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Chapter 09

The Housing Decision: Factors


and Finances

McGraw-Hill/Irwin

Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

9-1

Chapter 9
Learning Objectives
1.

Evaluate available housing alternatives

2.

Analyze the costs and benefits associated with renting

3.

Implement the home-buying process

4.

Calculate the costs associated with purchasing a


home

5.

Develop a strategy for selling a home


9-2

Housing Alternatives by life stage

9-3

Housing Alternatives
Objective 1: Evaluate available housing
alternatives
Your lifestyle and your choice of housing
How you spend your time and money, affects your
housing choice.
Personal preferences are modified by financial
factors.
Traditional financial guidelines suggest you
spend no more than 25-33% of take-home pay
on housing, or no more than 2 1/2 times your
annual income.
9-4

Housing Alternatives (continued)


Opportunity costs of housing choices
Interest earnings lost on money used for a down
payment or the interest on a security deposit for
an apartment

Time and cost of commuting to live in an area


that offers less costly housing or more space

9-5

Housing Alternatives (continued)


Opportunity costs of housing choices (continued)
Renters lose tax advantages and equity growth

Time and money you spend to repair and


improve a lower-priced home
Time and effort when you have a home built to
your personal specifications

9-6

Renting-the process

9-7

Renting your Residence


Objective 2: Analyze the costs and benefits
associated with renting
The search
Select an area and rental cost for your needs
Compare costs and facilities between units
Talk to current and past residents

9-8

Renting your Residence


Advantages of renting
Easier to move
Fewer maintenance and repair responsibilities
Lower initial costs

9-9

Renting your Residence (continued)


Disadvantages of renting
No tax benefits
Limitations regarding remodeling
Restrictions regarding pets and other activities

Legal concerns of a lease


Costs including a security deposit, utilities and
renters insurance

9-10

Renting your Residence (continued)


LEGAL DETAILS OF A LEASE

Description and address of property


Name and address of the owner/landlord (lessor)
Name of tenant (lessee)

Effective date and length of the lease


Amount of security deposit
Amount and due date of rent
9-11

Renting your Residence (continued)


LEGAL DETAILS OF A LEASE (continued)
Location where rent is due

Date and amount for late rent payments


List of included utilities, appliances
Restrictions on certain activities
The right to sublet the unit
Conditions where landlord may enter rental unit
9-12

Home Buying Process

9-13

Home Buying Process


Objective 3: Implement the home-buying process
Step 1: DETERMINE THE HOMEOWNERSHIP
NEEDS
Benefits of Home Ownership
Pride of ownership
American dream

Financial benefits
Deduct property taxes and mortgage interest
Potential increase in value of your home
Building equity in your home

Lifestyle flexibility - express your individuality


9-14

Home Buying Process (continued)


Drawbacks of Homeownership
Financial uncertainty
Obtaining money for the down payment
Obtaining mortgage financing
Home values could drop

Limited mobility
Can take time to sell your home

Higher living costs


Home improvements
Rising real estate taxes
9-15

Home Buying Process (continued)


Assess Types of Housing Available
Single-family dwelling
Multi-unit dwelling
Duplex, townhomes

Condominium
You own your unit in a building of units
It is not a type of building structure, but rather a
form of homeownership

Cooperative housing
Non-profit organization - members own shares
and rent a unit in a building with multiple units
9-16

Home Buying Process (continued)


Manufactured homes
Fully or partially assembled in a factory, and then
moved to the housing site
Prefabricated type has components built in the
factory and assembled at the site
Mass production under factory conditions keeps
costs lower than site built homes

Mobile homes
A type of manufactured home, often <1,000 sq. ft.
Offer same features as a conventional house
Safety is debated and they tend to depreciate
9-17

Home Buying Process (continued)


Building a home
Does the contractor have needed
experience?
Does contractor have a good working
relationship with architect, suppliers,
electricians, plumbers, carpenters and
others?
What assurance do you have about
quality?
What are the payment arrangements?
9-18

Home Buying Process (continued)


Building a home (continued)
What delays will be considered legitimate?
Is the contractor licensed and insured?
Are there any complaints about this
contractor?
Contract should have a time schedule, cost
estimates, description of work, and a
payment schedule.
9-19

Home Buying Process (continued)


Step 2: FIND AND EVALUATE A PROPERTY
TO PURCHASE
Selecting a Location
Be aware of zoning laws
Assess the school system if you have children.

9-20

Home Buying Process (continued)


Step 2: FIND AND EVALUATE A PROPERTY
TO PURCHASE (continued)

Using a real estate agent


They present your offer, negotiate the price,
assist you in obtaining financing, and represent
you at the closing

Conduct a home inspection or hire an inspector

Mortgage company will want an appraisal


9-21

Home Buying Process (continued)


Step 3: PRICING THE PROPERTY
Determine the Home Price
Price is affected by whether it is a sellers or a
buyers market.

Negotiating the Purchase Price


Counteroffers are common
Earnest money
Contingency clauses, such as...
Buyer must be able to obtain financing
Sale contingent on the sale of the buyers
current home
9-22

The Finances of Home Buying


Objective 4: Calculate the costs associated
with purchasing a home
Step 4: OBTAIN FINANCING
Determine the amount of the down payment
Mortgage insurance (PMI) if less than 20% down

Investigate the rates, types, & terms of


mortgages
Apply for a mortgage and evaluate types of
mortgages. Guidelines for affordability of
housing costs are 33% to 38% of gross income
9-23

The Finances of Home Buying


(continued)

Qualifying for a mortgage


includes your income, debts, credit history, down
payment amount, length of the loan, and current
mortgage rates
Step 1: Prequalification
Step 2: Finding a property, including appraisal
Step 3: Fee Payment and commitment

Points are prepaid interest as a % of the loan


amount

9-24

The Finances of Home Buying (continued)

FIXED-RATE, FIXED-PAYMENT
MORTGAGES
Conventional
Fixed rate, fixed payment, amortized
5%, 10% or 20% down
15, 20 or 30 years of fixed payments
9-25

The Finances of Home Buying (continued)


Government financing programs
Veterans Administration
Federal Housing Authority
Lower down payment than conventional

Balloon
Fixed monthly payments plus one large
payment, usually after 3, 5 or 7 years

9-26

The Finances of Home Buying


(continued)

ADJUSTABLE-RATE, VARIABLE-PAYMENT
MORTGAGES
Adjustable rate mortgages
During the life of the loan the interest rate varies
with the prime rate, but has a rate cap
A payment cap may limit the payment but,
extend the loan

9-27

Comparison of
30 and 15 Year Fixed Mortgages
Loan Amount= $1,000,000
Interest Rate=6%
Loan Term # of
(years)
payments

Payment
amount

Total cost

30

360

$6,000

$2,160,000

15

180

$8,430

$1,517,400

Total Savings=$642,600
9-28

Comparison of Different Rates


Loan Amount= $1,000,000
Loan term= 30 years (360 payments)

Interest
rate

# of
payments

Payment
amount

Total cost

7%

360

$6,650

$2,394,000

6%

360

$6,000

$2,160,000

Total Savings=$234,000
9-29

The Finances of Home Buying (continued)


OTHER FINANCING METHODS
Buy-Downs
Interest subsidy from a home builder or a real
estate developer that reduces the mortgage
payments for the first few years

Second mortgage
Home is collateral and interest may be tax
deductible. Home equity loans are an example

9-30

The Finances of Home Buying (continued)


OTHER FINANCING METHODS (continued)
Reverse mortgages
Provides elderly (>62 years old) with tax-free
income based on the home equity

Refinance if interest rate drops at least 1%


9-31

The Finances of Home Buying


(continued)

Step 5: CLOSE THE PURCHASE TRANSACTION

Documents signed; meeting of buyer, seller, and


lender
Closing costs include...

Title insurance and search fee


Attorneys and appraisers fees
Property survey; Pest inspection
Deed recording fees; Transfer taxes
Credit report; Lenders origination fee
Escrow account for tax and insurance reserve
Pre-paid interest; Real estate commission
9-32

Selling Your Home


Objective 5: Develop a strategy for selling
Preparing your home
Repair, repaint, and clean

When showing home turn on lights and open


drapes. Bake bread or make coffee for a
welcoming smell

9-33

Selling Your Home


Objective 5: Develop a strategy for selling
Determining the selling price
Appraiser estimates the current value
Real estate agent markets your home

If for sale by owner, use a lawyer or Title Company


Listing with a real estate agent for services

9-34

End of Lecture

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