© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill C HAPTER 9 Personal Finance The Housing Decision: Factors and Finances Kapoor Dlabay Hughes 7e 9-1

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Evaluating Housing Alternatives Your lifestyle and your choice of housing.  How you spend your time and money, your lifestyle, affects your housing choice.  Personal preferences are modified by financial factors.  Traditional financial guidelines suggest you spend no more than 25-30% of take-home pay on housing, or no more than 2 1/2 times your annual income. 9-2

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Opportunity costs of housing choices include some common trade-offs.  Interest earnings lost on money used for a down payment or the interest on a security deposit for an apartment.  Time and cost of commuting to live in an area that offers less costly housing or more space.  Renters lose tax advantages and equity growth.  Time and money you spend to repair and improve a lower-priced home.  Time and effort when you have a home built to your personal specifications. Evaluating Housing Alternatives 9-3 (continued)

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Rent versus Own: Evaluating Housing Alternatives Advantages of renting.  Fewer maintenance and repair responsibilities.  Easier to move.  Lower initial costs. Disadvantages of renting.  No tax benefits.  Limitations regarding remodeling.  Restrictions regarding pets and other activities.  Legal concerns of a lease.  Costs including a security deposit, utilities and renter’s insurance. 9-4

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Housing Rental Activities The search.  Select an area and rental cost for your needs.  Compare costs and facilities between units.  Talk to current and past residents. Before signing a lease.  Make sure the lease dates, costs, and facilities are clearly represented.  Talk to a lawyer about unclear lease aspects.  Note in writing, signed by the landlord, the condition of the rental unit.  Any person who signs a lease can be held responsible for the full rent. 9-5

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Legal Details of a Lease Description and address of property. Name and address of the owner/landlord (lessor). Name of tenant (lessee). Effective date and length of the lease. Amount of security deposit. Amount and due date of rent. Location where rent is due. Date and amount for late rent payments. List of included utilities, appliances. Restrictions on certain activities. The right to sublet the unit. Conditions under which landlord may enter the rental unit. 9-6

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Housing Rental Activities (continued) Living in rental property.  Keep all appliances and facilities in good condition.  Contact the owners regarding needed repairs.  Respect the rights of others (stereo and parties).  Obtain renter’s insurance. At the end of the lease.  Clean and leave unit in same condition you got it.  Provide landlord with new address for deposit.  Require than any deductions from your security deposit be documented. 9-7

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Home Buying Process Step 1: Determine Homeownership Needs Benefits of Home Ownership  Pride of ownership.  American dream/norm.  Financial benefits.  Deduct property taxes and mortgage interest.  Potential increase in value of your home.  Building an equity in your home.  Lifestyle flexibility - express your individuality. 9-8

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Home Buying Process Step 1: Determine Homeownership Needs (cont.) Drawbacks of Homeownership.  Financial uncertainty.  Obtaining money for the down payment.  Obtaining mortgage financing.  Home values could drop.  Limited mobility.  Can take time to sell your home.  Higher living costs.  Maintenance, repainting,repairs, and home improvements.  Rising real estate taxes. 9-9

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Home Buying Process Step 1: Determine Homeownership Needs Assess Types of Housing Available  Single-family dwelling.  Multi-unit dwelling.  Duplex (two homes).  Townhouse (2, 4, or 6 units).  Condominium.  You own your unit in a building of units.  It is not a type of building structure, but rather a form of homeownership.  Cooperative housing.  Non-profit organization - members own shares and rent a unit in a building with multiple units. 9-10

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Assess Types of Housing Available Manufactured homes.  Fully or partially assembled in a factory, and then moved to the housing site.  Prefabricated type has components built in the factory and assembled at the site.  Mass production under factory conditions keeps costs lower than site built homes. Mobile homes.  A type of manufactured home, often <1,000 sq. ft.  Offer same features as a conventional house.  Safety is debated and they tend to depreciate. (continued) 9-11

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill If building a home to your specifications, …  Does the contractor have needed experience?  Does contractor have a good working relationship with architect, suppliers, electricians, plumbers, carpenters and others? Assess Types of Housing Than Can be Purchased 9-12

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Assess Types of Housing Than Can be Purchased  What assurance do you have about quality?  What are payment arrangements?  What delays will be considered legitimate?  Is the contractor licensed and insured?  Are there any complaints about this contractor?  Contract should have a time schedule, cost estimates, description of work, and a payment schedule. (continued) 9-13

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Home Buying Process Step 1: Determine Homeownership Needs Calculate how much you can afford.  Consider both price and quality.  Look at your income, your current living expenses, and how much you have for a down payment.  Have a loan officer prequalify you. There is no charge to have this done.  Purchase what you can afford - you can always move up.  You can buy a handyman’s special to get a lower price, if you have the time, skills, and money to fix it up. 9-14

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Home Buying Process Step 2: Finding and Evaluating a Property to Purchase Select a location, location, location.  Be aware of zoning laws.  Assess the school system if you have children. Consider using a real estate agent.  They present your offer, negotiate the price, assist you in obtaining financing, and represent you at the closing. Conduct a home inspection or hire an inspector. Mortgage company will want an appraisal. 9-15

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Home Buying Process Step 3: Pricing the Property Determine an appropriate market price. Price is affected by whether it is a seller’s or a buyer’s market. Negotiate an agreement price via a purchase agreement or contract. Counteroffers are common. Earnest money if part of your offer. Contingency clauses, such as...  Buyer can obtain financing.  Sale contingent on the sale of the buyer’s current home. 9-16

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Determine the amount of the down payment.  Mortgage insurance if less than 20% down. Investigate the rates and conditions of mortgages. Apply for a mortgage and evaluate types of mortgages. Guidelines for affordability of housing costs are 28% to 36% of gross income. Qualifying for a mortgage includes your income, debts, credit history, down payment amount, length of the loan, and current mortgage rates. Points are prepaid interest as a % of the loan amount. Home Buying Process Step 4: Obtaining Financing 9-17

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Conventional.  Fixed rate, fixed payment, amortized.  5%, 10% or 20% down.  15, 20 or 30 years of fixed payments. Government-guaranteed financing programs.  Veterans Administration.  Federal Housing Authority.  Lower down payment than conventional. Adjustable rate mortgages.  During the life of the loan the interest rate varies with the prime rate, but has a rate cap. Type of Mortgages 9-18

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Type of Mortgages 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.  Increases in payments to allow the loan to be paid off more quickly. (continued) 9-19

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Type of Mortgages Shared appreciation.  Borrower gets a lower interest rate and agrees to share appreciated value of the home with the lender. A second mortgage.  Home is collateral and interest may be tax deductible. Home equity loans are an example. Reverse mortgages.  Provides elderly with tax-free income based on the home equity. Refinancing if interest rate drops 2-3%. (continued) 9-20

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Make arrangements for a walk through and a closing date. Closing involves a meeting between the buyer, seller and lender, and document signing. Closing costs include...  Title insurance and search fee.  Attorney’s and appraisers fees.  Property survey; Pest inspection.  Recording fees; Transfer taxes.  Credit report; Lender’s origination fee.  Escrow account for tax and insurance reserve.  Pre-paid interest; Real estate commission. Home Buying Process Step 5: Close the Purchase Transaction 9-21

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Overview of the Main Elements of Buying a Home Location. Down payment. Mortgage application. Points. Closing costs. PITI (principal, interest, taxes, insurance). Maintenance costs. 9-22

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Selling Your Home Preparing your home.  Repair, repaint, clean, reduce clutter.  When showing home turn on lights and open drapes. Bake bread or make coffee for a welcoming smell. Determining the selling price.  Appraiser estimates the current value.  Real estate agent markets your home. If “for sale by owner,” use a lawyer or title co. Listing with a real estate agent for services. 9-23

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill The end!