Transcript Credit - Bellevue College

Real Estate
Creating wealth with real
estate
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Homeownership has grown
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Rent versus Buy
1. If you’re planning to move within five years, renting
gives you more flexibility.
2. If you’re uncertain about your present or near future
financial circumstances, renting requires less financial
commitment and risk.
3. If time does not permit you to look for the area you
would be making such an investment into. You should
research very carefully before you buy a house.
4. Renting often offers fewer responsibilities such as
repairs, yard maintenance or needing to buy
appliances, which could be expensive and take time.
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Activity – Rent versus Buy
• Do a rent versus buy analysis using this
calculator
• http://www.ginniemae.gov/rent_vs_buy/ren
t_vs_buy_calc.asp?Section=YPTH
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The Six Steps to Buying a House
1. Determine how much you can afford to buy and if it is the right time
to buy. Check out resources to help you buy a home.
2. Recruit a team to help you find your home. Find a good broker,
attorney, home inspector and insurance agent.
3. Do your research and select a Home, What features are important
to your family? Starting the search for the home.
4. Get mutual acceptance: Contract completely signed around and all
parties agrees to the terms of the contract.
5. Shop for a mortgage: Take the time to shop for the best mortgage.
6. Close the deal. Satisfy all contingencies and sign the closing
document at escrow.
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Step 1: Prepare
• Check credit report and correct all errors
• Determine what you can afford, don’t let
the broker tell you
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What can you afford?
• How affordable is the real estate in your
area?
• National Association of Home Builders
Housing Affordability Index measures
the percentage of homes sold that a
median income family could afford
http://www.demographia.com/dbnahb0001.htm
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Look at housing prices
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Debt-to-income ratio
• A = Total all your housing expenses (mortgage,
insurance and taxes)
• B = Total all your debt payments A + others (car,
education and credit card)
• C = Total all your monthly income
• Debt-to-income ratio
A/C and B/C determines how much you can afford
Try it at:
http://www.ginniemae.gov/2_prequal/intro_questions.asp?Section=YPTH
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How much down payment?
• Check for resources to help with down
payment:
• http://www.hud.gov/local/wa/homeownersh
ip/buyingprgms.cfm.
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How to hold title
• Single ownership – tenancy in severalty
• Concurrent ownership
– joint tenancy - equal ownership of property by two or more
parties, each with the right of survivorship.
– tenancy by the entireties - ownership of property only between
husband and wife in which neither can sell without the consent of
the other and the property is owned by the survivor in the event
of death of either party.
– tenancy in common - equal ownership of property by two or
more parties without the right of survivorship.
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Step 2 – Choose the right team
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Real estate broker
Home inspector
Insurance agent
Attorney
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Real estate broker
• Realtor knows the housing market in the area of your choice well.
The realtor should be able to assist the home buyer with any homes
they desire.
• Interview your realtor. How does the realtor work with buyers?
Have the realtor to explain their buying process, including the followup. How much time will the realtor spend with you? How many
homes has your realtor sold?
• Realtor should be resourceful and able to assist or refer the
homebuyer to sources of information for the community and schools.
• What fees are paid to the realtor when buying a home? Is the
homebuyer expected to pay any of these fees?
• What hours does the realtor work? Are these hours convenient to
you?
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Home inspector
• Get a list of the items the home inspector will cover.
• Ask for referrals.
• Check to make sure that they are experienced in residential
inspections.
• The average on-site inspection time for a single inspector is two to
three hours for a typical single-family house.
• Negotiate a price before they start.
• Ask to see samples of the inspection report and determine whether
or not you can understand the inspector's reporting style.
• Attend the inspection.
• Make sure the inspector is up-to-date by asking if they are part of an
association or attend classes.
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Step 3: Select your home
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Factors
• Neighborhood – transportation, school,
shopping, hospital, traffic, security, parking, etc.
• Price range
• Type of home – style, age, condition, yard, etc.
• Interior – bedrooms, bathrooms, flooring,
kitchen, living room, dining room, fireplace,
workshop, in-law, etc.
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Activity – Your dream home
• Using The Basics and Wishlist from the
handouts, determine what kind of home
you want to buy
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Step 4: Making an offer and getting mutual
acceptance
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Sales Price. For most home purchasers, the sales price is the most important term.
Title. The seller should provide title, free and clear of all claims by others against your new home.
Mortgage Clause. The agreement of sale should provide that your earnest money or “deposit” will
be refunded if the sale has to be canceled because you are unable to get a mortgage loan.
Pests. Your lender will require a certificate from a qualified inspector stating that the home is free
from termites and other pests and pest damage.
Home Inspection. An inspection will determine the condition of the plumbing, heating, cooling
and electrical systems.
Lead-Based Paint Hazards in Housing Built Before 1978. If you buy a home built before 1978,
you have certain rights concerning lead-based paint and lead poisoning hazards.
Other Environmental Concerns. Your city or state may have laws requiring buyers or sellers to
test for environmental hazards such as leaking underground oil tanks, the presence of radon or
asbestos, lead water pipes, and other such hazards, and to take the steps to clean-up any such
hazards.
Sharing of Expenses. You need to agree with the seller about how expenses related to the
property such as taxes, water and sewer charges, condominium fees, and utility bills, are to be
divided on the date of settlement.
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Activity – Purchase Agreement
• Look at the purchase agreement and give
factors that you should consider.
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Step 5: Obtain a loan
The home is part of the American dream,
but you can’t get one without a mortgage.
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Mortgages -$10.2 trillion in debt
Mortgages and Refinances
($ billions)
1400
1200
Refinance
Originations
1000
Purchase
Originations
800
600
400
200
Source: Mortgage Bankers Association
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2006-Q1
2005-Q1
2004-Q1
2003-Q1
2002-Q1
2001-Q1
2000-Q1
1999-Q1
1998-Q1
1997-Q1
1996-Q1
1995-Q1
1994-Q1
1993-Q1
1992-Q1
1991-Q1
1990-Q1
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How do mortgages work?
Breakdown of Annual Mortgage Payment by Year of Payment
$200,000 at 6% for 30 years
$14,000.00
$12,000.00
Principal
Total $200,000
$10,000.00
$8,000.00
$6,000.00
$4,000.00
Finance Charge
Total $235,893
$2,000.00
$0.00
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10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
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Interest rates change
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Effect of interest rates
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Adjustable-rate Mortgages
Per
$100,000
Monthly
Payment
5%
$542.10
6%
$605.41
7%
$671.55
8%
$740.23
9%
$811.14
10%
$883.99
11%
$958.54
12%
$1,034.53
13%
$1,111.76
14%
$1,190.02
15%
$1,269.17
You have an adjustable-rate
mortgage for $200,000 that
resets after a year. The rate
is set at 2% above the 90day treasury bill. When you
assumed the mortgage a
year ago, you were given the
rate of 4.97%. The treasury
bill rate is now 5.03%. What
will your rate be? What
increase will you see in your
monthly payments?
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Effect of term of mortgage
30-year mortgage $200,000
Total Interest $235,894
$16,000.00
$14,000.00
$12,000.00
$10,000.00
$8,000.00
Principal
$6,000.00
Interest
$4,000.00
$2,000.00
$0.00
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15-year mortgage $200,000
Total interest $108,888
$25,000.00
$20,000.00
$15,000.00
Principal
$10,000.00
Interest
$5,000.00
$0.00
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Understanding APR
APR 10%
Month
Principal
Interest
1
$7.96
$1.50
2
$8.02
$1.38
3
$8.09
$1.27
4
$8.16
$1.15
5
$8.23
$1.03
6
$8.30
$0.91
7
$8.36
$0.78
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$8.43
$0.66
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$8.50
$0.53
10
$8.58
$0.40
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$8.65
$0.27
$0.14
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Principal
Interest
APR 18%
$ 100.00
$ 10.00
$8.72
$ 100.00
$ 10.00
$100.00
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$10.02
Evaluating a mortgage - APR
Company Interest
rate
A
5.75
Points
0
Down
payment
0 – 20%
B
5.875
1
0 – 20%
C
4.875
5.875
0 – 20%
D
5.25
2.875
0 – 20%
APR
– http://www.dinkytown.net/java/MortgageApr.html
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Mortgage Shopping Worksheet
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What could you afford?
Down payment
APR
Points
Private mortgage insurance
Fees (Application, origination, lender, appraisal,
attorney, document preparation, broker’s fee,
credit report fee
• Other closing fees
• Other costs
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Mortgages
• Adjustable versus fixed rate?
• 30-year versus 15-year?
• How much down payment?
Try it at:
http://www.ginniemae.gov/2_prequal/le_intro
_questions.asp?subTitle=YPTH
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Activity – Shop for a mortgage
• Break into groups.
• Using the mortgage evaluation form,
evaluate 3 mortgages
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Step 6: Close the deal
• Satisfy all contingencies and then close
the deal
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Escrow Agent
• Gathers the purchase and sale agreement and other necessary
information that is needed for closing
• Obtains preliminary title report from the title insurance company.
They ensure that the title is not cloudy
• Pays off all debts secured by the property and prepares the deed
and other necessary documents
• Deposits all monies from the buyer and seller
• Prorates expenses and allocates closing costs
• Prepares the Settlement Statement
• Obtains title insurance policies
• Records and documents
• Delivers funds and other important documents
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Activity – Settlement Statement
• In the forms packet, look at the DFI
explanation of the Settlement Statement
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Mr. and Mrs. Lee Buys A Home
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Follow the six step buying process to prepare you for buying your next home. All
analysis, decision making and follow up must be included in your written
presentation.
Mr. and Mrs. Lee are relocating to Seattle Washington from Houston Texas. They
have three children: ages 13, 5, and 15. They want a 4 bedroom homes with a
minimum of 3 baths.
Mrs. Lee’s concerns are schools, shopping, and community activity for the children to
participate in. She wants to live in suburban area. They are moving from a 3200 sq
feet home on 1.5 acres; which just sold for $250,000 (seller’s net of $198,000)
Mr. Lee concern is the distance from his job site to his home. He also likes to work
on small projects in the garage. A shop will be ideal.
Their joint income is $150,000 per year. Ms Lee is a stay-home mom.
Debts: 30,000 on two cars, 15,000 in credit card; rental home with outstanding
mortgage of $35,000; stocks and bonds=Market value of $45,000;
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Your rights
According to the Real Estate Settlement Procedures Act, you have the following rights.
• To shop for the best loan for you and compare the charges of different mortgage
brokers and lenders.
• To be informed about the total cost of your loan including the interest rate, points and
other fees.
• To ask for a Good Faith Estimate of all loan and settlement charges before you agree
to the loan and pay any fees.
• To know what fees are not refundable if you decide to cancel the loan agreement.
• To ask your mortgage broker to explain exactly what the mortgage broker will do for
you.
• To know how much the mortgage broker is getting paid by you and the lender for
your loan.
• To ask questions about charges and loan terms that you do not understand.
• To a credit decision that is not based on your race, color, religion, national origin, sex,
marital status, age, or whether any income is from public assistance.
• To know the reason if your loan was turned down.
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Your rights
• The Fair Housing Act prohibits discrimination by
direct providers of housing, such as landlords
and real estate companies as well as other
entities, such as municipalities, banks or other
lending institutions and homeowners insurance
companies whose discriminatory practices make
housing unavailable to persons because of race,
religion, sex, national origin, family status, or
disability.
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Investing in Real Estate
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Commercial real estate
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Commercial real estate
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How has real estate done?
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Do most landlords make money?
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Analysis based on the economy
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