Chapter 9: The Housing Expenditure

Objectives Discuss the options available for rented and owned housing and whether renters or owners pay more for housing. Determine how much buyers can afford for housing. Discuss the various mechanisms for financing a home.

Objectives Identify the numerous costs of buying a home, including principle, interest, and closing costs. List and describe the steps in the home-buying process. Identify some important concerns in the process of selling a home.

Young Couple, No Children Couple, Children No Longer At Home Housing Decision Young Single Rental housing has limited maintenance and offers mobility. Purchase a home or a condominium for financial and tax benefits. Single Parent Rental housing can provide suitable environment for children and some degree of housing security. Purchase low-maintenance housing to meet financial and social needs of family. Young Couple, No Children Rental housing offers convenience and flexibility of lifestyle. Purchase housing for financial benefits and to build long-term financial security. Couple, Children No Longer At Home Rental housing for convenience, flexibility for changing needs and financial situation. Purchase housing that requires minimal maintenance and meets lifestyle needs. Couple, Young Children Rental housing can provide facilities for children in a family-oriented area. Purchase a home to meet financial and other family needs. Retired Person Rental housing meet financial, social, and physical needs. Purchase housing that requires minimal maintenance, offers convenience, and provides needed services.

Renting Your Residence Advantages Mobility Fewer responsibilities Lower costs initially More amenities Disadvantages Few financial benefits Restricted lifestyle Cost of renting - deposits Legal concerns of a lease

Advantages of Owning Pride of ownership American dream/norm Reduced income taxes deduct property taxes deduct mortgage interest

Advantages of Owning Build an equity pay down the loan (continued) Build an equity pay down the loan price appreciation Builds your credit rating Hedge against inflation Lifestyle flexibility can express your individuality

Disadvantages of Owning Financial risk need down payment home prices could drop Limited mobility can take time to sell Higher living costs maintenance repairs & improvements utilities & insurance real estate taxes

Renting vs. Owning Your Home WHO PAYS MORE: Based on cash flow, renters appear to win After taxes and appreciation, owners usually win

Renting versus Buying Place of Residence RENTAL COSTS EXAMPLE YOUR FIGURES Annual Rent Payments $15,000 Renter’s Insurance 210 Interest Lost on Security Deposit (amount of security deposit times after-tax savings account rate) 36 Total annual cost of renting $15,246 Annual mortgage payments $15,168 Property taxes (annual) 4,800 Homeowner’s insurance (annual) 600 Estimated maintenance and repairs (1%) 2,000 After-tax interest lost on down payment and closing costs 750 Less financial benefits of home ownership Growth of equity (1,120) Tax savings for mortgage interest (annual mortgage interest times tax rate) (3,048) Tax savings for property taxes (annual property taxes times tax rate) (1,344) Estimated annual appreciation (1.5%) (3,000) Total annual cost of buying $14,806 Comparing an apartment with $1,250 of monthly rent and a home that cost $200,000. A 28% tax rate is assumed.

Housing Options for Home Buyers Single-family dwelling tract housing built on speculation by builder built to your specifications previously lived in home manufactured home mobile home

Home Buying Process Step 4: Obtaining Financing Determine the amount of down payment mortgage insurance Qualifying for a mortgage can be pre-qualified based on income, assets, debts, credit history and length of loan purpose of “points” (prepaid interest) The home loan application process fixed or adjustable rate mortgage locking in an interest rate - search Web

Qualifying for a Mortgage Amount available for down payment Amount of income Amount of other debts Credit rating Current mortgage rates Length of loan desired

Home Buying Process Step 1: Determine Ownership Needs How much you can afford down payment loan amount size and quality handyman’s special sweat equity

Home Buying Process Step 2: Finding and Evaluating a Property to Purchase Select a location Zoning laws Covenants, codes and restrictions Using a real estate agent Property appraisal Conducting a home inspection 9-15

Home Buying Process Step 3: Pricing the Property Determining the price to offer Negotiating the purchase price seller’s or buyer’s market earnest money Contingency clauses home passes structural inspection able to get a loan

Estimating Mortgage Loan Payments for Principal and Interest (Monthly Payment per $1,000 Borrowed)   Payment Period (Years) Interest Rate (5) 15 20 25 30 4.5 $7.6499 $6.3265 $5.5583 $5.0669 5.0 7.9079 6.5996 5.8459 5.3682 5.5 8.1708 6.8789 6.1409 5.6779 6.0 8.4386 7.1643 6.4430 5.9955 6.5 8.7111 7.4557 6.7521 6.3207 7.0 8.9883 7.7530 7.0678 6.6530 7.5 9.2701 8.0559 7.3899 6.9921 8.0 9.5565 8.3644 7.7182 7.3376 8.5 9.8474 8.6782 8.0523 7.6891 9.0 10.1427 8.9973 8.3920 8.0462 9.5 10.4422 9.3213 8.7370 8.4085 10.0 10.7461 9.6502 9.0870 8.7757 Note: To use this table to calculate a monthly mortgage payment, divide the amount borrowed by 1,000 and multiply by the appropriate figure in the table where the interest rate and the time period for the loan intersect. For example, a $150,000 loan for 30 years at 9 percent would require a payment of $1,206.93 [($150.000/1,000) x 8.0462]; over 15 years it would require a payment of $1,521.41.

Effect of Down Payment Down Payment Amount Of Loan Monthly $5,000 Effect of Down Payment Size on Monthly Payment for a $150,000 Home (7 Percent Mortgage Loan for 30 Years) Down Payment Amount Of Loan Monthly $5,000 $145,000 $964.69 10,000 140,000 931.42 15,000 135,000 898.16 20,000 130,000 864.89 25,000 125,000 831.63

Type of Mortgages Conventional fixed rate, amortized 5, 10 or 20 percent down 15, 20 or 30 years of fixed payments Government guaranteed Veterans Administration Federal Housing Administration Adjustable rate mortgages varies with the prime rate but has a rate cap

Type of Mortgages Graduated payment payments start lower and go up (continued) Graduated payment payments start lower and go up for persons whose income will increase Balloon fixed monthly payments plus one large payment, usually after 3, 5 or 7 years Growing equity payment increases to allow loan to be paid off more quickly

Type of Mortgages Shared appreciation (continued) Shared appreciation borrower agrees to share appreciated value of the home with the lender Home equity loans a second mortgage home is collateral and interest may be tax deductible Reverse a loan based on the home equity Refinancing

Home Buying Process Step 5: Closing the Purchase Transaction Title insurance and search fee Attorney’s and appraisers fees Property survey Recording fees; transfer taxes Credit report Termite inspection Lender’s origination fee Tax and insurance reserves Pre-paid interest Real estate commission Closing Costs

The Main Elements of Buying a Home Location Down payment Mortgage application Points Closing costs TIPI (taxes, insurance, principal, interest) Maintenance costs

Selling Your Home Preparing your home Determining the asking price Appraiser Realtor For sale by owner or use a broker Listing with a real estate agent

Make Sure Security Deposit Is Returned 1. List damages/defects before moving in unit. 2. Maintain unit and promptly notify landlord of any problems. 3. Give proper written notice of intent to move. 4. List all damages/defects after moving out of unit. 5. Use certified mail to request return of security deposit. 6. Use small claims court, if necessary.

Types of Real Estate Agents Listing agent Selling agent Buyer’s agent Dual agent