Chapter 6 Own a Home or Car

6.1 Borrowing to Buy a Home Goals Calculate the down payment, closing costs, and mortgage loan amount Calculate the total interest cost of a mortgage loan Calculate the savings from refinancing mortgages

6.1 Borrowing to Buy a Home The Total Cost of buying a home includes the purchase price, the cost of borrowing money for the purchase, and the closing costs Most people make a cash down payment, or a percentage of the total cost of the house paid at the time of purchase, to their lender.

6.1 Borrowing to Buy a Home A mortgage loan is a loan taken with a bank or other lender for the purchase of a new home. The money borrowed is called the Principal A mortgage gives the lender the right to take the property if the loan is not repaid as agreed. Common terms of mortgages are 15, 20, and 30 years

6.1 Borrowing to Buy a Home Closing Costs are fees and expenses paid to complete the transfer of ownership of a home. Closing costs typically include legal fees, recording fees, title insurance, loan application fees, appraisal and inspection fees, land surveys, prepaid taxes, and prepaid interest charges known as points. Interest rates and closing costs vary among lenders, so it pays to compare when looking for a lender.

6.1 Borrowing to Buy a Home To calculate the amount of a loan you need, subtract the down payment from the purchase price. Mortgage Loan = Purchase Price – Down Payment To calculate the amount of money you need to buy a home, add the down payment and the closing costs. Cash Needed to Buy a Home = Down Payment + Closing Costs

6.1 Borrowing to Buy a Home Hilda Mikon is buying a home for $74,000. She will make a 20% down payment and estimates closing costs as: legal fees, $950; title insurance, $140; property survey, $250; inspection, $175; loan processing fee, $84; recording fee, $740. What amount of mortgage loan will she need? What amount of cash will she need when she buys the house? Find the Down Payment $74,000 x .20 = $14,800 Find the amount of the mortgage loan $74,000 - $14,800 = $59,200 Find the total closing costs $950 + $140 + $250 + $175 + $84 + $740 = $2,339 Find the cash needed to buy a house $14,800 + 2,339 = $17,139

6.1 Borrowing to Buy a Home Get out Whiteboards Check for Understanding - Page 223 A & B Get out Whiteboards

6.1 Borrowing to Buy a Home Homework Workbook pg. 77 #1-5

6.1 Borrowing to Buy a Home – Con’t There are many different types of mortgages. The two most common are… Fixed Rate – Same Interest Rate for the Life of the Loan Variable Rate – The Rate of Interest is based on the Interest Rate Economy Most mortgages are repaid in equal monthly payments Part of the payment goes to principal and part goes to interest

6.1 Borrowing to Buy a Home – Con’t Get a computer and log onto www.google.com. In the search type Mortgage Amortization and click on the first link. (bankrate.com) Your screen should look like this

6.1 Borrowing to Buy a Home – Con’t Enter Mtg Amt 120,000 Term 30 years Rate 5.25 Start Date Jun 1, 2009 Monthly Pmts? $662.64

6.1 Borrowing to Buy a Home – Con’t Homework Mortgage Amortization Worksheet

6.2 Renting or Owning a Home Goals Calculate the costs of home ownership Calculate the costs of renting a home or apartment Compare the costs of renting vs. owning

6.2 Renting or Owning a Home COST OF HOME OWNERSHIP After a home is bought, homeowners have many outgoing expenses. These include Property Taxes Repairs Maintenance Utilities Insurance Mortgage Interest And special services such as trash pickup

6.2 Renting or Owning a Home Two other less obvious expenses include depreciation and loss of income on the money invested in the home. Depreciation is the loss in value of property cause by aging and use. Examples of depreciation Weathering of a roof Change of Home Styles Home becoming too expensive to heat and cool Most homes depreciate about 1% to 4% of its original value per year

6.2 Renting or Owning a Home Loss of Income occurs because the money initially invested in buying the property (down payment and closing costs) could have been deposited into an investment account and earned interest. One financial benefit homeowners have is that they may include the interest they pay on their home mortgage and their property taxes as itemized deductions on their income tax returns.

6.2 Renting or Owning a Home Take a look at Example 1 on page 230

Add all the expense items 6.2 Renting or Owning a Home The Krafts want to buy a home. Their estimated first year expenses are: mortgage interest, $6,848; Property Taxes, $3,782; Insurance, $560; Depreciation, $1,790; Utilities, $1,300; Maintenance and Repairs, $2,050. They estimate lost interest income on savings to be $1,562. Income tax savings are estimated to be $1,320. Find their net cost home ownership for the first year. Add all the expense items $6,848 Mortgage Int. $3,782 Property Taxes $560 Insurance $1,790 Depreciation $1,300 Utilities $2,050 Maint & Repairs $1,562 Lost of Income $17,892 Total Expenses Subract the tax savings $17,892 Total Expenses - $1,320 Tax Reductions $16,572 Net Cost

Add all the expense items 6.2 Renting or Owning a Home The Sutter family is building a home for $87,000 on a lot they own. They estimate their expenses for the first year to be: Mortgage Interest, $5,788; Property Taxes, $1,904; Insurance, $347; Lost Interest Income, $1,140; Depreciation, 2% of their home’s cost; Maint. and Repairs, $900. The cost of heating, electricity, and water is estimated to be $1,860. The Sutter’s expect to save $1,050 in income taxes as a result of owning a home. What will be the net cost of the home the first year? Add all the expense items $5,788 Mortgage Int. $1,904 Property Taxes $347 Insurance $1,140 Lost Interest Income .02 x 87,000 = $1,740 Utilities $800 Maint & Repairs $1,860 $13,679 Total Expenses Subract the tax savings $13,679 Total Expenses - $1,050 Tax Reductions $12,629 Net Cost

COST OF PROPERTY RENTAL 6.2 Renting or Owning a Home COST OF PROPERTY RENTAL Financial Advantages of Rental Not having to pay a significant down payment Earning interest on money that would be used for a down pmt More predictable housing costs No maintenance costs Financial Disadvantages of Rental No federal income tax benefits Do not build equity Usually pay a one time security deposit and is not guaranteed in return.

6.2 Renting or Owning a Home Take a look at Example 2 on page 231

6.2 Renting or Owning a Home Rick Cassell rented an apartment for one year and paid $625 monthly rent. His other apartment-related costs for the year were: security deposit of $625; insurance, $85; utilities, $1,210; replacement of lost mailbox key, $10. What was the cost of renting the apartment for the one year? Add the Expenses 12 x $625 = $7,500 Cost for year’s rent $625 Security Deposit $85 Insurance $1,210 Utilities $10 Replacement Key $9,430 Total 1st Year Cost

6.2 Renting or Owning a Home Terrell Pryor’s monthly rent on a house he is leasing is $1,250. The security deposit is one month’s rent. Terrell is responsible for mowing the lawn and clearing the snow and estimates he will spend $100 a month to have this done. His other annual costs include $136 for insurance and $1,700 for utilities. What will be his first-years costs of renting this home? Add the Expenses 12 x $1,250 = $15,000 Cost for year’s rent 12 x $100 = $1,200 Mowing and Plowing $85 Insurance $1,210 Utilities $10 Replacement Key $9,430 Total 1st Year Cost

COMPARING RENTING & OWNING HOMES 6.2 Renting or Owning a Home COMPARING RENTING & OWNING HOMES Whether you buy or rent a property, some expenses are similar, such as insurance and utilities. Some expenses are different, such as taxes and loss of income.

Net Cost of Home Ownership Net Cost of Home Ownership 6.2 Renting or Owning a Home Look at Example 3 on page 232 $12,930 - $9,959 = $2,971 Buying is $2,971 less expensive than Renting Net Cost of Home Ownership - $5,184 Interest - $1,720 Property Taxes - $3,270 Other Costs - $680 Loss of Income + $895 Saving on Income Tax $9,959 Cost of Home Net Cost of Home Ownership 12 x - $850 = - $10,200 Annual Rent - $1,200 Security Deposit - $130 Insurance - $1,400 Utilities $12,930 Cost of Renting

Net Cost of Home Ownership Net Cost of Home Ownership 6.2 Renting or Owning a Home Look at CYU E on page 232 $10,986- $10,885= $101 Renting is $101 less expensive than Buying Net Cost of Home Ownership - $9,100 Int, Tax, Ins, Maint. - $2,926 Depreciation - $560 Loss of Income + $1,600 Saving on Income Tax - $10,986 Cost of Home Net Cost of Home Ownership 12 x -$785 = -$9,420 Annual Rent - $115 Insurance - $1,150 Utilities - $ 200 Security Deposit $10,885 Cost of Renting

Net Cost of Home Ownership Net Cost of Home Ownership 6.2 Renting or Owning a Home Look at CYU F on page 233 $12,930 - $9,959 = $2,971 Buying is $2,971 less expensive than Renting Net Cost of Home Ownership $276 Insurance - $980 Utilities - $4,060 Annual Int - $240 Lot Rent $9,959 Cost of Home Net Cost of Home Ownership 12 x - $510 = - $6,120 Annual Rent - $1,200 Security Deposit - $130 Insurance - $1,400 Utilities $12,930 Cost of Renting

Net Cost of Home Ownership 6.2 Renting or Owning a Home Homework Page 233 – 234 # 9 – 13 Make sure you have charts for all the problems as shown in the previous examples. Ex. Net Cost of Home Ownership $276 Insurance - $980 Utilities - $4,060 Annual Int - $240 Lot Rent $9,959 Cost of Home

6.3 Property Taxes Goals Calculate the decimal tax rate Calculate property taxes for tax rates per $100 or $1,000 Calculate property taxes for tax rates in mills or cents per $1

6.3 Property Taxes DECIMAL TAX RATE Property taxes are taxes on the value of real estate such as homes, business property, or farm land. Taxes are collected annually or semiannually by the tax departments of local tax districts such as cities or townships where the property is located. The amount of property tax paid is based on the assessed value of a property.

6.3 Property Taxes Assessed values are generally less than their market values. Local tax districts then determine the decimal tax rate, which is the tax rate at which the property is to be taxed. Decimal Tax Rate = Total Property Tax Income Needed (to cover expenses) Total Assessed Value (of all properties in the district)

6.3 Property Taxes The Columbia School District’s total budgeted expenses last year were $6,000,000. Estimated income from other sources was $1,800,000. The total assessed value of all taxable property in Columbia last year was $39,000,000. Find the decimal tax rate needed to meet expenses. Tax Income Needed ($) $6,000,000 – $1,800,000 = $4,200,000 Decimal Tax Rate = Total Assessed Value $39,000,000 Decimal Tax Rate = 0.10769

6.3 Property Taxes Elk County’s budget for a year is $6,750,000. Of that, $650,000 is raised from other income, and the rest from property taxes. The total assessed value of the county’s property is $80,000,000. What is the decimal tax rate, rounded to three decimal places. Tax Income Needed ($) $6,750,000 – $650,000 = $6,100,000 Decimal Tax Rate = Total Assessed Value $80,000,000 Decimal Tax Rate = 0.07625 = 0.076 (Rounded)

6.3 Property Taxes The Happy Valley District must raise $1,950,000 from property taxes. The assessed value of property in the district is $48,200,000. What is the decimal tax rate needed, to four decimal places? Tax Income Needed ($) $1,950,000 Decimal Tax Rate = Total Assessed Value $48,200,000 Decimal Tax Rate = 0.040456 = 0.0405 (Rounded)

TAX RATES per $1,000 of ASSESSED VALUE 6.3 Property Taxes TAX RATES per $1,000 of ASSESSED VALUE The Watson’s property is valued at $120,000 and is assessed at 50% of its value. Calculate the property tax due on if their tax rate is stated as $62 per $1000. $60,000 / $1,000 = 60 Number of $1,000 units in the Assessed Value 60 x $62 = $3,720 Property Tax Due

$67,500 / $1,000 = 67.5 Number of $1,000 units in the Assessed Value 6.3 Property Taxes What tax must Art pay on his home, assessed for $67,500 if his tax rate is $50.08 per $1,000 $67,500 / $1,000 = 67.5 Number of $1,000 units in the Assessed Value 67.5 x $50.08 = $3,380.40 Property Tax Due

$13,500 / $1,000 = 13.5 Number of $1,000 units in the Assessed Value 6.3 Property Taxes The Smiley family owns a cabin and land with an assessed value of $13,500. What property tax do they pay if the tax rate on the property is $25.83 per $1,000? $13,500 / $1,000 = 13.5 Number of $1,000 units in the Assessed Value 13.5 x $25.83= $348.71 Property Tax Due

6.3 Property Taxes TAX RATES in MILLS A mill is one tenth of a cent, or one thousandth of a dollar. There are ten mills in one cent and 1,000 mills in one dollar. Example: Calculate the tax due on the Watson’s property ($60,000 assessed value) if their tax rate is stated as 62 mills 62 mills / 1,000 = $0.062 (mills rate in $) $60,000 x $0.062 = $3,720

52 mills / 1000 = $0.052 (mills rate in $) 6.3 Property Taxes The city tax rate in Lakeview is 52 mills of the assessed value. Find the tax rate to be paid on property assessed at $38,400. 52 mills / 1000 = $0.052 (mills rate in $) $38,400 x $0.052 = $1,996.80

6.3 Property Taxes What tax must Michelle Nolan pay on a condominium assessed at $32,100 if her tax rate is 38 mills? 38 mills / 1,000 = $0.038 $32,100 x $0.038 = $1,219.80

6.3 Property Taxes Homework Worksheet From Workbook pg 81 – 82 #1 - 8

6.4 Property Insurance Goals Calculate property insurance premiums for homeowners Calculate property insurance premiums for renters Calculate how much can be collected on insurance claims

PROPERTY OWNERS INSURANCE PREMIUMS 6.4 Property Insurance PROPERTY OWNERS INSURANCE PREMIUMS A policy that covers your home and protects you against other risks is called homeowners insurance. Basic homeowners insurance covers Dwelling – your home Other Structures – such as garages Personal Property – contents of your home Additional Living Expenses – cost of living expenses Personal Liability – protection against lawsuits Medical Payments to Others – medical expenses for injury

6.4 Property Insurance Other Insurance Notes Off Premises insurance covers personal property when you are away from home. For example, if the luggage and clothes you take on vacation are stolen, their loss would be covered Usually about 10% of the amount of your policy Replacement Cost Policies The Insurance Co. will pay the cost of replacing your property at current prices Ex. If a $600 leather chair is destroyed in a fire, the insurer will pay for a replacement even if it costs $900 now Premiums are about 10%-15% higher than a standard policy

6.4 Property Insurance The money paid to an insurance company for property insurance is called the insurance premium. Your premium will vary depending on Kind of coverage you buy How your house or apartment is built (Brick, Wood) Where it is located (Close to Fire Dept)

Multiply the rate per $100 by number of units 6.4 Property Insurance David Duval insured his house for $89,000 at an annual rate of $0.51 per $100. Find his Premium. Solution: Find the number of $100 units in the insured amount $89,000 / $100 = 890 units Multiply the rate per $100 by number of units 890 x $0.51 = $453.90

6.4 Property Insurance Vijay Singh insured his home for $61,000. Find the annual premium, to the nearest dollar, he will pay for a policy that costs $0.46 per $100. $61,000 / $100 = 610 units 610 x $0.46 = $281

6.4 Property Insurance Chi Chi Rodriguez insures his home for $43,000. What annual premium will he pay if the policy cost is $0.74 per $100 43,000 / 100 = 430 units 430 x $0.74 = $318

RENTERS INSURANCE PREMIUMS 6.4 Property Insurance RENTERS INSURANCE PREMIUMS A renters policy provides nearly the same coverage as a homeowners policy except for loss of the dwelling and other structures. Annual premiums for a renters policy are based on the amount of insurance on the contents of your apartment or rental home.

Maximum Coverage of Contents Distance from Fire Station 6.4 Property Insurance We will use the table below to calculate the renters policy rates. Maximum Coverage of Contents Distance from Fire Station Less than 5 miles 5 miles or more $5,000 $120 $138 $10,000 $129 $148 $15,000 $140 $161 $20,000 $152 $175 $25,000 $165 $190 $30,000 $177 $204

6.4 Property Insurance Dottie Pepper rents an apartment that is 4.1 miles from a fire station. He insures its contents for $10,000. A computer system Dottie owns is also insured, but at an extra cost of $27 per year. What total annual premium will Dottie pay for this coverage? Solution: Locate the premium on the chart. $129 Add the basic premium cost of additional insurance, if any. $129 + $27 = $156

6.4 Property Insurance Greg Norman wants to insure his apartment’s contents for $25,000. In addition, he decides to insure golf clubs appraised at $3,000 for an additional premium of $31. He lives one block from the fire station. Find his total premium for one year. $165 + $31 = $196

6.4 Property Insurance Bobby Jones rents a home that is located 12 miles from the nearest fire station. He insures the home’s contents for $5,000. What annual premium will he pay? $138

COLLECTING ON INSURANCE CLAIMS 6.4 Property Insurance COLLECTING ON INSURANCE CLAIMS If your property is damaged by fire or theft occurs, you have to file a claim with your company. The company will send an adjuster to look at the property and decide on the amount of loss. Your basic policy usually contains a deductible. With a $100 deductible, you are responsible for the first $100 of your loss and the insurance company will pay for the rest. The higher the deductible, the lower the premium

6.4 Property Insurance Your policy has a face value of $30,000 with a $1,000 deductible. How much will the insurance company pay if your loss is $7,800? $7,800 - $1,000 = $6,800

6.4 Property Insurance How much will an insurance company pay for a loss of $10,200 if property is insured for $18,000 with a $250 deductible? $10,200 - $250 = $9,950

6.4 Property Insurance Property insured for $70,000 with a $500 deductible suffers a loss of $82,000. How much will the insurance company pay? $70,000 - $500 = $69,500

6.4 Property Insurance Homework Page 247 – 248 # 14 - 25

6.5 Buying a Car

6.6 Depreciating a Car Goals Calculate average annual depreciation on a car Calculate the rate of depreciation

Original Cost – Trade-in/Resale Value = Depreciation 6.6 Depreciating a Car A car loses value as it grows older. This loss of value is called depreciation. To find depreciation Original Cost – Trade-in/Resale Value = Depreciation When you buy a car, you can only estimate what the depreciation will be. The actual amount of depreciation will be known only when the car is sold or traded.

6.6 Depreciating a Car To calculate the estimated average annual depreciation on a car, follow these steps: Estimate the number of years the car will be kept Estimate the value of the car when it is resold or traded in Subtract trade-in value from the original cost to estimate total depreciation Divide the total depreciation by the number of years the car will be kept.

6.6 Depreciating a Car John Smiley bought a car for $14,800. He estimates its trade-in value will be $5,800 at the end of 4 years. Find the estimated total and the estimated average annual depreciation of the car. Estimated total depreciation Original Cost - Trade-in Value = Total Depreciation $14,800 - $5,800 = $9,000 Estimated average annual depreciation Total Depreciation ÷ Years = Est. Ave. Annual Dep. $9,000 ÷ 4 = $2,250

6.6 Depreciating a Car Bob Walk bought a new care for $19,500. He has been told that his car will probably be worth $9,800 at the end of two years. What will be his estimated total and average annual depreciation for two years Estimated total depreciation Original Cost - Trade-in Value = Total Depreciation $19,500 - $9,800 = $9,700 Estimated average annual depreciation Total Depreciation ÷ Years = Est. Ave. Annual Dep. $9,700 ÷ 2 = $4,850

6.6 Depreciating a Car Jose Lind bought a car 9 years ago for $14,130. She sold it recently for $1,800. What was the total and average annual depreciation on the car? Estimated total depreciation Original Cost - Trade-in Value = Total Depreciation $14,130 - $1,800 = $12,330 Estimated average annual depreciation Total Depreciation ÷ Years = Est. Ave. Annual Dep. $12,330 ÷ 9 = $1,370

Rate of Depreciation = Ave. Annual Depreciation ÷ Original Cost 6.6 Depreciating a Car When the straight-line method of finding depreciation is used, the average annual depreciation may be shown as a percent of the original cost. The percent is called rate of deprecation. Rate of Depreciation = Ave. Annual Depreciation ÷ Original Cost

Ave Annual Depreciation ÷ Original Cost = Rate of depreciation 6.6 Depreciating a Car A $12,000 car is sold 3 years later for $6,960. What is the rate of depreciation? First, Find the total depreciation $12,000 - $6,960 = $5,040 Next, Find the Ave. Annual Depreciation $5,040 ÷ 3 = $1,680 Ave Annual Depreciation ÷ Original Cost = Rate of depreciation $1,680 ÷ $12,000 = 0.14 or 14%

Ave Annual Depreciation ÷ Original Cost = Rate of depreciation 6.6 Depreciating a Car A new car that cost $23,000 is worth $16,100 a year later. What was the rate of depreciation for the one year. First, Find the total depreciation $23,000 - $16,100 = $6,900 Next, Find the Ave. Annual Depreciation $6,900 ÷ 1= $6,900 Ave Annual Depreciation ÷ Original Cost = Rate of depreciation $6,900 ÷ $23,000 = 0.3 or 30%

Ave Annual Depreciation ÷ Original Cost = Rate of depreciation 6.6 Depreciating a Car Orlando Merced sold his car for $368. He paid $9,200 for the car when he bought it 12 years ago. What was the annual rate of depreciation? First, Find the total depreciation $9,200 - $368 = $8,832 Next, Find the Ave. Annual Depreciation $8,832 ÷ 12 = $736 Ave Annual Depreciation ÷ Original Cost = Rate of depreciation $736 ÷ $9,200 = 0.08 or 8%

6.6 Depreciating a Car Homework Workbook pg 86 #1-5