educational Publishing Costs and Responsibilities of Home Ownership  Maintenance and Repairs  Can be very costly to maintain a house

© South-Western Educational Publishing Finding and Selecting a Home  In buying a home you should consider:  Location  Accessibility  Nearness to employment  Type and quality of construction  Cost and effort of maintenance  Personal likes and dislikes

© South-Western Educational Publishing Finding and Selecting a Home  Working with a Real Estate Agent  Real estate agents can help you locate and look at houses o Know the market o Assist with purchasing, financing, closing

© South-Western Educational Publishing Finding and Selecting a Home  Working with a Real Estate Agent  Real estate agents work for a commission (percentage of the sales price) o 5-7% (could be more or less) o Seller pays the commission and the agents working for the buyer and seller splits it. It is important to understand that the real estate agent will get paid more, the higher the price of the house is they sell you and that since the commissions comes out of the sellers proceeds, they are really working for the seller

© South-Western Educational Publishing Finding and Selecting a Home  Working with a Real Estate Agent  Finding houses o Online o Newspaper ads (including owners who are selling without the services of a real estate agent)

© South-Western Educational Publishing Finding and Selecting a Home  Finding houses  Agents o MLS (Multiple Listing Service) A real estate marketing service in which agents from may agencies pool their home listings

© South-Western Educational Publishing Finding and Selecting a Home  Finding houses  Agents o Listings Detailed description of the house for sale Number of rooms Total square footage Special features (fireplace, garage, etc) Amount of land

© South-Western Educational Publishing Finding and Selecting a Home  Finding houses  Agents o Listings Sometime photographs of the home Online sometimes there are virtual tours

© South-Western Educational Publishing Finding and Selecting a Home  Making an Offer  After deciding that you are ready to buy a particular house you make an offer o Offer – a formal document (agreement) that expresses interest in entering into a contract with someone

© South-Western Educational Publishing Finding and Selecting a Home  Making an Offer  Offer o Explains the terms of the purchase o Price you are offering o Down payment o Mortgage amount o Dates when you will close the deal and take possession

© South-Western Educational Publishing Finding and Selecting a Home  Making an Offer  Earnest Money – a portion of the purchase price that the buyer deposits as evidence of good faith to show that the purchase offer is serious o Protects the seller in case you fail the meet the terms of the agreement o Protects the buyer from house being sold to someone else (with certain exceptions)

© South-Western Educational Publishing Finding and Selecting a Home  Making an Offer  Offer should be contingent on obtaining financing and the property passing inspections. o In these cases earnest money will be returned to you

© South-Western Educational Publishing Finding and Selecting a Home  Making an Offer  Acceptance – a formal agreement by the seller to the terms of the offer, which forms a contract between the parties  Counteroffer – an offer in response to another offer. Sometimes made by the seller in response to the offer made by the buyer. This can then be accepted or rejected by the buyer

© South-Western Educational Publishing Obtaining Financing  Down Payment Sources  Most common sources are personal savings and informal loans from parents or relatives  Most lending institutions will not allow mortgage applicants to formally borrow their down payment o Want buyer to invest a substantial amount of own cash

© South-Western Educational Publishing Obtaining Financing  Qualifying for a Mortgage  Must complete an extensive loan application  Financial institution will check your credit history, employment, and references

© South-Western Educational Publishing Obtaining Financing  Qualifying for a Mortgage  Financial institution wants to know o You can meet your current bills o You can meet the mortgage payment o The type and amount of current debts

© South-Western Educational Publishing Obtaining Financing  Qualifying for a Mortgage  Financial institution wants to know o The amount and source of income o Your creditworthiness o Monthly mortgage payments do not exceed percent of your take-home pay

© South-Western Educational Publishing Obtaining Financing  Qualifying for a Mortgage  Financial institution wants to know o What the true value of the property is (since it is the collateral for the loan) Will require an independent appraisal

© South-Western Educational Publishing Obtaining Financing  Types of Mortgages  Fixed rate mortgage o Interest rate does not change during the term of the loan  Adjustable-rate mortgage (ARM) o Starts lower than current rates for fixed rates, but are subject to change (usually has a ceiling)

© South-Western Educational Publishing Taking Title to Property  Closing  The title will be transferred to the buyer o Title – a legal document that establishes ownership o Deed – a legal document that transfers title of real property from one party to another

© South-Western Educational Publishing Taking Title to Property  Closing  The title will be transferred to the buyer o Title search – checks to make sure that the title to a property is clear prior to transferring ownership and that is has no liens

© South-Western Educational Publishing Taking Title to Property  Closing  The title will be transferred to the buyer o Lien – a financial claim on property o Title insurance – protects the new owner from any claims that could arise from a defective title

© South-Western Educational Publishing Taking Title to Property  Closing  At closing, buyer and seller sign all necessary papers and pay all related closing costs and the property is transferred to the new owner