Chapter 9: The Housing Decision: Factors and Finances

9.0 Introduction

To increase mortgage equity for financial security, one can increase monthly payments or opt for a shorter term, accelerating equity growth and cutting interest.

9.1 Housing Alternatives

Housing Choices

Young, single person: Could rent for mobility or buy a home/condo for financial/tax advantages.
Single parent: Rent for simplicity or buy to meet financial/social child-rearing needs.
Young couple (no kids): Rent for flexibility/convenience or buy for security/benefits.
Couple (no kids at home): Rent for flexibility/convenience or buy low-maintenance housing.
Couple (young children): Rent for kid-friendly facilities or buy to fulfill financial/family needs.
Retired person: Rent for financial, social, and physical needs, or buy for low-maintenance/convenient services.

Financials affect final housing decisions. Financial records determine housing spending.

Consider housing trade-offs: security deposit interest loss, increased commuting costs from moving farther, loss of tax advantages from renting, increased maintenance costs from buying a cheaper home, and increased time/effort for building a home.

Longer stays might necessitate home buying, but renting avoids maintenance. Invest savings for future home purchase. Research via the internet, friends, or books.

9.2 Renting Your Residence

Renting Steps

Search: Select location, size, and amenities. Talk to area residents.
Verification: Consult a lawyer, take notes/photos, clarify payment. Joint leases hold each person responsible.
Living: Maintain facilities, respect noise rules, get renter's insurance.
Ending: Clean, retrieve security deposit, document deductions.

Consider space needs, location, exterior/interior, rent, security deposit, utilities, and layout when choosing a unit. Room rentals, houses, and condos are potential options.

Renting advantages: mobility, fewer responsibilities (maintenance), lower initial costs.
Renting disadvantages: No tax deductions/equity, increasing rent, restrictions (pets, parties, decor). Negotiate lease terms (rent cuts based on credit, payment consistency, or hardship).
Subletting: Someone else takes over rent/unit.

Subletting may also be an option. This option allows you to have another person take over rent payments and live in the unit.

Leases are usually written, but oral leases require a 30-day written notice before termination/rent increase. Written leases offer better protection.

Renter's insurance protects personal property not covered by the landlord's policy.

Security deposits cover damages, often one month's rent (plus first/last month's rent). Some states require interest on deposits. Deposits must be returned within 30 days (in many states). You are entitled to a list of all repair costs if the full amount is not returned.

While rent may cover water/utilities, heat, electricity, and Wi-Fi might not be covered for houses.

9.3 The Home Buying Process

Homeownership Steps

Step 1: Needs

Evaluate owning vs. renting, housing types, and affordability. Owning offers pride, financial benefits (mortgage interest deduction, equity, appreciation), and flexibility, but also financial uncertainty (down payments, financing, changing values, limited mobility, higher costs).
1. Property tax appeal: Know the appeal deadline (14-90 days via certified mail). Check for errors and issues affecting value. Prepare evidence for the hearing.
2. Housing Types:
  1. Single-family: Existing, new, custom homes. Consider age and quality.
  2. Multi-unit: Duplexes, townhouses (2-6 units). PUDs combine housing with amenities/commercial areas, typically with homeowners' associations.
  3. Condominiums: Individually owned units, common areas owned by an association (monthly fees).
  4. Cooperative: Nonprofit owns the building, shareholders buy stock for the right to occupy a unit.
3. Building:
  1. Factory-built: Assembled in a factory, then moved to the site.
  2. Prefabricated: Components built in a factory, assembled on-site (e.g., modular homes).
  3. Mobile homes: Less than 1,000 sq ft, rarely moved. Purchase/lease sites, but they may depreciate faster and spread fire quicker.
4. Contractor Considerations: Experience, supplier relationships, material quality, payment schedule, potential delays, licenses, insurance, previous work, complaints, contract details (time, cost, description).
5. "Home in a Box": DIY materials costing half as much as a completed home, though you may have to hire labor or do it yourself.
6. Affordability:
  1. Price and Down Payment: Consider funds, income, expenses, mortgage rates, future value, and monthly payments. Get pre-qualified.
  2. Size and Quality: Buy what you can afford. Consider "handyman's specials" requiring additional investment or “sweat equity” (doing repairs yourself).

Step 2: Property Evaluation

Location: Preferences, zoning, property usage, schools with children.
Real Estate Agents: Can show houses, negotiate, obtain financing, and provide referrals. "Dual agents" represent both buyer and seller with agreement from both parties. Buyer agents represent the buyer's interest and are paid for by either the seller or the buyer.
Home Inspection: Inspect thoroughly to minimize future problems. Some states require inspection documents before purchase. Mortgage companies require appraisals.

Step 3: Pricing

Consider area prices, demand, time on market, seller's need, financing, features, and conditions. Purchase agreements make legal offers.
Counteroffers: Negotiate price. "Seller's market" (high demand) = less negotiation. "Buyer's market" (low demand) = more negotiation.
Earnest Money: Deposit showing serious offer, applied to down payment at closing (refundable if sale fails).
Contingency Clauses: Bind the agreement past certain events (e.g., financing, sale of buyer's current home).

9.4 The Finances of Home Buying

Early in the home buying process, meet with a banker or mortgage broker to determine how much you can afford.

Step 4: Financing

Meet with a banker/broker early to determine affordability. Determine the down payment and investigate mortgage rates. Apply for/evaluate mortgages.

Down Payment Sources: Savings, investments, relatives, government programs.
Private Mortgage Insurance (PMI): Required if down payment <20%, protects the lender. Canceled after 20% equity; terminated after 22% by law.
Mortgages: Long-term loans (10-30 years) from banks, credit unions, mortgage companies. Your home serves as security for it.
Credit Score: At least 620 allows financing. 720+ gives you a lower rate and ability to pay without a down payment.
Mortgage Application Phases:
1. Pre-qualification: Complete the application, provide evidence of income, assets, and debts.
2. Verification: Credit report/financial status verification determines approval/denial and maximum amount. Loan estimates summarize loan information.
3. Fees: Up to $500. Loan commitments pledge funds. Lock in interest rates (30-90 days) or let them float.
ATR/QM Rules:
1. Ability to Repay (ATR): Lenders must assess income, assets, employment, liabilities, credit history, and income ratio.
2. Qualified Mortgage (QM): Limits fees/points, restricts mortgage features, imposes a maximum debt-to-income ratio.
Factors Affecting Affordability: Interest rates, down payment, and points (prepaid interest). A discount point is 1% of the loan.
Mortgage Options:
1. Conventional: Fixed interest rates (15-30 years). Amortization reduces the loan balance over time. Shorter loans build equity faster.
2. Assumability: Buyer assumes seller's mortgage (usually government programs only).
3. Government Financing (FHA/VA): Low interest, low down payment.
  1. FHA: Income requirements, down payments starting at 3.5%. Borrowers pay insurance protecting the lender.
  2. VA: Service requirements, no down payment (based on credit score), closing costs. The government facilitates, but doesn't provide funds. Both options are assumable by qualifying buyers.
  3. USDA: Funds rural housing/community facilities.
4. Adjustable-Rate Mortgages (ARMs): Interest rates vary. Risky due to rate increases.
  1. Rate Caps: Limit rate increases/decreases.
  2. Payment Caps: Limit payment increases. Prevent negative amortization (payment doesn't cover interest).
  3. Always determine the frequency and restrictions for rate changes, monthly payment charges, loan extension due to negative amortization, and indexes used to set the mortgage rate.
Other Financing Options:
1. Real Estate Short Sales: Selling price < amount owed. Longer acceptance time, possible damages.
2. Interest-Only Mortgages: Lower payments initially (only interest). Payments may adjust after the period. Dangerous if property value declines.
3. Buy-downs: Developer subsidy to reduce payments. Higher prices may offset the buy-down.
4. Second Mortgages (Home Equity Loans): Borrowing on paid equity. Lump sum, fixed interest.
  1. Home Equity Lines of Credit (HELOCs): Variable interest, use funds as needed. Can create continuous debt.
5. Reverse Mortgages: Tax-free income (loan repaid upon sale/death). Available to those 62+. Lump sum, credit line, or payments. Can have high fees/scams.
6. Refinancing: New mortgage at a lower rate. Best with larger mortgages and 1%+ rate reduction.

Step 5: Closing

Arrange closing date, funds, documents.
Walk-through: Inspect the home before closing, document issues.
Closing Costs: Fees paid at the transaction's completion.
Title Insurance: Defines property boundaries, protects against future claims.
Deed: Transfers ownership.
Warranty Deed: Guarantees a clear title with the right to sell.
Real Estate Settlement Procedures Act (RESPA): Requires disclosure of closing process/costs.
Escrow Account: Funds for property taxes, insurance, or PMI.
Implied Warranties: Cover limited circumstances; consider additional warranties.

Other Purchase Options

"Bank of Mom and Dad": Financial assistance from parents.
- Shared Equity Financing: Relatives provide the down payment to share appreciation. Contracts outline payments, deductions, and equity sharing.
Online Home Buying: Mortgage pre-qualification, rate comparison, application, negotiation (email), electronic closing. Electronic signatures are allowed under the ESIGN act.
Co-op College Housing: Off-campus co-op with chores for savings.
Scams: Down payment wire fraud. Use consumer notification services to know when documents related to your property are recorded. Verify mortgage company credentials.

9.5 Selling Your Home

Preparation: Set price, decide whether to sell yourself or use an agent.
Presentation:
1. Make repairs, clean (windows, exterior, etc.), ensure lawn care, remove unnecessary items, and clean up pet areas.
2. During showings, make the house comfortable and highlight eco-friendly features.
3. Home staging services (rented furniture/decor) can help.
4. Consider upgrades or repainting in preferred colors.
Pricing:
1. Appraisals: Cost $300 to $400 to determine realistic value.
2. Home Improvements: Affect the price, but consider ROI.
3. Long-Term Thinking: Consider selling from the moment you buy. Maintenance, repairs, and improvements can increase future prices.
Selling Houses Yourself: ~10% of sales.
1. Price competitively, advertise (newspapers, information sheets, online listings).
2. Use online listings for reference information.
3. Consider hiring a real estate photographer, 3D visualizer, or using drone videos.
Using a Real Estate Agent:
1. They can suggest listing prices, negotiate, promote your house, organize promotional items, and coordinate repairs/services.
Discount Brokers: 1-2% flat fee instead of 6%, but you may handle marketing/negotiation.
1. Decide how much attention/assistance you want.