Housing Costs Chapter 10

10.1 – Mortgage Loans When purchasing a home… Make a down payment Generally between 10%-40% of the selling price Finance the remaining portion Mortgage Loan – A real estate loan that gives the lender the right to seize and sell the property if the borrower fails to make the payments on the loan.

The mortgage loan is usually repaid with interest in equal monthly payments Mortgage Loan Amount = Selling Price – Down Payment

Example Jen wants to purchase a home for $89,000, but a 12% down payment is required. What is the amount of the mortgage loan needed to finance the purchase? STEP 1: Find the down payment amount $89,000 x 12% = $10,680 STEP 2: Find the mortgage loan amount Loan amount = Selling Price – Down Payment = $89,000 – $10680 = $78,320 mortgage loan

Example You want to buy a new house. You have $15,000 in a house-savings account. You are required to make a 15% down payment. What is the most expensive house you can afford? What will your mortgage loan amount be? Selling Price x down pay % = down payment (SP) x (15%) = $15,000 SP = $100,000 Loan amount = $100,000 - $15,000 = $85,000

10.2 – Monthly Payment and Total Interest Lenders that make mortgage loans charge Interest The amount of money paid for the use of the lender’s money Interest rates vary from lender to lender

If you know the annual interest rate, the amount of the loan, and the length of the loan, you can use a table to find…. Monthly Payment Total Amount Paid Total Interest Charged

Amount Paid = Monthly Payment × # of Payments Total Interest Charged = Amount Paid – Amount of Mortgage = ↑ TABLE VALUE ↑

Example Pg. 346 table Suppose you apply for an $110,000 mortgage loan at 5.5% for 30 years. What is the monthly payment? The total amount paid? The interest charged? MP = 𝑚𝑜𝑟𝑡𝑔𝑎𝑔𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 $1,000 ×5.68 = $110,000 $1,000 ×5.68=$624.80 TAP = 𝑚𝑜𝑛𝑡ℎ𝑙𝑦 𝑝𝑎𝑦 ×# 𝑝𝑎𝑦𝑠=$624.80 ×30 12 = $224,928 IC = 𝑎𝑚𝑜𝑢𝑛𝑡 𝑝𝑎𝑖𝑑 −𝑚𝑜𝑟𝑡𝑔𝑎𝑔𝑒=$224,928 −$110,000 = $114,928

Selling Price: $195,000 What’s the total Down Payment: 20% interest charged??? Terms: 6% for 30 years Mortgage value = $195,000×80%=$156,000 MP = $156,000 $1,000 ×6.00=$936 𝑚𝑜𝑛𝑡ℎ𝑙𝑦 𝑝𝑎𝑦 TAP = $936 ×12 30 =$336,960 IC = $336,960−156,000=$180,960

Questions? Pg. 345, #7-12 Pg. 347, #2-13

10.3 – Closing Costs When you sign documents transferring ownership of the home to you, the lender charges closing costs May include fees for lawyers, credit checks and title searches, surveys, taxes, and the preparation of the documents

10.3 – Closing Costs Some lenders charge a flat fee regardless of the loan Some charge a percent of the amount of the loan (usually 2 to 5 percent of the loan) Others charge itemized fees at the closing

10.3 – Closing Costs Closing Costs = Sum of Bank Fees

Example You have been granted a mortgage loan at an annual interest rate of 8% for 25 years. The home has a selling price of $95,500, and needs a 15% down payment. You are allowed to finance the closing costs as part of the mortgage. What are the total closing costs? What is the actual amount financed with the mortgage? Closing Costs Credit report $65.00 Loan origination 2% of mortgage Abstract of title $120.00 Attorney fee $250.00 Documentation stamp 0.3% of mortgage Processing fee 1.10% of mortgage Total Closing Costs

Closing Costs Credit report $65.00 Loan origination 2% of mortgage Abstract of title $120.00 Attorney fee $250.00 Documentation stamp 0.3% of mortgage Processing fee 1.10% of mortgage Total Closing Costs Find down payment $95,500×15%=$14,325 Find mortgage amount $95,500−$14,325 $81,175 Fill in the rest of the table

Example 2 Mortgage loan of $150,000 Find the closing costs. Appraisal fee $250 Credit report $75 Title search $275 Service fee 1.3% of mortgage Legal fees $295 Mortgage loan of $150,000 Find the closing costs. Find the actual amount financed with the mortgage. Service fee = $150,000 x 1.3% = $1,950 service fee Closing Costs = $250 + $75 + $275 + $1,950 +295 = $2,845 Amount Financed = $150,000 + $2,845 = $152,845

QUESTIONS? Pg. 350, #2-8

10.4 – The Monthly Payment Most mortgage loans are repaid in equal monthly payments Includes an amount for payment of interest and an amount for payment of the principal of the loan The amount borrowed to finance the mortgage

10.4 – The Monthly Payment Interest = Principal x Rate x Time Important Questions What formulas do I use? How do I find simple interest? 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡=𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 ×𝑟𝑎𝑡𝑒 ×𝑡𝑖𝑚𝑒 How do I figure out the payment to principal amount? 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑡𝑜 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 =𝑚𝑜𝑛𝑡ℎ𝑙𝑦 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 −𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 How do I figure out the new principal? 𝑛𝑒𝑤 𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙= 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝐵𝑎𝑙𝑎𝑛𝑐𝑒 − 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑡𝑜 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙

Obtain a 30-year, $80,000 mortgage loan at 8% interest Obtain a 30-year, $80,000 mortgage loan at 8% interest. Monthly payment is $587.20. For first payment, what is the interest? What is the payment to principal? I=PRT= $80,000(0.08)( 1 12 )= $533.33 interest $587.20 - $533.33 = $53.87 payment to principal $80,000 - $53.87 = $79,946.13 new principal

10.5 – Real Estate Taxes When you own a home, you typically have to pay city and county real estate taxes, as well as a school tax Used to operate and maintain roads, parks, schools, government offices, and other city expenses

Real Estate Taxes These taxes are paid into an escrow account monthly, and are collected once a year.

10.5 – Real Estate Taxes The amount of real estate tax you pay depends on… The assessed value of your property The tax rate Assessed value is found by multiplying the market value of your property by the rate of assessment

10.5 – Real Estate Taxes Market Value – the price at which a house can be sold or bought Determined by an assessor The rate of assessment is a percent Mill = $0.001 or Mill = $1.00 ÷ 1,000

A tax assessor determined that the market value of your house is $74,000. The rate of assessment is 70% of market value. Tax rate is 44.26 mills. What is the real estate tax on Courtland Farm? 𝑎𝑠𝑠𝑒𝑠𝑠𝑒𝑑 𝑣𝑎𝑙𝑢𝑒=𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 ×𝑟𝑎𝑡𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑠𝑠𝑚𝑒𝑛𝑡 $74,000 x 70% = $51,800.00 44.26 mills ÷ 1,000.00 = 0.04426 tax rate Real estate tax = Tax rate x Assessed Value 0.04426 x $51,800.00 = $2,292.67 real estate tax

Questions? Pg. 356, #1-10

10.6 - Homeowners Insurance The following factors can affect your homeowners insurance premium: Home features and characteristics Location Protective Devices Personal Factors Claims History

Homeowners Insurance Loss-of-use coverage Pays for expenses of living away from home while repairs are being completed Personal Liability and Medical Coverage Protect you from financial losses if someone is injured at your home

Homeowners Insurance Replacement Value Amount required to reconstruct your home if it’s destroyed To receive full payment for any loss up to the amount of the policy, you must insure your home for at least 80% of its replacement value Use this to calculate the amount of coverage you receive on your garage, personal property, and for loss of use.

Amount of the insurance = $94,000 ×0.80=$75,200 Replacement value of home is $94,000. The home is insured for 80% of its replacement value. What is the amount of the coverage on the home? What is the coverage amount for personal property, loss of use, and garage? Coverage Percent Covered Garage 10% Loss of Use 20% Personal Property 50% Amount of the insurance = $94,000 ×0.80=$75,200 Personal Property Coverage = $75,200 ×0.50=$37,600 Loss of Use Coverage = $75,200 ×0.20=$15,040 Garage Coverage = $75,200 ×0.10=$7,520

Questions? Remember, the coverage amount is not what we pay. It is what we are reimbursed in case of damage/loss to our house.

10.7 – Homeowners Insurance Premium How much insurance you pay depends on location and your house structure High crime area? Flood area? Susceptible to fire? On a mountainside? Brick or wood?

10.7 – Homeowners Insurance Premium Homeowners Policy Premium is the amount you have to pay for insurance coverage Every home is assigned a number that reflects how fire resistant your house is and how close you are to a water source. This is called your fire protection class

Homeowners Insurance Premiums Amount of Insurance Coverage Annual Premiums for a Typical Homeowners Policy Amount of Insurance Coverage Brick/Masonry Veneer Wood Frame Fire Protection Class 1-6 7-8 $40,000 $166 $170 $178 $183 45,000 173 178 187 191 50,000 183 190 195

Home replacement cost = $150,000 Home replacement cost = $150,000. Home is insured for 80% of its replacement value. Wood-frame home, rated in fire protection class 4. What is the annual premium? Find amount of insurance coverage $150,000 ×0.80=$120,000 coverage on home Find the annual premium in the table $381 annual premium

Questions?

10.8 – Other Housing Costs In addition to monthly mortgage payment, real estate taxes, and insurance payment, you’ll have expenses for utilities, maintenance, and home improvements Utility Costs – may include charges for electricity, gas, water, telephone, cell phone, cable TV, Internet service, repairs, and heating fuel. Federal Housing Administration (FHA) recommends that your total monthly housing cost be less than 35% of your monthly net pay.

Don’t pay property taxes Don’t pay for repairs Pay property insurance Rent vs. own Good investment Security and stability Tax breaks Pay mortgage Value of home may give equity or profit Mobility Less costly Don’t pay property taxes Don’t pay for repairs Pay property insurance Pay Utilities

Mortgage Payment Insurance ($303 ÷ 12) Real estate taxes ($1,885 ÷ 12) Housing Expenses for May Mortgage Payment $698.24 Insurance ($303 ÷ 12) 25.25 Real estate taxes ($1,885 ÷ 12) 157.08 Electricity 65.90 Heating fuel 54.20 Telephone 36.18 Water 26.20 Cell Phone 29.95 Cable TV Service 39.95 Loan payment on oven 50.00 Repair storm door 38.68 You take home $3,320 a month. Find the total monthly cost Find the recommended maximum (35%) Within the guidelines? $1,221.63 $1,162.00

Pg. 362, #1-13