MoneyCounts: A Financial Literacy Series Mortgage – Financial Process 11-A Grange Building University Park, PA 16802 financialliteracy.psu.edu finlit@psu.edu 814-863-0214

Description Nothing can fully prepare you for new experiences. Top of that list is the experience of purchasing your first home and getting your first mortgage! Getting a mortgage is a long- term commitment to turn acquired debt into an asset over time. It is critical you get the best return on your investment. It is one of the most important financial decisions you will have to make in your life. You should fully understand the financial process of owning a home.

Learning Outcome Define key terms Discuss components of a mortgage Explore the search process for a mortgage Evaluate ways to improve your chances of getting a good mortgage Understand the financial life of a mortgage, and the amortization process

Home Sweet Home! MY home Mortgage

What is a Mortgage? ? A long tem loan used to purchase a home A debt instrument that is secured by the collateral of specified real estate property and that the borrower is obliged to pay back with a predetermined set of payments Used by individuals and businesses to make large purchases of real estate without paying the entire value of the purchase up front. Also known as “liens against property” or “claims on property”

Components of a mortgage Property Taxes Principal Interest Mortgage Insurances Private Mortgage Insurance (PMI if < 20% down payment) *Tip: Some lenders allow you to pay your own property taxes and home insurance premiums, but they could also raise your interest rate to compensate! need to understand escrow arrangement

Key Terms Mortgage Closing cost Down payment Pre-payment penalties Interest Escrow Principal Truth in Lending Act Interest rate Refinancing Credit rating Delinquent Fixed interest rate Variable interest rate Equity Amortization schedule Foreclosure

First things first! Prepare a budget (housing is between 25% -30% of net income) How much of a mortgage can you afford to carry for 15-30 years?

Ask the right financial questions! How much house can you afford? How much down payment have you saved? How much mortgage can your carry for a long time? Can you afford maintenance? Your total mortgage should not exceed 2.5% your total yearly net income When your yearly net income is $60,000, your mortgage should not exceed $150,000

Will you get a good mortgage? What is your FICO Credit Score? How clean is your credit report? Range of interest rate you hope to get? Pay your debts balances in full and on time for at least 6-9 months before you start the process of buying a home Equifax, Experian and TransUnion Annual Credit Report.com Call 877-322-8228

Getting your “docs” in a row! First-time Home Buyer! Getting your “docs” in a row! Application Fee (cost of appraisal and credit report) Sales contract signed by buyers and sellers Social Security numbers of all applicants Complete address for the past 2 years (Landlord info) Employment information for past 2 years W-2 for the last 2 years Most recent year to date pay stub /current pay stub Banking information, saving accounts, checking accounts for the last 3 months Loans and LOC information Family help and assistance (letter) Tax information for the last 2 years

Approval letter for estimated amount of loan Know the differences! Pre-qualification Pre-approval Approval letter for estimated amount of loan

Variable-rate mortgage Fixed-rate mortgage Variable-rate mortgage A loan that charges a set rate of interest that does not change throughout the life of the loan The traditional loan used to finance the purchase of a home What most people have in mind when they think about a mortgage Also known as an adjustable-rate mortgage or a floating-rate mortgage The rate of interest is subject to change. When such a change occurs, the monthly payment is “adjusted” to reflect the new interest rate. Over long periods of time, interest rates generally increase. An increase in interest rates will cause the monthly payment on a variable-rate mortgage to move higher

Amortization Schedule Loan amount: $165,000 Interest rate: 4.25% Mortgage term: 30 years Number of payments: 360 Monthly payment: $811.70 Total interest paid: $127,212.30 Amortization Schedule Date Payment Principal Interest Balance July 2013 $811.70 $227.32 $584.38 $164,772.67 Aug 2013 $228.13 $583.57 $164,544.54 Sep 2013 $228.94 $582.76 $164,315.60 Oct 2013 $229.75 $581.95 $164,085.85 Nov 2013 $230.56 $581.14 $163,855.29 Dec 2013 $231.38 $580.32 $163,623.91 Jan 2014 $232.20 $579.50 $163,391.71 Feb 2014 $233.02 $578.68 $163,158.69

The Search Process! First-time Home Buyer! Define search parameters Internet search In person search Type of home and neighborhood How long should it take to buy your first home? How long do you want to spend searching? How many homes are you willing to see? How do you decide this is the home?

The Search Process! (2) First-time Home Buyer! Take pictures, take notes, check the surroundings, rate each home on a scale of 1 to 10 and pick top choices Visit top choices again to re-evaluate with open eyes and mind Research the real estate tax and required insurance Do not allow real estate agents to pressure you work with a real agent you trust and comfortable with or hire your own agent Keep searching till you are satisfied with your top choice Resist falling in love with the house! Making the offer, negotiating the terms, price, closing cost Sticking to your budget/price range

The Search Process! (3) First-time Home Buyer! *Tip: Make a list of what you are looking for including location, type of a home, features, age, school district, neighborhood, real estate tax, insurance requirements, etc., and adjust as needed. *Tip: Shop for a loan before you shop for a property! this will guide you to make sound financial decisions.

The Art of Negotiation! First-time Home Buyer! Your offer is presented to the seller who could either accept it, reject it or counter offer it. Now, it is your turn to do the same! Negotiation can be rough and time sensitive. So stay calm, remain flexible within your budget, always do the math. Consider what you are willing to accept and what a deal breaker is to you. Make a list of terms (pros & cons) Keep your list handy and re-evaluate throughout the process. Once an offer is accepted, an agreement is reached, the contract is signed.

Things you must do throughout the process Carefully review the good faith estimate Get a house inspection Understand any restrictive covenants or association rules Do a final walk before you take possession to make sure no damage happened after closing date Ask questions and do your own research for every step in the way

Overview the cost Down payment (20% of purchase price) If not, expect .05% PMI Closing cost (3%-5%) If not, negotiate with seller Inspection of the house (varies) Insurance (varies) Taxes (varies) Application fee for loan Moving expense into the new house Set a budget, avoid using credit cards *Tip: Conduct a garage sale before you move into your new home to clean clutter and make extra money to help with the move

Budgeting Tips (1) Increase your emergency fund saving by at least 5% to allow for unexpected house maintenance cost (15% instead of recommended 10%) Trim your spending budget to allow for the increase Live in your home at least 6 month to a year before you start making any major changes to your house Do not acquire credit card debt to accommodate additional spending on the new house

Budgeting Tips (2) Instead of making a monthly mortgage payment, send 1/2 of your mortgage payment every 2 weeks, you end up making 13 payments in the year instead of 12 payments. you reduce the life of your loan by 5 years Prepare different scenarios of payment to accommodate your long term goal, use online mortgage calculators to help you decide the best payment option for you and your family Mortgage Calculator [Bankrate]

Budgeting Tips (3) Pursue a 30 year mortgage, but make your own plans to pay it in 15 years (run your own amortization schedule). Make sure there is NO prepayment penalty in your loan documents This approach guarantees you a lower monthly payment just in case life throws you a surprise. This takes discipline and a commitment to meet the goal of owning your home in less than 30 years.

MoneyCounts: A Financial Literacy Series Comments and questions 11A Grange Building University Park, PA 16802 financialliteracy.psu.edu finlit@psu.edu 814-863-0214