Ch 15 Home Purchase Decisions

Outline 1. Rent vs. Buy Decisions 2. How Much Can You Afford? 3. Choosing the property: a) Choosing the Area b) Evaluating the Home c) Making the Deal

1. Rent vs. Buy Decisions  Consider: - Emotional factors - Financial Analysis: Monthly payments & value appreciation  Variables to consider: - Tax consequences - Alternative investments - Inflation and home prices* - Impact of mortgage interest rates - Period of ownership

1. Rent vs. Buy Decisions RentBuy vs. monthly payment: monthly mortgage payment + monthly property tax + monthly insurance + monthly maintenance fees - monthly tax saving (interest + tax) x tax rate monthly payment: monthly rent + home value appreciation: net sales price - loan amount outstanding - down payment and closing costs - opportunity cost - taxes (note: fist $250,000 or $500,000 in capital gain are exempt) compounded monthly difference over holding horizon

2. How Much House Can You Afford?  Use qualifying ratios to get your maximum mortgage payment allowed  range of ratios: 28/36 for conventional loans 31/(41->50) for FHA loans  1st figure: mortgage debt ratio MDR = PITI / GMI  2nd figure: total debt ratio TDR = (PITI + other contractual expenses)/GMI

2. How Much House Can You Afford? Cont’d  Example: Assume your gross monthly income (GMI) is $8,000, the maximum mortgage debt ratio (MDR) allowed by the lender is 25%. Your monthly property taxes are $300 and monthly property insurance is $90.  What is the maximum monthly debt payment you can afford?  Given 5% interest (APR) and a 30-year monthly payment loan, how much can you borrow?  Assume an LTV ratio of 0.8, how much can you offer for the house?

3. Choosing a Property a) Choosing an area Property taxes (see county’s property appraisers web site) Quality of public services Proximity to recreational facilities/park/downtown Quality of school system Crime statistics Overall quality of the community

3. Choosing a Property Cont’d b) Evaluating the individual home (note: take pictures!!) Create and prioritize a list of features # Bed & bathrooms Ability to add-on Repairs needed Pool/hot tub Water access Check out/have inspector (CRI) evaluate: Attic Walls, ceilings and floors Basement or crawl space Electrical and mechanical systems (HV/AC systems) Water supply and waste disposal Roof Mold Termites

3. Choosing a Property Cont’d c) Making and Closing the Deal - Real estate agents - Negotiating the price (remember: no emotions!) - Dealing with the lender - Closing attorneys and escrow agents