Transcript Buying a house

Chapter 22

Goals / “I can…”
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
Discuss the advantages of home ownership.
Describe the costs and responsibilities of buying and
owning a home.
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Market Value—the highest price that the property
will bring on the market
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what a ready buyer and seller would agree upon as the
price.
Appraised Value—examine the structure, size,
features, and quality as compared to similar homes
in the same area
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the recent selling price of a similar home in your area is a
good estimate of the current value of your home.
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Assessed Value—the county in which you live sets
an assessed value for purposes of computing
property taxes owed on your home
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based on the cost to build, the cost of improvements, and
the cost of similar properties.
usually a percentage of market value.
Estimated Value—Real estate agents also estimate
the value of homes to help sellers establish a list
price.

They compare your house and its features to similar ones
that have sold in your area, called comps, and it gives a
general idea of a property’s value.
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The value of most homes appreciates, or increases
in market value, over time.

Appreciation is one way that the equity –the difference
between the market value of property and the amount
owed on it—increases.
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Equity also increases because each loan payment
you make decreases your debt.

Equity turns into cash when you sell your home.
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Home ownership generally offers more privacy,
more space, and more personal freedom not
available to renters.
In your own home, you can make the changes you
choose to accommodate your own needs and
personal style.
Owning a home also provides a feeling of security
and independence.
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You also get a sense of stability and belonging to
your community.
Neighborhood associations - groups of
homeowners in geographic areas that meet and
work to set quality-of-life standards for the area,
working with local government groups to be sure
the area is being provided with needed services.
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The interest you pay on your home loan, along with
the property taxes, is tax-deductible.
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These deductions lower the cost of home ownership.
Because of these tax savings, owning real estate is a tax
shelter.
Even though your equity in your home may be
increasing each year, you do NOT pay tax on the
equity until you sell your home.

Mortgage lenders usually require that borrowers
pay a certain amount down toward the purchase
price (Down-payment). They will then provide a
loan for the balance of the price.

A conventional loan is a mortgage agreement that
does not have government backing and that is
offered through a commercial bank or mortgage
broker.

This type of loan requires a down payment of 10-30%.
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“Rule of thumb” when buying a home:
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Make sure your mortgage payment does NOT exceed
25% of you monthly household income!!!
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Jack & Jill bought a house two years ago for
$175,000. They put 15% down. Their payments
have reduced their debt by $6,000. Houses in the
area have been appreciating at 4% each year.
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Down Payment = $175,000 x .15 = $26,250
Initial Loan = $175,000 - $26,250 = $148,750
Current Debt = $148,750 - $6,000 = $142,750
Current Market Value =
($175,000 x 1.04) x 1.04 = $189,280
Current Equity = $189,280 - $142,750 = $46,530
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An FHA loan
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government-sponsored loan
carries mortgage insurance
borrowers pay a monthly insurance premium and their
loan payments are guaranteed through the Federal
Housing Administration insurance program.
Down payments for FHA loans can be as little as 3
percent and are often available for first-time homebuyers,
veterans, and low-income buyers.
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Mortgage is a loan to purchase real estate.
A trust deed is similar to a mortgage, it is a debt
security instrument that shows as a lien against
property.
Payments on a mortgage or trust deed are made
over 15-30 years.
Monthly loan payments include principal AND
interest. If the borrower is required to have an
escrow account, the payment includes property tax
and insurance.
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Escrow account - a fund where money is held to pay
amounts that will come due during the year.
Mortgage lenders often allow borrowers to buy discount
points, which are used to lower the mortgage interest rate.
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Typically, one point equals one percent of the loan amount.
Points are essentially extra interest that borrowers must pay at
closing.
They increase the cost of the loan, but lenders usually offer lower
interest rates in exchange for higher points.
Depends on how long you keep your house for whether it is a good
tradeoff.
Points are often charged in addition to a loan origination fee, the
amount charged by a bank or lender to process the loan papers.
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The formula we will use is below:
n
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Where
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r 
r

P 1   
12  12

A
n
r 

1    1
 12 
A = the estimated monthly mortgage payment.
P = the amount initially borrowed for the house.
r = the annual interest rate (expressed as a decimal).
n = the total number of monthly payments that will be made to
pay the mortgage.
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Suppose you obtain a 30-year fixed-rate mortgage
for $100,000 at a rate of 5.5%. Then we have
P = 100,000 (the mortgage amount)
 r = 0.055 (the interest rate expressed as a decimal)
 n = 360 (30 years multiplied by 12 months gives 360
mortgage payments)

360
0.055
 0.055
100,0001 
 
2377.5528
12 
12

A

 567.79
360
4.1874
 0.055
1 
 1
12 

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Closing costs - referred to as settlement costs.
Expenses incurred in transferring ownership from buyer to
seller in a real estate transaction.
 Closing costs can add $3,000 - $5,000 to the purchase price of
your home.
 The buyer usually pays for the title search to make sure the
seller is the legal owner and that no one else has a claim on the
property.
 The buyer may also pay for a credit report, loan origination fee,
loan assumption fee (to take over someone else’s mortgage),
closing fees, recording fee, and their share of taxes and interest
owed on the property.
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The real estate property tax is a major source of
funding for local governments.
Homeowners pay property tax based on the assessed
value of the property.
 A local taxing authority determines the assessed value,
usually a percentage of the market value.
 Property taxes are tax-deductible.
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A homeowner must have property insurance
covering the structure.
Usually a requirement of the loan agreement to
protect the interests of the mortgage lender as well
as the homeowner.
Standard homeowners’ insurance includes both fire
and liability protection.
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Because most homes are larger than apartments,
the utility bills are usually higher.
The homeowner pays for all utilities and garbage
services, water and sewer charges, storm drain
assessments, lighting fees, gas, electricity.
They are responsible for costs to repairs to things
like water and sewer lines that are on their
property.
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Many housing subdivisions or planned unit
developments have covenants, conditions, and
requirements that were agreed upon when the
subdivision was built.
They are rules to maintain property values and protect
the interests of all property owners and include things
like
maintaining your lawn
specifying where cars can and can’t be parked
controlling the kind of fences or storage buildings that can be
built
 types of roof that can be installed
 etc.
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You must obey all zoning laws and local ordinances,
like obtaining a building permit and when you add
or modify your home, following setback
requirements, adhering to restrictions regarding the
kinds and types of buildings that can be
constructed in the area.
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You will be responsible for maintenance and repairs
inside and outside of your home.
Before you buy, make sure you are willing to spend
the time and money needed to keep your home in
good condition.
Ongoing maintenance includes painting, mowing,
weeding, and fixing things that break.
There will be occasional expensive repairs, like a
new roof, furnace, water heater, appliances.

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22.2

Goals / “I can…”
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Describe the steps in the home-buying process.
Discuss how to qualify for real estate loans and how to
take title of a property.
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Before selecting a home to buy, look at many
houses.
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You can look by yourself or work with a real estate agent.
Agents know the market, can help you find the right
home, and will assist you with the purchasing, financing,
and closing processes.
 One of the first things an agent will have you do is go to a
mortgage lender and prequalify for a real estate loan.
 You fill out an application to see how much money you
would be qualified to borrow.
 This will help you find houses in your price range.
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Real estate agents earn commission income.
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The commission is a percentage of the home sale price,
usually 5 – 7%
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The SELLER pays the commission, and the agents
working for the buyer and seller split it.
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As the purchaser, you do not pay the agents’
commission.
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If you are buying directly from an owner without the
assistance of an agent, you might be able to negotiate a
lower price because the seller would not have to pay
this fee.
However, you should still seek advice from a
professional, such as a lawyer, to be sure your interests
are protected.
You can find homes for sale online or in the newspaper.
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The Multiple Listing Service is a real estate marketing service in
which agents from many agencies pool their home listings and
agree to share commissions on their sales. Sellers gain wide
exposure for their properties this way.
After you have narrowed your choices to a small
number of homes in your price range, you should visit
them with your agent.
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To let the homeowner know of your interest in
buying the home and the price you are willing to
pay, you will sign an agreement called an offer.
An offer is a serious intent to be bound to an
agreement. When you make an offer it is called an
earnest-money offer. It is accompanied by a deposit
called earnest money, which is held in escrow until
the transaction is completed. This protects the
seller in case you fail to meet the terms of the
agreement.
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If you and the seller agree to terms, the seller will take
the house off of the market until the deal is completed.
During that time, the house cannot be sold to anyone else.
 If you later back out of the deal, you will likely forfeit your
earnest money to the seller.
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One way to avoid losing that money is to make your
offer contingent (dependent) on obtaining financing
and the property passing an inspection.
So if you don’t qualify for a mortgage, you have not
violated the contract and can get your money back.
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The seller may not accept your initial offer.
When they agree to it, you have an acceptance.
If the seller wants to change any part of the offer,
they will make a counteroffer—a rejection of the
original offer with a listing of what would be
acceptable, and they offer a new offer.
The buyer and seller will negotiate until an
agreement is made or decide not to complete the
transaction.
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The most common sources of down payment
money are
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personal savings
informal loans from parents or relatives.
Most lending institutions will NOT allow mortgage
applicants to formally borrow their down payment.
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In other words, you must invest a substantial amount of
your own cash in the property.
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To qualify for a mortgage, you must complete an
extensive loan application.
The financial institution will check your credit history,
employment, and references.
 They will look for evidence that you can meet your
current bills and look at the type and amount of your
current debts, the amount and source of your income,
and your creditworthiness.
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There are 2 types of mortgages:
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Fixed-rate mortgage -- is a mortgage on which the
interest rate does not change during the term of the loan.
Adjustable-rate mortgage (ARM) - is a mortgage for
which the interest rate changes in response to the
movement of interest rates in the economy as a whole.
 The rate for an ARM usually starts lower than the current
rates for a fixed-rate mortgage.
 The lender than adjusts the ARM rate based on the ups and
downs of the economy, but rates usually go up.
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After you and the seller reach an agreement and
you have arranged your financing, the next step is
to prepare for the closing.
An escrow closer is an independent person who
gathers and verifies information.
The closer also prepares the closing statement that
lists what you owe and what credits will be applied
to you.
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You will meet with the closer to sign documents
and pay the balance you owe.
Once the sellers receive their money, the escrow
closer makes sure that title passes to you.
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Title is legally established ownership.
A deed is the legal document that transfers title of
real property from one party to another.
Before you take ownership, you will want to make
sure that the title is clear—free of any liens, which
is a financial claim against the property.
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To ensure that the property has a clear title
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the escrow closer orders a title search
 which is the search of public records to check for ownership
and claims to a piece of property.
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When the title insurance company confirms that
title is clear and all is represented, it will issue title
insurance
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a policy that protects the buyer from any claims arising
from a defective title.
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Before the closing, the lending institution prepares
the loan papers and sends them to the escrow
closer.
If any problems arise, the closer or the lender will
notify the buyer and seller.
When all procedures are complete, they will be
notified of the closing date.
In this meeting, you and the seller sign the papers
and pay all related closing costs and the ownership
is transferred from the seller to the buyer.
Type of Cost
Typical Amount
Who Pays
Credit report (on buyer)
$50 - $100
Buyer
Property appraisal fee
$350 - $500
Buyer
Pest / damage inspection
$250 - $500
Buyer
Electric/Plumbing/Water Inspection
$250 - $500
Buyer
Mortgage Loan Fee
~ 1% of loan
Buyer
Points
~ 1% of loan
Buyer
$50 - $100
B&S
$750 - $2,000
B&S
Depends on date
B&S
Varies by state
Seller
$500 - $1,500
Seller
5 - 7% of sale price
Seller
Notary & Filing Fees
Title search & title insurance
Interest & Taxes
Transfer taxes & fees
Survey
Real estate commission

If Jack & Jill bought a house two years ago for
$175,000. They put 10% down. Calculate their
down payment.

The Marrs family is going to borrow $100,000 for a
new house. If there is a 2.25 points loan
origination fee and 0.75 points for a discount
charge, what are their costs for these two items?
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Origination Fee =
Discount Fee =
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A family decides to buy a home at an agreed upon price of
$135,000. They will make a down payment of 20% and finance
the rest at 6% for 30 years. The origination fee is 3 points and the
discount charge is 1.25 points. How much money is needed at
closing, and what is the mortgage payment?
Down payment =
Loan =
Origination Fee =
Discount Fee =
Closing Costs =
135,000 x .2 =
135,000 – 27,000 =
108,000 x .03 =
108,000 x .015 =
27,000 + 3,240 + 1,350 =
27,000
108,000
3,240
1,350
31,590
Mortgage =
108,000 = bunch ‘o’ stuff
647.51

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