1. Slides by Pamela L. Hall Western Washington University 1 Chapter 8 The Housing Decision

2. 2 Your Personal Housing Requirements  Where do you want to live? Lifestyle: leisure and work activities Commuting distance/time Taxes  Vary across different states & local communities Public services  Health care, police/fire protection, parks, etc. Schools  Some believe good system helps maintain property values, but may pay higher property taxes

3. 3 Your Financial Resources  Experts suggest that you spend no more than 30% of your monthly take-home pay on housing  Decline in mortgage interest in 1990s let more people afford houses  Amount required for down payment is usually more of a hurdle than the monthly payment While there are ways to reduce the needed down payment, you should plan on paying at least 10% of purchase price in a down payment (plus closing costs, which can easily reach 2.5%)

4. 4 The Kind of Home You Want and Need  Important to do a needs vs. wants analysis  Housing needs change over the life cycle Single person versus family with children versus retired couple

5. 5 Major Housing Options  Single Family Homes About 2/3 of American households are of this type Typically about 2,225 square feet, 3 bedrooms, 2.5 baths Typically sells for $145,000  Varies widely throughout the country More than 90% are bought via financing with the property serving as collateral (mortgage)

6. 6 Major Housing Options  Condominiums and Co-ops Condo buyers receive title to unit plus joint ownership in all common areas  Owners belong to a homeowners association Co-op dwellers own shares in a corporation that owns the building  Resident leases unit from corporation

7. 7 Major Housing Options  Manufactured homes 95% are permanent structures Much cheaper than site-built houses If built after June 1976 must conform to national building code  Rental option Most rentals are unfurnished Average rental in U.S. is $788/month  Varies substantially based upon Type of unit Location Lease defines rights and obligations of landlord and tenant

8. 8 Buy-vs.-Rent  Advantages of renting Mobility (no need to be concerned with selling house, although length of lease is a consideration) No large up-front costs involved Little or no repair and maintenance costs  Advantages of buying ‘Pride of ownership’ Ability to decorate to your satisfaction Potential price appreciation (but depreciation can occur) Tax savings (itemize deduction for mortgage interest) Build up equity  The current value of the house minus the loan balance

9. 9 Buy-vs.-Rent  In many areas of the country buying is cheaper than renting even if appreciation in value is not considered  This could change if interest rates rise or mortgage interest deduction is eliminated

10. 10 Web Links  Checkout Buying a Home: Settlement Costs and Helpful Information at:  www.hud.gov/buying/index.cfm www.hud.gov/buying/index.cfm  www.pueblo.gsa.gov www.pueblo.gsa.gov  Interactive guide to the home buying decision  www.fanniemae.com www.fanniemae.com

11. 11 Financing the Purchase of a Home  Determine how much you can afford in terms of the total purchase price Dependent upon your income, down payment, interest rates  Lenders don’t want monthly mortgage payment, real estate taxes and homeowners insurance to exceed 28% of your gross monthly income  Also, make sure you can afford the monthly upkeep Utilities, repairs, maintenance

12. 12 Financing the Purchase of a Home  Down payment First-time buyers usually pay about 12% Average down payment is  25% for all buyers  If you have a lower loan-to-value ratio may get a better interest rate on mortgage If you purchase Private Mortgage Insurance (PMI) you may be able to reduce the size of your down payment  Expensive, but can be canceled after a point

13. 13 The Monthly Payment  Most mortgages are fully amortized Each payment goes partly to principal reduction and partly to interest Over life of loan, principal is reduced to zero Initially most of monthly payment goes toward interest but this decreases (slowly) over the life of the loan

14. 14 Table 8.1

15. 15 Figure 8.5

16. 16 Closing Costs  Include fees involved with the transfer of ownership (such as loan origination fee, credit report, etc.) Most are paid at the closing meeting Points  Fees paid (usually by buyer) to lender (AKA as a loan origination fee or loan discount) Typically considered interest and are tax deductible Stated as a % of the loan amount

17. 17 Closing Costs  Prepaid Interest Generally over a month passes before your first mortgage payment is due However, your mortgage is accruing interest charges during that time  If mortgage closed on June 15 and 1 st payment was due July 30 th, it would cover interest from June 30 th to July 30 th, but not June 15 th to June 29 th  Sales Commission Usually paid by seller Compensates real estate agents for their services  Quite expensive (about 6 or 7% of purchase price)  Title Charges Normally split between buyer and seller

18. 18 Sources of Mortgage Loans  Can be obtained through Commercial banks Savings banks Mortgage companies Some credit unions  Shop around Mortgage broker will search for best loan to meet your needs Check the Internet  Lender doesn’t have to be local  Loan application is rather detailed  May have the option of locking-in the current mortgage rate

19. 19 Types of Mortgages  Fixed-rate loans—interest rate remains constant over the life of the loan 30-year  360 identical payments are made, generally once a month 15-year  Are about 33% of all new mortgage loans  Interest rates are slightly less than a 30-year mortgage  Monthly payment is larger than 30-year

20. 20 Types of Mortgages  Adjustable-Rate Mortgages (ARMs) Interest rate changes at preset intervals, depending on whether interest rates have increased or decreased  Tied to a specific index  Limits (caps) to how much the interest rate can change per period and over the life of the loan The initial (teaser) rate is far below the rate of fixed-rate loans

21. 21 Types of Mortgages  Choosing between an ARM and Fixed- Rate loan Many consumers dislike ARMs because interest rate can change—adds uncertainty However, may be a good choice for some consumers  The shorter the amount of time you plan to keep the house, the more attractive an ARM

22. 22 Sources of Mortgage Loans  Federal Housing Administration (FHA) Federally insured mortgages made by private lenders  Down payment is usually quite low (because receive insurance via federal government)  Buyer pays an FHA insurance premium each month  Ceilings on the amount of money that can be borrowed Exactly what the ceiling is depends on geographic location

23. 23 Sources of Mortgage Loans  Veterans Administration Guaranteed by the Veterans Administration and loans are made through private lenders Only available to veterans Guarantees 100% of the loan amount  Subject to ceilings which vary by region Limits on closing costs Low down payments (sometimes as low as 0%)

24. 24 Sources of Mortgage Loans  Conventional Mortgages One that is not FHA or VA insured If borrow more than 80% of purchase price most lenders require PMI If property is sold for less than the loan balance, borrower is still obligated to pay the rest

25. 25 Refinancing a Mortgage  Involves taking out a new loan while paying off the old loan  Costs associated with refinancing Closing costs Are there pre-payment penalties on your current loan  Will there be pre-payment penalties on new loan? Generally if interest rates have dropped to 2% or more from your current rate, it makes sense to refinance but depends on time you plan to remain in house

26. 26 Second Mortgages  Tax Reform Act of 1986 eliminated interest deductions on car loans, credit cards, etc.  May make sense to obtain a second mortgage on your house to finance car purchases, make home improvements, pay for college costs, etc. Interest is tax-deductible  Similar to home equity loans, except home equity loans are basically a credit limit An amount up to which you can borrow without reapplying each time  Interest is tax deductible

27. 27 Second Mortgages  Warning: Even if you pay your primary mortgage payments on time, you can lose your house if you fail to pay your second mortgage payments on time If your house drops in value the amount you owe stays the same  125 loans Loans up to 125% of the market value of the house  Risky!

28. 28 125 Loans  Recently 125 loans have become available Before the most you could borrow was 80-85% of the home owner’s equity Example: If your home is appraised at $150,000 and you owe $135,000 on the mortgage, you can borrow $18,750 (125% x (150,000 – 135,000)  Disadvantages Charge high interest rates Not all the interest is tax deductible (the % above the value of the home is not) If you are having a financial crisis you can stop paying your credit card debt (or pay the minimum) but you can’t stop paying this loan without losing your home You can’t sell your home if you can’t repay the 125 loan If you file for personal bankruptcy, your credit card debt would be wiped out (probably) but mortgage debt remains (usually)

29. 29 Finding the Right House to Buy  Recommend that you pre-qualify for mortgage before you start looking Know the max you can afford so you won’t waste time Lets you quickly arrange financing once you find the house you want

30. 30 Using a Real Estate Agent  You can either find houses yourself that you are interested in or  Tell an agent what you’re interested in and have them contact you with a list of prospects  Once you’ve selected a house, agent will help you make a formal offer Prepare a contract stating offer price, desired closing date, etc. Seller will either accept offer, make counteroffer or reject offer You’ll have to put up earnest money  A security deposit (which you’ll probably lose if you recant offer)

31. 31 Home Inspections  You’ll definitely want the house inspected before you buy it, even if it is brand new  You can ask seller to fix things that are found during the house inspection, or lower the purchase price to adjust for these items  Expect to pay $150-$500 for a home inspection

32. 32 Warranties  Most new homes come with a one-year warranty  For an older home you could either buy a warranty (for about $350) that covers certain items (water heater, stove, etc.)  Some sellers now buy these warranties and offer as a sales incentive

33. 33 Selling a Home  Should you use a real estate agent? Agents charge between 6 and 7% of selling price If you don’t use a real estate agent, you have to advertise the house, arrange for viewing, negotiate with buyer, etc.  About 80% of houses are sold via an agent  Setting the asking price Agent will help establish this  Selling costs May include real estate commission, title insurance, real estate taxes

34. 34 Web Links  References associated with selling a house:  www.realtor.com www.realtor.com  www.hud.gov/selling/index.cfm www.hud.gov/selling/index.cfm

35. 35 Fixing Up Your Home  Why do home improvements? Satisfy you Increase potential selling price  Bathroom/kitchen improvements tend to recover the best  Don’t improve your home too much If the value is more than 10-15% of average home price in neighborhood, probably won’t get that much for it  Shop around

36. 36 Taxes and the Sale of Your Home  Most homeowners will never pay federal taxes on the sale of their home  However, it is important to keep good records