1. Theme 4: Financing of Housing (and the Fed)

2. Where to rent or buy? When renting or buying, here are some lifestyle ideas to consider: Location (what characteristics does the neighborhood provide: Shopping, grocery stores, parks, businesses, restaurants, laundry mats, school system…) Location to work/school and the commute How long you plan on staying in the location? How much do you value privacy? Crime?

3. Renting: Advantages and Disadvantages Advan: Mobility- Month-to-month lease or the ability to give 30 days allows the ability to quickly move when needed. If you own, you will need to sell which can be a lengthy process. Advan: Fixed Cost- Outside of utilities (which are sometimes included), the cost is always the same because there is no maintenance. Advan: Low Initial Fee- Outside of deposit, most apartments don’t require any down payment. Dis: No tax deductions Dis: Aren’t paying towards ownership (not an investment, no equity) Dis: A lease is a legal binding agreement which you accountable to Dis: don’t own, can’t refinish Consider - Renters Insurance : a type of insurance that covers lose of a tenant’s property as a result of damage or theft.

4. When Renting Consider - Renters Insurance : a type of insurance that covers lose of a tenant’s property as a result of damage or theft. Rental inventory: a detailed list of the current property conditions. o Be sure to walk through the property before you sign your lease and mark down any issues that could cause you to lose your deposit later.

5. Housing: Advantages and Disadvantages Advan: Building equity : the value of your home subtracted by what you owe. (example- $300,000 home which you have paid off $150,000. After sale, you have $150,000) Advan: Private property. You can refurnish your home as long as it fits within legal limits. Advan: Tax benefits Advan: Stability- Lease can’t just end => move out or increase in rent Dis: Maintenance Dis: Down payment (20% of house) or PMI (Private Mortgage Insurance) which protects lender in case of default (usually.03% to 1.5% depending on Credit Score) Dis: Liquidity issues (can lose value and difficult to make liquid) Dis: Difficult mobility Dis: Municipal restrictions Dis: Property Taxes Dis: Have to own home insurance

6. Terms: Default and Mortgage Default: failure to fulfill obligation (especially pay on a loan) Mortgage: a loan to purchase real estate Usually are paid in 15 to 30 year intervals. Fixed Rate : a mortgage on which the interest rate does not change during the term of the loan. Adjustable Rate Mortgage (ARM) : a mortgage for which the interest rate changes in response to the movement of interest rates in the economy. Why do interest rates change? The Federal Reserve

7. Business Fluctuations Business Cycle- alternating periods of growth and decline in economic performance. o What are the two variables being measured?

8. Business Cycle Expansion: Real GDP increases (does not measure intensity of the growth). o Peak: the highest point of expansion before decline Recession: Real GDP decreases for 6 straight months. GDP: the total value (in dollars) of all the “final” goods and services produced in a country during a single year. Real GDP: GDP after the distortions of prices changes/inflation have been removed

9. Federal Reserve System Central bank of the United States 12 Reserve Districts (12 banks) run by a Board of Governors (7 members) and a Fed Chairman (Janet Yellen) Functions: o Banking regulations: overseas commercial banks and how they function o Consumer credit: create interest rates and laws that pertain to borrowing money o Act as the government’s bank and bank’s bank o Issues nation’s currency

10. Monetary Policy Controlling the supply of money and the cost of borrowing. 1.Discount Rate: the interest rate charged by the federal reserve to commercial banks. -If the fed lowers the discount rate, banks will lower their interest rates. -If the fed wants to slow down the economy, it raises the discount rate. Explain. 2.Reserve limit: the minimum banks are required to leave in their vaults required by the Fed. - If the fed raises the reserve limit, it slows down the economy. Explain. 3.Bonds: The government buys and sells bonds at a set interest rate. -The higher the rate, the better investment. If you buy now, you aren’t spending in the economy. -Higher rate => Slows down the economy

11. Back to Housing: Purchasing Agent : the seller of a home must pay the commission for real estate agents (usually 6% to 8%) split between the buyers and sellers agent. o If purchasing, can’t hurt to have an agent (unless they’re no good at their job) Prequalified : determine how much you can borrow before you look at homes to determine what is feasible. An offer or Earnest Money Offer : is a serious intent to buy often backed by a deposit made (~1%) until the transaction is complete. o Keeps the buyer from backing out if in an agreement, the seller takes the house off of the market. If you back out, you may lose the deposit. o Your offer can be below the selling price. Check houses around the area to determine average costs per sq/ft. The inspection report : An inspector (paid for by the buyer) does a detailed inspection of the house to look for home issues which can often lead to a renegotiation of the price.