ch 7

Chapter 7: Selecting and Financing Housing

Learning Objectives

  • LO 7.1 Assess costs and benefits of renting.

  • LO 7.2 Implement the home-buying process.

  • LO 7.3 Determine costs associated with purchasing a home.

  • LO 7.4 Develop a strategy for selling a home.

LO 7.1: Evaluating Renting and Buying

  • Personal Preferences:

    • The foundation of a housing decision lies in personal preferences.

    • Financial factors will ultimately influence the final choice.

  • Financial Guidelines:

    • Traditional guidelines suggest spending no more than 25% to 30% of take-home pay on housing.

    • Economic and social changes have prompted adjustments to these guidelines.

Comparing Renting and Buying Housing

Lifestyle and Financial Factors

  • Decision should be analyzed based on two categories:

    • Lifestyle factors

    • Financial factors

Renting

Advantages:

  • Mobility: Easy to move without significant financial burden.

  • Maintenance Responsibilities: Fewer responsibilities for maintenance and repairs.

  • Financial Commitment: Minimal financial commitment compared to buying a home.

  • Cost Efficiency: Lower costs associated with immediate possession.

Disadvantages:

  • Tax Benefits: Renters receive no tax benefits or deductions for mortgage interest and property taxes.

  • Limitations on Activities: Restrictions regarding remodeling and decorating, as well as pet ownership.

Buying

Advantages:

  • Pride of Ownership: Provides a sense of pride and stability in having one's own home.

  • Financial Benefits: Potential for financial gains through real estate appreciation and tax deductions.

  • Lifestyle Flexibility: Greater flexibility in home customization and long-term living.

Disadvantages:

  • Financial Commitment: Requires a significant financial investment and commitment.

  • Higher Monthly Costs: Generally incurs higher monthly costs compared to renting.

  • Limited Mobility: More challenging to sell or move due to financial investment.

Rental Activities

Selecting a Rental Unit

  • Types of Rental Housing:

    • Apartments are the most common; houses if more space is required.

Advantages of Renting:

  • Ease of movement if renting needs change.

  • Lower upfront costs and maintenance responsibilities.

  • Time for credit establishment and saving for future home purchases.

Disadvantages of Renting:

  • Absence of tax deductions associated with homeownership.

  • Restrictions on personal activities and decor.

Before Signing a Lease

  • Legal Aspects of a Lease:

    • A lease is a legal document that details rental agreement terms.

Key Components Include:

  • Description and address of the property.

  • Name and address of the landlord (lessor) and tenant (lessee).

  • Effective date and length of the lease agreement.

  • Amount of the security deposit and late payment terms.

  • List of included utilities, appliances, and restrictions on tenant activities.

At the End of the Lease

Key Responsibilities Include:

  • Cleaning the apartment and returning it to its original condition.

  • Notifying the landlord regarding the security deposit return.

  • Ensuring any deductions from the security deposit are documented.

Selecting an Apartment

Factors to Consider

  • Location: Proximity to schools, shopping, public transport, and recreation.

  • Building Exterior: Condition, parking facilities, and safety features.

  • Building Interior: Maintenance of hallways, condition of elevators, and security features.

  • Financial Aspects: Rent, lease length, security deposit, and utilities.

  • Layout and Facilities: Room sizes, appliances, and heating/cooling options.

Costs of Renting

  • Security Deposit: Usually equivalent to one month’s rent.

    • Must be returned within a reasonable time frame post-vacating, along with an itemized list of deductions if applicable.

  • Utilities: Often, water is included in rent but other utilities such as heat, electricity, and Internet may not be.

  • Renter’s Insurance: Highly recommended to cover personal property and liability.

LO 7.2: Home-Buying Activities

Home-Buying Process Steps

  1. Determine Home Ownership Needs:

    • Evaluate desire for stability versus flexibility and financial readiness.

  2. Find and Evaluate a Property to Purchase:

    • Assess location, condition, and financial viability.

  3. Price the Property:

    • Negotiate appropriate market price based on valuation and terms.

  4. Obtain Financing:

    • Explore mortgage options to secure funds for purchase.

  5. Close the Purchase Transaction:

    • Finalize sale through necessary documentation and negotiations.

Step 1: Determine Home Ownership Needs

  • Motives for Home Buying:

    • Stability of residence and lifestyle customization.

    • Tax benefits available for mortgage interest and real estate deductions.

    • Financial responsibilities related to repairs and maintenance also necessary.

Step 2: Find and Evaluate a Home

  • Location Considerations:

    • Primary factor in home-buying decisions; evaluate zoning laws and property uses.

  • Services of Real Estate Agents:

    • Provide valuable insights and assist in negotiating and financing the purchase.

  • Home Inspection:

    • Conducting an inspection can reveal critical condition information and future repair needs.

    • Mortgage companies usually require an appraisal separate from a home inspection to assess property value.

Step 3: Price the Property

  • Negotiating the Purchase Price:

    • Initial offer acceptance leads to a valid contract.

    • Counteroffers indicate a willingness to negotiate beyond price.

    • Earnest money signifies good faith in the form of an initial payment.

    • A contingency clause may be included that binds agreement on specific conditions being met.

LO 7.3: The Finances of Home Buying

Obtaining Financing

  • Down Payment Sources:

    • Personal savings, asset sales, or assistance from family are common sources.

    • Private mortgage insurance (PMI) is typically required if the down payment is below 20%.

    • Options for PMI cancellation once 20% equity is achieved.

    • Homeowners Protection Act outlines automatic PMI termination at 22% equity.

The Mortgage

  • Definition:

    • A mortgage is a long-term loan typically ranging from 10 to 30 years for purchasing real estate.

    • Application process includes providing detailed financial and employment information to lenders.

    • Ability-to-Repay (ATR) and Qualified Mortgage (QM) rules protect borrowers during mortgage approval processes.

Housing Affordability and Mortgage Qualification

  • Calculation Example:

    • Determine monthly gross income and compute affordable monthly payments based on ratios of income for principal, interest, taxes, and insurance (PITI).

    • Variables such as debt payments must be deducted to ascertain maximum mortgage payment affordability.

Step 4: Mortgage Payment Factors

  • Different Mortgage Terms and Their Rates:

    • 30-year, 25-year, 20-year, and 15-year mortgages have varying interest rates affecting total payments.

  • Formula for Monthly Payment Calculation:

    • Example of a 30-year mortgage at 6.5% for $220,000 calculated using established guidelines leads to a specific monthly payment amount.

Types of Mortgages

Fixed-rate Mortgages

  • Definition:

    • Equal payments typically over 15, 20, or 30 years based on a stable interest rate.

    • Effects of amortization met through regular payments reducing the loan balance over time.

Adjustable-rate Mortgages (ARM)

  • Definition:

    • Interest rates can fluctuate impacting monthly payments.

    • Rate caps and evaluation of changes must be considered during the loan evaluation process.

Balloon Payment Mortgages

  • Definition:

    • Shorter-term financing with a larger balance due at the end of the term.

Home Equity and Reverse Mortgages

  • Second mortgages allow borrowing against paid-up equity.

  • Reverse mortgages enable older homeowners to access cash without needing to repay until property sale or passing.

Step 5: Close the Purchase Transaction

  • Closing Process:

    • Involves final documentation signing and addressing last-minute issues.

    • Closing costs include various fees like title search fees, insurance costs, appraisal fees, and attorney fees.

Common Closing Costs

  • Typical Costs:

    • Title search fee: $150 to $375

    • Title insurance: $800 to $1,800

    • Property survey: $400 to $500

    • Closing settlement fees: $500 to $1000+

    • Loan origination fee: 1-3% of the loan amount

LO 7.4: A Home-Selling Strategy

Preparing Your Home for Sale

  • Effective Presentation:

    • Perform necessary repairs and general maintenance.

    • Enhance curb appeal by landscaping and decluttering property.

    • Clear personal belongings to make spaces appear larger and more inviting.

Determining Selling Price

  • Methods of Selling:

    • Use a lawyer/title company for DIY sales; may be time-consuming but can save costs.

    • Real estate agents provide expertise and wider marketing exposure, assisting with contract and closing.

Chapter Review

LO 7.1 - Assess Costs and Benefits of Renting

  • Advantages of Renting:

    • Mobility and low initial costs.

  • Disadvantages of Renting:

    • Limited financial benefits and legal concerns.

LO 7.2 - Implement the Home-buying Process

  • Stages of Home Buying:

    • Home ownership needs assessment, property evaluation, pricing, financing, and closing.

LO 7.3 - Determine Costs Associated with Purchasing a Home

  • Associated Costs:

    • Include down payment, mortgage origination costs, closing costs, and escrow fees.

LO 7.4 - Develop a Strategy for Selling a Home

  • Selling Strategy Steps:

    • Decision-making on repairs, pricing, and whether to engage a real estate agent.