1. The Finances of Housing
Chapter 7
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2. Opportunity Costs of Housing Choices
What are some opportunity costs to consider when purchasing a home?
Mobility- ability to move easily from place to place
Renting vs. Buying- Why would you rent a home if you could buy one?
Buying a “fixer upper” will allow you to buy a larger property for less money but also means you will have to work on the house…renting an apartment may give you more mobility but you give up the tax advantages that homeowners enjoy
3. Decision depends on your lifestyle and on financial factors…renting is a good choice for young adults who need mobility or people who do not want to devote time or money to maintenance…owning is a good choice for people who want a certain amount of stability in their lives…more privacy and some freedoms that are not available to a renter…ownership is costly in the short run but it allows for tax advantages as well
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3. Housing Information Sources
Housing information is plentiful and often free.
Sources:
Libraries
Newspapers
articles on renting, buying, & other housing topics in the real estate section of a newspaper
Internet
Home buying tips, latest mortgage rates, & information on available housing
Friends & Family
Real Estate Agents
Government Agencies
Last…any combination of these sources will provide the information you need to make wise housing decisions, whether you decide to rent or buy your home.
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4. Renting a Residence What should you know before signing a lease?
Ability to read & understand classified ads in newspaper is a skill you will need if you are going to rent
Tenant- person who pays for the right to live in a residence owned by someone else
Landlord- person who owns the property that is rented
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5. Selecting an Apartment
Location
Near school or work
Near shopping, recreation, public transportation
Finances
Amount of rent?
Amount of security deposit?
Utility cost?
Length of lease?
Building
Condition of building & grounds
Parking facilities
Security system
Condition of hallways, stairs, elevators
Access to mailboxes
Layout & facilities
Size & condition of apartment
Plumbing & water pressure
Type & condition of appliances
Condition of doors, locks, windows, closets, & floors
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6. Advantages of renting Mobility & fewer responsibilities
Low initial costs
Disadvantages
Financial & lifestyle restrictions
Legal issues
Lease- legal document that defines the conditions of the rental agreement between tenant & landlord
If you want to move, you can usually notify your landlord 30 days prior to leaving. Making major repairs & maintaining the property are the landlord’s concern…don’t have to worry about property taxes or property insurance
Don’t have to pay a big down payment…just one or two months’ rent to move into a rental unit
4. Ineligible for tax deductions that a homeowner receives…once house is paid off, no monthly payment…renter continues to pay rent and also subject to rent increases…homeowners have more freedom to do what they want to their own property
5. Renters sign a lease…never sign a lease w/o making sure that you understand & agree with what it says. Pay special attention to the amount & due date of the monthly rent & length of rental period…leases are designed to protect landlord & tenant…tenant is protected from rent increases during the lease term…lease gives landlord right to take legal action against tenant who does not pay his or her rent or who damages the property
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7. Cost of Renting Location Living space
Proximity to work & major freeways
Living space
Utilities – before signing the lease, ask the landlord if the rent payment includes any utilities
Security deposit – amount of money paid by a tenant to guard against any financial loss or damage that the tenant might cause. Usually one or two months’ rent
Renters insurance – covers loss of tenant’s personal property as a result of damage or theft
2. The larger the apartment is…the more it costs; could also get a roommate to share expenses
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8. Home-buying process Step 1: Determine your home ownership needs
Benefits & drawbacks of owning a residence
Equity – value of home less the amount still owed on the money borrowed to purchase it.
Types of housing
Affordability & your needs: price & down payment, size & quality of house, & trading up
benefits: sense of stability & permanence. More freedom to decorate & change your own home and to have pets. Financial benefits as well. Deduct interest charges on your loan payments from your federal income taxes each year. Property taxes are also deductible. Drawbacks: down payment is expensive, property values don’t always go up, limited mobility, maintenance & repair expense
Houses, condos, cooperative housing, prefabricated homes, mobile homes
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9. Step 2: find & evaluate a property to purchase
Selecting a location
Local zoning laws – regulations that limit how property in a given area can be used.
Hiring a real estate agent
Conducting a home inspection
Would you rather live in the city, suburbs, or in a small-town or country setting. Distance between home & work, quality of local school system, your interests & lifestyle, all help determine where you will want to live
Good sources of information about the location, availability, prices, & quality of homes. Also able to negotiate the purchase price between buyer & seller…real estate services are usually free to the buyer. Agents may represent the sellers, who pay them a commission of 3-6% when property is sold
Home inspections can cost you money but will save you from problems & unplanned expenses in the future. Also, if problems are uncovered, you may be able to negotiate a lower price w/seller in anticipation of these expenses
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10. Step 3: Price the property
Determining the price of the home
How long has home been on market?
What have similar homes in the neighborhood sold for recently?
Do the current owners need to sell in a hurry?
How easily can you arrange financing?
Negotiating the purchase price
Escrow account- money is held in trust until it can be delivered to a designated party. Applied toward down payment.
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11. Step 4: obtain financing
What are the costs involved in purchasing property?
Determining the amount of down payment
Private mortgage insurance (PMI) – protects lender in case buyer cannot make payments.
Qualifying for a mortgage
Long-term loan extended to someone who buys property
Financial qualifications
Interest rate factors
Paying points – extra charges paid by buyer to get lower interest rate
3c- size of your mortgage will depend on current interest rate. The higher the rate, the more you will need to pay in interest each month. That means that less of your money will be available to pay off the purchase price.
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12. Types of mortgages How do the various types of mortgages differ?
Amortization – reduction of a loan balance through payments made over a period of time
Fixed-rate mortgages
Adjustable-rate mortgage (ARM)
Home equity loan – loan based on difference between current market value of home & amount borrower owes on mortgage
Refinancing – obtaining a new mortgage to replace an existing one. Closing costs & possible longer loan could result
3. Fixed interest rate & fixed schedule of payments…offers peace of mind because monthly payments always remain the same
4. Interest rate changes during the life of the loan…changes according to economic factors
5. Second mortgages are one source of extra cash for homeowners. However, taking out additional loans can keep a homeowner continually in debt. Also, if the borrower cannot make payments on second mortgage, lender can take the home
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13. Step 5: close the transaction
Closing – meeting w/seller, buyer, and lender to complete transaction
Documents are signed, last-minute details are settled, and money is paid (closing costs)
Title insurance – type of insurance that protects buyer if problems w/title are found later
Deed – official document transferring ownership from seller to buyer
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14. Selling a home
What can an owner do to his or her home to get the best selling price?
Determine selling price (appraisal)
Choosing a real estate agent
Sale by owner
2. Estimate of current value of property…use this as a basis for selling price
3. Services provided by agent: determine selling price, attract buyers, show your home, & handle financial aspects of sale….they are paid a commission upon sale of home usually 5-7% of purchase price
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