FIN2100 Chapter 9: The Housing Decision: Factors and Finances

What are renting and buying advantages when being young and single?

limited maintenance, offers mobility; buying property brings tax benefits

What are renting and buying advantages when being a young couple with no children?

flexible, convenient lifestyle; house comes with long-term financial stability

What are renting and buying advantages when being a couple with young children?

provides a place to live for children; meets financial needs

What are renting and buying advantages when being a single parent?

provides a suitable environment for children with home security; low-maintenance housing for financial and social needs

What are renting and buying advantages when being a couple with empty-nest?

convienience and flexibility for changes; minimal maintenance and meets life style needs

What are renting and buying advantages when being a retired person?

meets social and physical needs; minimal maintenance, convenience, and includes needed services

what are some opportunity costs of housing choices?

interest lost on down payments, time and cost for commute, renters lose tax advantages, and time and money for repairs

what should you consider when selecting a rental unit?

location, building exterior and interior, financial aspects, layout, and facilities

what is the price-to-rent ratio?

the relationship between home prices and annual rents

what does the price-to-rent ratio indicate?

the desirability of owning over renting

what are the 4 rental activities?

the search, before signing a lease, living in rental property, and at the end of the lease

what are some advantages of renting?

mobility, fewer responsibilities, lower initial costs, amenities

what are some disadvantages or renting?

few financial benefits, restricted lifestyle, legal details

what are the legal details of a lease?

description and address of property, name and address of owner/landlord, name of tenant, effective date and length of lease, security deposit, amount and due date of rent, where rent is paid, date and amount of late rent, Utilities and appliances, restrictions, charges for damages, and when landlord can enter place

what are benefits of home ownership?

pride, financial benefits, and financial flexibility

What are the steps of the home-buying process?

determine home ownership needs, find and evaluate a property to purchase, price the property, obtain financing, and close the purchase transaction

what are the drawbacks of home ownership?

financial uncertainty, limited mobility, and higher living costs

what types of housing are available?

single-family dwelling , multiunit dwelling, condominium, and cooperative housing

what is earnest money?

a portion of price of home for good faith

what is PMI?

private mortgage insurance

when is PMI required?- when down payment is less than 20%

How is front-end ratio calculated?

by dividing the monthly mortgage by monthly gross income

How is back -end ratio calculated?

by adding up all monthly debt payments, then dividing this by the total monthly debt payments by the monthly gross income

what are the phases of the application process?

Prequalification, lender obtains credit report, and lenders charge a fee to commit to the loan called loan commitment

what is loan commitment?

when the loan is legally binding, interest is locked for 30-90 days

what are points?

prepaid interest charged by lender, each equal to 1% Of the loan

what is an ARM?

adjustable-rate mortgage

what are factors to consider when evaluating an ARM?

frequency and restrictions of interest and monthly payments, loan extension due to negative amortization, and knowing the index of the rate

what does an interest-only mortgage consist of?

allowing a homeowner to pay less in the first few years, no mortgage payment is to the loan, but can be dangerous if value of property declines

what are other financing methods?

balloon payment mortgage, buy downs, second mortgage, reverse mortgage, and refinancing

what is a balloon payment mortgage?

financing for a short term, and the lower payment is due at the end, but can also increase due to interest

what is a buy down?

a method for when interest rates subsidize from a builder to reduce mortgage payments in the beginning, but home price is often increased

what is a second mortgage?

a method that allows the homeowner to borrow the value of the property, so the home is collateral

what is a second mortgage also known as?

home equity loan

what is a reverse mortgage?

a method that provides elders with tax free income based on their equity in a form of a loan that is paid back

what is refinancing?

a method to obtain a new mortgage if the interest drops to at least 1% of the current rate, and benefits occur faster

what do closing costs include?

title insurance and search fee, attorneys and appraisal fee, property survey, termite inspection, recording fees, transfer taxes, warranty deed, lender’s origination fee, escrow accounts, and prepaid interest

what are some considerations to pay off your mortgage early?

no prepayment penalty, loss of tax deductions and earnings from retiring the debt, paying credit cards before, and evaluating programs to pay mortgages