PERSONAL FINANCE Buying a Home

Objectives: Buying a Home Students will understand how key percentages are used to determine how much housing expense a person can afford based on their gross income. Students will explore the costs associated with taking out a mortgage and buying a home. Students will understand PMI and how it relates to down payments.

DO NOW: WHAT FACTORS SHOULD YOU TAKE INTO CONSIDERATION WHEN BUYING A HOME? OR IS IT BETTER TO RENT OR BUY A HOME? WHY OR WHY NOT? Buying a Home

Location, Location, Location Choosing a home in a good location is very important.  Safety issues  What school district do residents belong to?  Is the home conveniently located near shopping ?  A library?  A park?  Surrounding: people would rather buy a fancy home if it is surrounding by other fancy homes.

Owning Versus Renting Renting Advantage:  is the most economical approach in the short term. Renting Disadvantage:  The money you spend on rent is not buying you anything in the long run.  You are not building up value or equity  You have nothing to show for paying rent. Owning Advantage:  Money you pay every month is going to the value of the home.  You get some of the money back when you sell it.  It is an investment

Owning vs. Renting Reasons to rent Career uncertainty. If you think you might need to move in the near future, or are mulling job changes that span several areas of town or are located elsewhere in the country, you might want to rent. Buying ties you down to a greater extent. Income uncertainty. If you expect a pay hike or cut in the near future, that can change your borrowing ability as well as impact your ability to pay a mortgage. Bad credit. Creating a history of on-time rental payments can help you build the sort of credit you'll need to qualify for a mortgage. No maintenance expenses. When a pipe leaks, you don't head to the store; you head for the telephone and call the landlord. Reasons to buy Equity. When you pay rent, you are paying your landlord's mortgage or adding equity to his or her bank account. However, when you have a home mortgage, you increase your degree of ownership in your home with every payment. Tax deductions. You can deduct mortgage interest as well as your property taxes. Uncle Sam doesn't give renters this bonus. You can keep the first $250,000 in profit you make when selling the home if you're single, or the first $500,000 if married. In addition, those who work from home may be eligible to take deductions for their home office and portions of utilities. Creative control. You like dozens of pictures on the wall? Well, hammer away -- they are your walls now. Go ahead and paint them mango! Wish you had another room? Go ahead and add one. Maintenance choices. If you live in a house, you can decide how to approach maintenance, either doing it yourself or picking your own contractor. If you live in a condominium or homeowners' association, you may pay a monthly fee to have maintenance work covered by the association's contractors.

Housing Choices Single Family Home: owner is responsible for maintaining the home as well as the property on which it is located. Condominiums: several units are connected together. Usually smaller and less expensive than a single family home.  Monthly fee to cover maintenance in common areas, etc.. Duplex or Double: look like single family homes but are really two homes connected in the middle by a common wall.

How Do I Find a Home? Easiest method is to work with a Real Estate Agent.  Pay commission for his/her work in the arrangements “For Sale By Owner” meaning that they will try to sell their home themselves and avoid paying commission to an agent. You can find homes listed in the paper, the internet, or even on television  Internet sources:

How Much Home Can I Afford? 1. How much money is coming in? 2. How much money do you owe?  As a general rule, you should not spend more than 28% of your monthly pre-tax income on housing costs.  Housing costs are considered to be the sum of your principle and interest payment, real estate taxes, and insurance each month.  Count loans unrelated to housing, such as school loans, car loans, or credit card debt when figuring out debt you owe.

What is a Mortgage? A mortgage is a way of borrowing money to buy a home and paying it back over a long period of time. It is a legal agreement between you, the borrower, and a lender, usually a bank. You agree to prepay the amount of the loan, with interest, by making monthly payments over a period of time.  You do not want to stop making payments, the lender will take possession of the home from you.  There is also a late penalty for late payments.

Mortgage You want to shop around for the best interest rates before you choose a mortgage. Check all the factors– the interest rate and the length of the loan. Down Payment: is the initial sum of money that you pay toward your house.  The amount you will need to borrow is the selling price minus the down payment. (Sometimes there is a minimum % of the cost of the home)

Mortgage Part of the payment will go towards paying the principle, or amount of the loan, and the rest of the payment will be interest.  Interest is always calculated as a percentage of the outstanding loan amount.

Mortgage continued Besides the down payment you must pay closing costs.  These are the costs of obtaining a credit report, the cost of doing a title search on your home, the appraisal fee, and points Origination points are added fees to cover processing expenses for the loan. Discount points are like interest paid up front to reduce the amount of the monthly mortgage payments.

PMI Private Mortgage Insurance: protects the lender in case you, the borrower, cannot make your loan payments. In the simulation you will see how increasing your down payment lowers the cost of PMI because you are borrowing less money and there is less risk for the lender.

Different Types of Mortgages Fixed Rate Mortgage: the interest rate will not change for the life of the loan.  15 or 30 year mortgage:  a 15 year mortgage will have higher payments than a 30 year mortgage for the same amount because you will be paying off the loan in less time.  You pay much less in interest for a 15 year loan.

Types of Mortgages Adjustable rate mortgage:  ARM: the interest rate is fixed for an initial period of time: 5, 7 or 10 years:  then it can fluctuate up or down based on a national index such as the U.S. Treasury bill rate.  Fear that the interest rate can increase significantly

Types of Mortgages Balloon mortgage: starts off like a fixed rate mortgage but the balance of the loan, or balloon, is due in one large payment after a short period of time (in like 5 or 7 years)  Usually someone who picks this mortgage does not plan to be in their home for very long.  Most people need to get a new mortgage or to refinance when the balloon payment is due.  Refinancing means replacing your existing loan with a new loan, often to take advantage of lower interest rates.

How Much of My Home Do I Really Own? Equity = Fair Market Value – Outstanding Loan Balance

Mortgage Calculator affordability/ affordability/

Questions? What three facts about buying/renting a home did you learn? Do you have any questions?