Transcript Nobody plans to fail....

Chapter 7
Selecting and
Financing Housing
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Selecting and Financing Housing
Chapter Objectives
1. Assess costs and benefits of renting
2. Implement the home-buying process
3. Determine costs associated with
purchasing a home
4. Develop a strategy for selling a home
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Objective1
Assess Costs and Benefits of Renting
Evaluating Renting and Buying Alternatives
• Your lifestyle and your choice of housing
– How you spend your time and money
– Every buying decision = lifestyle statement
• Personal preferences vs. financial factors
• Traditional financial guidelines:
– Spend no more than 25-30% of take-home pay on
housing, or
– No more than 2 1/2 times your annual income
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Renting vs. Buying Housing
Choice should be based on:
– Lifestyle
– Financial Factors
– Mobility vs. permanence
– Renting = less costly in the short run
– Home ownership =long-term financial
advantage
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Rent vs. Buy
RENTING vs. BUYING
Advantages
Disadvantages
Renting
Easy to move
Fewer responsibilities for maintenance
Minimal financial commitment
No tax benefits
Limitations regarding remodeling
Restrictions regarding pets, etc
Buying
Pride of ownership
Financial benefits
Lifestyle flexibility
Financial commitment
Higher living expenses than renting
Limited mobility
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Housing Rental Activities
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Rental Activities
• Selecting a rental unit
– Apartment or house
• Advantages of renting
– Easier to move
– Fewer maintenance responsibilities
– Minimal financial commitments
• Disadvantages of renting
– No tax benefits
– Limitations regarding remodeling
– Restrictions regarding pets and other
activities
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Selecting an Apartment
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Legal Details of a Lease
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Description and address of property
Name and address of the owner/landlord (lessor)
Name of tenant (lessee)
Effective date and length of the lease
Amount of security deposit
Amount and due date of rent
Date and amount for late rent payments
List of included utilities, appliances, etc.
Restrictions on certain activities
The right to sublet the unit; transfer clause
Conditions under which landlord may enter the
rental unit
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Costs of Renting
• Security deposit
– Usually one month’s rent
– Held against damages to the property
– Returned at end of lease if unit undamaged
– Any deductions must be documented
• Utilities not covered in rent payment
– Water frequently covered in apartment rent
– If renting a house no utilities included
• Renter’s insurance
– Covers contents of rented property
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Objective 2
Implement the Home-buying Process
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Home Buying Activities
Step 1: Determine Homeownership Needs
• Evaluate Home Ownership
– Stability of residence
• American dream/norm
– Financial benefits
• Deduct property taxes and mortgage
interest
• Potential increase in value of your home
• Building an equity in your home
– Lifestyle flexibility - express your individuality
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Home Buying Activities
• Drawbacks of Homeownership
– Financial uncertainty
• Obtaining money for the down payment
• Obtaining mortgage financing
• Home values could drop
– Limited mobility
• Can take time to sell your home
– Higher living costs
• Maintenance, repainting, repairs, and home
improvements
• Rising real estate taxes
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Home Buying Activities
Types of Housing Available
• Single-family dwelling
• Multi-unit dwelling
– Duplex (two homes)
– Townhouse (2, 4, or 6 units)
• Condominium
– Individual ownership of a unit in a building
– “Condominium” ≠ a type of building structure
– “Condominium” = a form of homeownership
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Home Buying Activities
Types of Housing Available
• Cooperative housing
– Units owned by a non-profit organization
– Shareholders purchase stock for the right to live in a
unit in a building with multiple units
• Manufactured homes
– Fully or partially assembled in a factory, and then
moved to the housing site
– Prefabricated = components factory-built and
assembled at the site
– Mass production under factory conditions keeps
costs lower than site built homes
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Home Buying Activities
Types of Housing Available
• Mobile homes
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A type of manufactured home, often <1,000 sq. ft.
Same features as a conventional house
Safety is debated
Tend to depreciate
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Home Buying Activities
Types of Housing Available
• Building a custom home:
– Does the contractor have needed experience?
– Does contractor have a good working relationship
with
- Architect
- Suppliers
- Electricians
- Plumbers
- Carpenters
and others?
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Home Buying Activities
Building a Custom Home
– What assurance do you have about quality?
– What are payment arrangements?
– What delays will be considered legitimate?
– Is the contractor licensed and insured?
– Are there any complaints about
this contractor?
– Contract should have
a time schedule, cost
estimates, description
of work, and a payment schedule
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Home Buying Activities
Determine What You Can Afford
– Consider both price and quality
– Look at your income, your current
living expenses, and how much
you have for a down payment
– Have a loan officer prequalify you
– Purchase what you can afford - you can
always move up
– Buy a “fixer-upper” at a lower price, if you
have the time, skills, and money to fix it
up
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Home Buying Activities
Step 2: Find and Evaluate a Home
• Select a location, location, location
– Be aware of zoning laws
– Assess the school system
if you have children
• Services of real estate agents
– Will show homes that meet your needs, present
your offer, negotiate the price, assist in obtaining
financing, and represent you at the closing
– Commission paid by seller; built into price
– Seller’s agent, Dual agent or Buyer’s agent
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Home Buying Activities
Step 2: Find and Evaluate a Home
• The Home Inspection
– Conduct a home inspection or hire an
inspector
– Mortgage company will require an
appraisal
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Home Buying Activities
Step 3: Price the Property
• Determine the home price
– Price affected by selling prices in the area
– Current demand for housing
– Time home has been on the market
– Owner’s need to sell
– Financing options
– Features and condition of the home
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Home Buying Activities
Step 3: Price the Property
• Negotiate the purchase price
– Counteroffers are common
– Earnest money
• Portion of the price deposited as
evidence of good faith
– Contingency clause
• Offer dependent on certain events:
–Obtaining financing
–Sale of current home
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Objective 3
Determine Costs Associated with
Purchasing a Home
The Finances of Home Buying
Step 4: Obtain Financing
Determine down payment amount
• Mortgage insurance if < 20% down (PMI)
• Automatic PMI termination when equity
=>22%
– Required by Homeowners Protection Act
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Home Buying Activities
The Mortgage
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Long-term loan on a specific piece of
property
Usually 10, 15, 20, 25, or 30 years
Three main phases
1. Complete application and meet with lender to
provide evidence of qualification
2. Lender obtains credit report and verifies
application
3. Mortgage is approved or denied
– Approval usually locks rate for 60-90 days
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Home Buying Activities
The Mortgage
• Qualifying for a mortgage includes:
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Income
Debts
Credit history (700+ score)
Down payment amount
Length of the loan
Current mortgage rates
• “Points” = prepaid interest as a % of loan amount
– Each point =1% of the loan amount
– Premium paid to obtain a lower mortgage rate
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Home Buying Activities
The Mortgage
• Loan for which you qualify will be greater when
rates are lower
• Calculating the monthly principal and interest
payment:
– Exhibit 7-7 = Mortgage payment factors (page 230)
– Example:
• 30-year, 7%, $223,000 mortgage
• Monthly payment = 223 X $6.65 = $1,482.95
• Payment = Principal repayment + interest
• PITI = payment + taxes + insurance
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Home Buying Activities
Types of Mortgages
• Fixed-Rate, Fixed-Payment Mortgage
– Fixed rate, fixed payment, amortized
– 5%, 10% or 20% down
– 15, 20 or 30 years of fixed payments
• Government-guaranteed financing
programs
– Veterans Administration (VA)
– Federal Housing Authority (FHA)
– Lower down payment than conventional
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Home Buying Activities
Types of Mortgages
• Adjustable rate mortgage (ARM)
– Flexible-rate or variable-rate mortgage
– Interest rate varies over the life of the loan
– Rate cap restricts amount of change in rate
– Payment cap restricts amount of change in
payment
• Can result in negative amortization
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Home Buying Activities
Creative Financing
• Convertible ARM
– Allows conversion to a fixed rate during a certain
period
• Balloon mortgage
– Fixed monthly payments
– Large final payment after 3, 5, or 7 years
• Growing-equity mortgage (GEM)
– Payments increase to allow loan to be paid off more
quickly
• Interest-only mortgage
– Lower payments for the first few years
– Payments go towards interest only
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Home Buying Activities
Other Financing Options
• Shared appreciation mortgage (SAM)
– Borrower gets a lower interest rate
– Agrees to share appreciated value of home
with the lender
• Second mortgage
– Home equity loan
– Home = collateral
– Interest may be tax deductible
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Home Buying Activities
Other Financing Options
• Reverse mortgages
– Home equity conversion mortgage
– Provides homeowners who are 62+ with
tax-free income based on home equity
• Refinancing
– Consider costs of refinancing in decision
• Making extra payments
– Reduces payoff time & interest paid
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Home Buying Activities
Step 5: Close the Purchase Transaction
• Make arrangements for a walk through
– Last-minute items for negotiation
• Closing
– Meeting including buyer, seller
and lender
– Document signing
– Last-minute details settled
– Closing costs = settlement costs
– Real Estate Settlement Procedures Act
• Requires buyers be given closing costs
estimate before the closing
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Home Buying Activities
Closing Costs
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Title insurance and search fee
Attorney’s and appraisers fees
Property survey
Pest inspection
Recording fees
Transfer taxes
Credit report
Lender’s origination fee
Escrow account for tax and insurance reserve
Pre-paid interest
Real estate broker’s commission
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Home Buying Activities
Closing Cost Components
• Title Insurance
– Title company defines boundaries of property
– Title search to insure property is free of claims
– Protects against future defects in title
• Deed
– Document that transfers ownership
– Warranty deed guarantees the title is good
• Seller is true owner with right to sell the property
• No outstanding claims against the title
• Escrow Account
– Money deposited with lending institution for payment
of taxes and insurance
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Objective 4
Develop a Strategy for Selling a Home
• Preparing your home
– Repair, repaint, clean, reduce clutter
– When showing home, “Stage It”:
• Turn on lights
• Open draperies
• Bake bread or make coffee for
a welcoming smell
– Ideas from HGTV:
• “Designed to Sell”
• “Get It Sold”
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Selling Your Home
• Determining the selling price
– Appraisal = estimate of the current value
• “For Sale by Owner”
– Use a lawyer or title company
– Time consuming for seller
• Listing with a Real Estate Agent
– Consider agent’s knowledge of the
community
– Various services and marketing efforts
– Screens potential buyers
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