Housing

The Housing Decision

• Buying a home is one of the most important financial decisions you will make

• The choice between renting and buying housing depends on your personal preferences and financial factors

• Economic factors such as inflation and interest rates are also important

Advantages of Renting

• Mobility

• Fewer maintenance/repair responsibilities

• Lower initial costs

• If very little savings then this would be the best option

Disadvantages of Renting

• No tax benefits

• No benefit from increased real estate values

• Limitations on activities

• Restrictions regarding pets and decorating

• Tenants cannot take tax deductions for mortgage interest and property taxes

Advantages of Home Ownership

• Security of ownership

• Financial benefits

• Lifestyle flexibility

• Personalized living location

• Fully equipped kitchen and fireplace

• Less expensive than other options

Disadvantages of Home Ownership

• Financial commitment

• Higher living expenses than renting

• Limited mobility

Price to rent ratio = median home price/median annual rent

The Home Buying Process

1. Determine home ownership needs

2. Select a property to purchase

3. Price the property

4. Obtain financing

5. Close the purchase

Types of Housing

• Single-family home

  • Stand-alone home or townhouse

• Condominion

  • Individually owned housing units in a building

  • Ownership does not include common areas

  • Fewer maintenance responsibilities

• Cooperative housing

  • Units owned by a non-profit organization

  • Members own shares/stock and rent a unit in a building

  • The right to occupy the unit for as long as the stock is owned

How much can you afford?

• Home price should be 3-5 times your annual household income

  • Experts recommend spending no more than 30% of your income on housing costs

• Save an amount equal to your annual household income for the down payment and closing costs

• Contact a mortgage company or other financial institution to prequalify you, free of charge

When determining a price for the home

• Owner’s need to sell

• The time the home has been on the market

• The features and condition of the home

Select Property to Purchase

• Location!!!!! Location!!!!!! Locationnnn

  • The most important factor when buying a home

• Use services of real estate agents/brokers

  • Showing you homes based on your needs

  • Presenting your offer to the seller

  • Negotiating purchase price

  • Assisting in obtaining financing

  • Representing you at closing

• Conduct home inspection

• Purchase agreement - your legal offer to purchase the home

Price the Property

• Negotiate the purchase price

  • If your initial offer is rejected, counteroffer from owner indicates willingness to negotiate price

  • Earnest money - portion of the price of a home that the buyer deposits as evidence of good faith

  • Contingency clauses

    • Buyer must be able to obtain financing

    • Sale contingent on the sale of the buyer’s current home

The Finances of Home Buying

• Up front costs

  • Down payment

  • Closing costs

• Recurring costs

  • Monthly mortgage payment (principal and interest)

  • PITI - Principal, Interest, real estate property Taxes & homeowner’s Insurance

• Mortgage insurance (if required)

• Down payment - portion of the purchase price that is not borrowed

• Private Mortgage Insurance (PMI) - required if down payment is less than 20%

  • Protects lender from financial loss

  • Homeowners can contact lender to cancel once they reach 20% equity

  • Homeowners Protection Act requires PMI be terminated automatically when equity reaches 22%

• Mortgage - long-term loan on a specific piece of property, such as a home or other real estate

  • Terms 10 to 30 years

  • Home used as collateral

• Applying for a mortgage involves these steps:

  1. Complete application and meet with lender to present

  evidence of employment, income, ownership of assets, and

  existing debt amounts

  2. Lender obtains credit report, and verifies your application

  and financial status

  3. Mortgage is either approved or denied

Services of Real Estate Agents

1. Showing you homes based on your needs and you pre-approved mortgage amount, recommending other advisors to help you with the process of buying or selling a home

2. Presenting your offer to the seller based on a market analysis

3. Negotiating a purchase price

4. Assisting you in obtaining financing

5. Representing you at the closing

The Finances of Home Buying

• Ability-to-repay (ATR) / Qualified Mortgage (QM) rule requires lenders to carefully consider a borrower’s financial situation before granting a mortgage

• Factors considered

  • Income

  • Debts

  • Assets

  • Credit history

  • Job stability

  • Down payment amount

  • Length of the loan

  • Current mortgage rates

• Front-end ratio

  • Maximum percentage of monthly gross income you should spend on housing

  • Back-end ratio (debt-to-income ratio)

    • Maximum percentage of monthly gross income you should spend on debt payments (including housing)

Calculating Amount = Mortgage Payment x $1-\frac{1}{\frac{\left(1+\frac{i}{12}\right)^{12xn}}{\frac{i}{12}}}$

Type of Mortgages

• Fixed-rate mortgage

  • Conventional mortgage with equal payments, typically over 10, 15, 20, 30 years based on a fixed interest rate

  • Fixed mortgage payments are set to allow amortization of the loan

  • In the past, many conventional mortgages were assumable, but those are seldom available today

  • Gov’t-guaranteed financing programs

    • Include loans insured by the Federal Housing Authority (FHA) and loans guaranteed by the Veterans Administration (VA)

    • U.S. Dept. of Agriculture (USDA) finances housing and community facilities in rural areas

    • Lower down payment and lower interest

  • Adjustable-rate mortgage (ARM)

    • Variable-payment and variable interest rate

    • Lower initial interest rate than fixed-rate mortgage; borrower bears risk of future interest rate increases

    • Rate cap restricts the amount by which the interest rate can increase or decrease during the life of the loan

  • Interest only mortgage

    • Allows a home buyer to have lower payments

    • During the period when none of the mortgage payments go toward the loan amount

    • High payments will occur later in the loan

    • Can be especially dangerous if the value of the property declines

How to save on your mortgage

• Increase your down payment

• Get a lower interest rate

  • Increase your credit score

  • Take a shorter-term loan, e.g. 15-year mortgage

  • Shop around

• Prepay the principal

  • Check if your mortgage has a prepayment penalty

Close the Purchase Transaction

• Walk-through to inspect the home and condition

• Closing involves meeting of buyer, seller, lender, and signing of documents

• Closing costs - fees and charges paid when a real estate transaction is completed

  • Real Estate Settlement Procedures Act (RESPA) requires buyers be given closing costs estimate before the closing

• Title insurance - protects the owner or lender against financial loss resulting from future defects in the title and from other unforeseen property claims not excluded by the policy

  • Title company conducts survey to define boundaries of property and searches to determine whether property is free of claim

• Deed - document that transfers ownership of property from one party to another

  • With a warranty deed, the seller guarantees the title is good

• Escrow account - money, usually deposited with lending institution, for payment of property taxes and insurance

Summary

• Steps in home buying process

  • Determine your housing needs and how much you can afford

  • Find a home to purchase

  • Negotiate the price and sign a purchase contract

  • Apply for a mortgage loan

    • Down payment, closing costs, PITI, mortgage insurance

    • Types of mortgages - fixed rate, FHA/VA, ARM, interest only

  • Close the purchase transaction

  • Enjoy your new home