HOME BUYING STUDY CASE Shae Bell

Sue & Dan Shimo ◦ Sue has been disabled and has been unable to work for the past five months. ◦ The family has lost 42% of their income ◦ They having soaring credit card balances ◦ Their interest rate is 7 ¾ ◦ Sue had a 401(k) with her previous employer but spent the $2,800 balance when she received a lump sum distribution earlier this year.

Renting Pros Possible lower monthly payment No mortgage insurance required No property tax No up keep costs Possible recreation facilities included Cheaper utility costs Easier to change homes Cons No investment return No tax break Monthly payment can increase You don’t build equity You can’t customize without owner’s approval

Non-Traditional Purchase ◦ Subprime mortgage : is extended to individuals who are of higher risk due to history of bankruptcy, a higher debt to equity ratio, a history of non-payment of debt despite sufficient cash flow and/or low credit score. ◦ Interest-only mortgages : balloon loans in which the borrower must service the interest during the life of the loan and then make a balloon payment at maturity to pay off the principal. ◦ ARM’s : are loans that have interest rates that will be reset in periodic intervals. These intervals can vary from months to years, and will cause payments to fluctuate more than a traditional mortgage. ◦ Lease option to buy : is a type of loan where you don’t have to go through a mortgage company, you work directly with the homeowner.

Non-Traditional Purchase Pros Don’t have down payment immediately Part of monthly payment goes towards down payment While leasing, the property owner is still responsible for the property up keep Could help towards buying a home, if you have credit issues Good idea, if loan is meant to pay off a higher interest debt (such as credit card debt) and the borrower has no other means for payment. (subprime loan) Cons Only a portion of your payment is going to the equity of the home The property owner can set guidelines Takes longer to actually be the homeowner Higher Interest Rate

Non-Traditional Purchase Pros (ARM) Interest rate could go down resulting in a lower monthly payment Could result in a lower monthly payment (interest-only mortgage) At the end of the interest-only term the borrower can either renew the interest-only mortgage or repay it through standard means, such as entering a normal mortgage and liquidating investments. Interest only mortgages can be useful for first-time home buyers because it allows young people to defer large payments until their income grows. Opportunity for lower interest rate by shopping around Cons (ARM) Interest rate could go up resulting in a higher monthly payment Worst-case scenario if you hold the mortgage past the initial fixed-rate period. Some ARMs come with a prepayment penalty. ARM’s can come with some very complicated terms and conditions.

Modest Home Pros Affordable to build Very cheap to live Very efficient to clean Very cozy Cons Not enough storage space Small Kitchen Small Yard Sometimes no privacy

Extravagant Home Pros More space(library, gym, play room) Big outdoors (backyard, pool, animals) Business Opportunities (bed&breakfast, weddings, seminars, conferences, retreats) Cons Utility bills increase(lighting, heating, air conditioning) Cleaning(big house, big mess) The Yard (need equipment, help, more money)

Renting vs. Buying Renting ◦ No Maintenance is Required ◦ It’s Easier to Move ◦ You Can Avoid Owning a Depreciating Asset Buying ◦ You Can Build Equity ◦ You have the Freedom to Decorate the way you want ◦ You may be able to use your home as an investment ◦ You can take advantage of tax breaks for homeowners ◦ Your housing payments will stay stable ◦ You can settle in a community

Smart Buying Steps 1.Differentiate Want From Need 2.Do Your Homework 3.Make Your Purchase 4.Maintain Your Purchase

Wants and Needs Wants ◦ Near Dan’s Work ◦ Nice Neighborhood ◦ Near Elementary School Needs ◦ Some place that has a minimum of two bedrooms ◦ Low Mortgage Payment ◦ Close enough to public transportation so Dan can get to work.

20% Down Payment ◦ If the Shimo’s bought this condo, which is what they own already, 3480 Ashby View Cv, West Valley City, UT ◦ The price of the house is $145,000 ◦ The 20% down payment would be $29,00

Closing Costs Chart ◦ Down payment- $29,000 ◦ Points- 2 points, $2,900 ◦ Loan Origination Fee- $1,450 ◦ Loan Application Fee- $250 ◦ Appraisal Fee- $250 ◦ Title Search Fee- $200 ◦ Title Insurance- $500 ◦ Attorney’s Fee- $400 ◦ Recording Fee- $20 ◦ Credit Report- $50 ◦ Termite and Radon Inspection Fee- $150 ◦ Notary Fee- $50 ◦ Total Initial Costs- $35,220

Comparing Costs of Conforming ◦ For the West Valley condo the conforming costs would be… ◦ 30 year fixed $515/month ◦ 15 year fixed $783/month ◦ 5/1 ARM $467/month

Length of Time to Pay Off Home ◦ They would do a 30 year fixed loan. ◦ Loan balance would be $116,000 ◦ Loan payment $515/month

Total Interest they will pay. Worth it? ◦ $183,174 ◦ This is not worth it for the Shimo’s because of where they stand financially. % of income goes to mortgage ◦ 42% of their income goes to the mortgage

Home Appreciation vs. Investing Home Appreciation ◦ More in control ◦ Leverage with other people’s money ◦ Tax advantageous ◦ Easier to analyze and quantify ◦ The government is on your side Investing ◦ Higher rate of return ◦ Much more liquid ◦ Lower transaction costs ◦ Less work ◦ More variety ◦ Invest in what you use ◦ Tax benefits

Best immediate choice, long term plan ◦ They need to liquidate some of their assets to try and hold them over until Sue finds out about the disability insurance. ◦ Another option is trying to sell their home to pay off their bills and buy an inexpensive car and move into a rental and try to restart and get their credit back on track.