Rent vs. Buy The Finances of Housing and Real Estate

Housing Alternatives Rent an Apartment / Condo / Townhouse Rent a House Own a House Own a Condo / Townhouse Own a Manufactured Home

Advantages of Renting Mobility Fewer Responsibilities Low Initial Costs

Disadvantages of Renting Financial Restrictions Lifestyle and Property Restrictions Higher Long Term Costs – no equity buildup or tax breaks

Factors Affecting the Cost of Renting Location, location, location Living Space (square footage) Utilities (included?) Security Deposits Renters Insurance

Steps to Buying a Home 1. Get your finances in order Credit score, down payment 2. Determine your home ownership needs Housing type, affordability, quality

Steps to Buying a Home 3. Get pre-qualified for a mortgage Find out how much your bank will lend you 4. Find and evaluate a property to purchase Real Estate agent?

Steps to Buying a Home 5. Negotiate a purchase price Research prices Make an offer Earnest money

Steps to Buying a Home 6. Obtain Financing 7. Closing Day – sign all required documents and get the keys to your new home!

Housing Vocabulary assessed valuemortgage insurance closing costsprepayment fee escrow accountreal estate property taxes (interest) pointssubleasing / subletting leasetitle insurance

III. Financing a home

A. Mortgage Loans 1. Mortgage - loan to purchase real estate  the property is collateral 2. Principal (amount of loan) plus interest Example: If cost is $200K & $20K is down payment, principal is $180K 3. Generally have to pay “points” – a fee which is a percentage of the amount borrowed – each point is 1%

B. Factors Affecting Monthly Mortgage Payments 1. Amount borrowed a. Cost of home 1) compare similar homes b. The larger the down payment, the better 1) less interest 2) mortgage paid off more quickly 3) may get lower interest rate

2. Interest rates a. Higher the interest rate  higher monthly payment b. Fixed or variable interest rate? c. Re-finance your mortgage if interest rates decrease

3. Length of maturity (length of loan) a. shorter  less interest b. equity builds up faster with shorter loans c. pre-payment - option of paying more than monthly requirement

4. Equity is the amount that has been paid off plus an appreciation on the value of the home Example: - House cost $200K - Value has increased to $220K - You have paid $50K towards your mortgage  You have $70K in equity ($20K + $50K)

C. Unforeseen Expenses 1. “House poor” = too much income goes to mortgage  little leftover for other expenses 2. Closing costs can equal 2 – 10% of loan amount 3. Property taxes usually 1-4% of value of the home a. Escrow account – a reserve account where money is set aside each month to pay for property taxes 4. Lenders also require insurance on home (in case of fire, etc.)