The Finances of Housing Chapter 7 11/9/2018

Opportunity Costs of Housing Choices What are some opportunity costs to consider when purchasing a home? Mobility- ability to move easily from place to place Renting vs. Buying- Why would you rent a home if you could buy one? Buying a “fixer upper” will allow you to buy a larger property for less money but also means you will have to work on the house…renting an apartment may give you more mobility but you give up the tax advantages that homeowners enjoy 3. Decision depends on your lifestyle and on financial factors…renting is a good choice for young adults who need mobility or people who do not want to devote time or money to maintenance…owning is a good choice for people who want a certain amount of stability in their lives…more privacy and some freedoms that are not available to a renter…ownership is costly in the short run but it allows for tax advantages as well 11/9/2018

Housing Information Sources Housing information is plentiful and often free. Sources: Libraries Newspapers articles on renting, buying, & other housing topics in the real estate section of a newspaper Internet Home buying tips, latest mortgage rates, & information on available housing Friends & Family Real Estate Agents Government Agencies Last…any combination of these sources will provide the information you need to make wise housing decisions, whether you decide to rent or buy your home. 11/9/2018

Renting a Residence What should you know before signing a lease? Ability to read & understand classified ads in newspaper is a skill you will need if you are going to rent Tenant- person who pays for the right to live in a residence owned by someone else Landlord- person who owns the property that is rented 11/9/2018

Selecting an Apartment Location Near school or work Near shopping, recreation, public transportation Finances Amount of rent? Amount of security deposit? Utility cost? Length of lease? Building Condition of building & grounds Parking facilities Security system Condition of hallways, stairs, elevators Access to mailboxes Layout & facilities Size & condition of apartment Plumbing & water pressure Type & condition of appliances Condition of doors, locks, windows, closets, & floors 11/9/2018

Advantages of renting Mobility & fewer responsibilities Low initial costs Disadvantages Financial & lifestyle restrictions Legal issues Lease- legal document that defines the conditions of the rental agreement between tenant & landlord If you want to move, you can usually notify your landlord 30 days prior to leaving. Making major repairs & maintaining the property are the landlord’s concern…don’t have to worry about property taxes or property insurance Don’t have to pay a big down payment…just one or two months’ rent to move into a rental unit 4. Ineligible for tax deductions that a homeowner receives…once house is paid off, no monthly payment…renter continues to pay rent and also subject to rent increases…homeowners have more freedom to do what they want to their own property 5. Renters sign a lease…never sign a lease w/o making sure that you understand & agree with what it says. Pay special attention to the amount & due date of the monthly rent & length of rental period…leases are designed to protect landlord & tenant…tenant is protected from rent increases during the lease term…lease gives landlord right to take legal action against tenant who does not pay his or her rent or who damages the property 11/9/2018

Cost of Renting Location Living space Proximity to work & major freeways Living space Utilities – before signing the lease, ask the landlord if the rent payment includes any utilities Security deposit – amount of money paid by a tenant to guard against any financial loss or damage that the tenant might cause. Usually one or two months’ rent Renters insurance – covers loss of tenant’s personal property as a result of damage or theft 2. The larger the apartment is…the more it costs; could also get a roommate to share expenses 11/9/2018

Home-buying process Step 1: Determine your home ownership needs Benefits & drawbacks of owning a residence Equity – value of home less the amount still owed on the money borrowed to purchase it. Types of housing Affordability & your needs: price & down payment, size & quality of house, & trading up benefits: sense of stability & permanence. More freedom to decorate & change your own home and to have pets. Financial benefits as well. Deduct interest charges on your loan payments from your federal income taxes each year. Property taxes are also deductible. Drawbacks: down payment is expensive, property values don’t always go up, limited mobility, maintenance & repair expense Houses, condos, cooperative housing, prefabricated homes, mobile homes 11/9/2018

Step 2: find & evaluate a property to purchase Selecting a location Local zoning laws – regulations that limit how property in a given area can be used. Hiring a real estate agent Conducting a home inspection Would you rather live in the city, suburbs, or in a small-town or country setting. Distance between home & work, quality of local school system, your interests & lifestyle, all help determine where you will want to live Good sources of information about the location, availability, prices, & quality of homes. Also able to negotiate the purchase price between buyer & seller…real estate services are usually free to the buyer. Agents may represent the sellers, who pay them a commission of 3-6% when property is sold Home inspections can cost you money but will save you from problems & unplanned expenses in the future. Also, if problems are uncovered, you may be able to negotiate a lower price w/seller in anticipation of these expenses 11/9/2018

Step 3: Price the property Determining the price of the home How long has home been on market? What have similar homes in the neighborhood sold for recently? Do the current owners need to sell in a hurry? How easily can you arrange financing? Negotiating the purchase price Escrow account- money is held in trust until it can be delivered to a designated party. Applied toward down payment. 11/9/2018

Step 4: obtain financing What are the costs involved in purchasing property? Determining the amount of down payment Private mortgage insurance (PMI) – protects lender in case buyer cannot make payments. Qualifying for a mortgage Long-term loan extended to someone who buys property Financial qualifications Interest rate factors Paying points – extra charges paid by buyer to get lower interest rate 3c- size of your mortgage will depend on current interest rate. The higher the rate, the more you will need to pay in interest each month. That means that less of your money will be available to pay off the purchase price. 11/9/2018

Types of mortgages How do the various types of mortgages differ? Amortization – reduction of a loan balance through payments made over a period of time Fixed-rate mortgages Adjustable-rate mortgage (ARM) Home equity loan – loan based on difference between current market value of home & amount borrower owes on mortgage Refinancing – obtaining a new mortgage to replace an existing one. Closing costs & possible longer loan could result 3. Fixed interest rate & fixed schedule of payments…offers peace of mind because monthly payments always remain the same 4. Interest rate changes during the life of the loan…changes according to economic factors 5. Second mortgages are one source of extra cash for homeowners. However, taking out additional loans can keep a homeowner continually in debt. Also, if the borrower cannot make payments on second mortgage, lender can take the home 11/9/2018

Step 5: close the transaction Closing – meeting w/seller, buyer, and lender to complete transaction Documents are signed, last-minute details are settled, and money is paid (closing costs) Title insurance – type of insurance that protects buyer if problems w/title are found later Deed – official document transferring ownership from seller to buyer 11/9/2018

Selling a home What can an owner do to his or her home to get the best selling price? Determine selling price (appraisal) Choosing a real estate agent Sale by owner 2. Estimate of current value of property…use this as a basis for selling price 3. Services provided by agent: determine selling price, attract buyers, show your home, & handle financial aspects of sale….they are paid a commission upon sale of home usually 5-7% of purchase price 11/9/2018