Transcript Housing - University of Utah

Chapter 9:
The Housing Expenditure
Objectives

Discuss the options available for rented
and owned housing and whether renters
or owners pay more for housing.

Determine how much buyers can afford
for housing.

Discuss the various mechanisms for
financing a home.
Objectives

Identify the numerous costs of buying a
home, including principle, interest, and
closing costs.

List and describe the steps in the homebuying process.

Identify some important concerns in the
process of selling a home.
Housing Decision
Young Single
•Rental housing has limited maintenance
and offers mobility.
•Purchase a home or a condominium for
financial and tax benefits.
Single Parent
•Rental housing can provide suitable environment
for children and some degree of housing security.
•Purchase low-maintenance housing to meet
financial and social needs of family.
Couple, Children No Longer At Home
•Rental housing for convenience, flexibility for
changing needs and financial situation.
•Purchase housing that requires minimal
maintenance and meets lifestyle needs.
Young Couple, No Children
•Rental housing offers convenience and
flexibility of lifestyle.
•Purchase housing for financial benefits and to
build long-term financial security.
Couple, Young Children
•Rental housing can provide facilities for children
in a family-oriented area.
•Purchase a home to meet financial and other
family needs.
Retired Person
•Rental housing meet financial, social, and
physical needs.
•Purchase housing that requires minimal
maintenance, offers convenience, and provides
needed services.
Renting Your Residence

Advantages
 Mobility
 Fewer responsibilities
 Lower costs initially
 More amenities

Disadvantages
 Few financial benefits
 Restricted lifestyle
 Cost of renting - deposits
 Legal concerns of a lease
Advantages of Owning


Pride of ownership
 American dream/norm
Reduced income taxes
 deduct property taxes
 deduct mortgage interest
Advantages of Owning

(continued)
Build an equity
 pay down the loan
 price appreciation
 Builds your credit rating
 Hedge against inflation
 Lifestyle flexibility
 can express your individuality
Disadvantages of Owning

Financial risk
 need down payment
 home prices could drop

Limited mobility
 can take time to sell

Higher living costs
 maintenance
 repairs & improvements
 utilities & insurance
 real estate taxes
Renting vs. Owning Your Home

WHO PAYS MORE:
 Based on cash flow, renters appear to win
 After taxes and appreciation, owners usually
win
Renting versus Buying Place of Residence
RENTAL COSTS
Annual Rent Payments
Renter’s Insurance
Interest Lost on Security Deposit (amount of security
deposit times after-tax savings account rate)
Total annual cost of renting
Annual mortgage payments
Property taxes (annual)
Homeowner’s insurance (annual)
Estimated maintenance and repairs (1%)
After-tax interest lost on down payment and closing
costs
EXAMPLE
$15,000
210
36
$15,246
$15,168
4,800
600
2,000
750
Less financial benefits of home ownership
Growth of equity
(1,120)
Tax savings for mortgage interest (annual mortgage
interest times tax rate)
(3,048)
Tax savings for property taxes (annual property
taxes times tax rate)
(1,344)
Estimated annual appreciation (1.5%)
Total annual cost of buying
(3,000)
$14,806
YOUR
FIGURES
Comparing an
apartment with
$1,250 of
monthly rent
and a home
that cost
$200,000. A
28% tax rate is
assumed.
Housing Options for Home Buyers

Single-family dwelling
 tract housing
 built on speculation by builder
 built to your specifications
 previously lived in home
 manufactured home
 mobile home
Home Buying Process Step 4:
Obtaining Financing



Determine the amount of down payment
 mortgage insurance
Qualifying for a mortgage
 can be pre-qualified based on income, assets,
debts, credit history and length of loan
 purpose of “points” (prepaid interest)
The home loan application process
 fixed or adjustable rate mortgage
 locking in an interest rate - search Web
Qualifying for a Mortgage

Amount available for down payment
 Amount of income
 Amount of other debts
 Credit rating
 Current mortgage rates
 Length of loan desired
Home Buying Process Step 1:
Determine Ownership Needs

How much you can afford
 down payment
 loan amount
 size and quality
 handyman’s special
 sweat equity
Home Buying Process Step 2:
Finding and Evaluating a Property to Purchase

Select a location
 Zoning laws
 Covenants, codes and restrictions
 Using a real estate agent
 Property appraisal
 Conducting a home inspection
9-15
Home Buying Process Step 3:
Pricing the Property



Determining the price to offer
Negotiating the purchase price
 seller’s or buyer’s market
 earnest money
Contingency clauses
 home passes
structural inspection
 able to get a loan
Estimating Mortgage Loan Payments
for Principal and Interest
Estimating Mortgage Loan Payments for Principal and Interest
(Monthly Payment per $1,000 Borrowed)
Payment Period (Years)
Interest
Rate (5)
15
20
25
30
4.5
$7.6499
$6.3265
$5.5583
$5.0669
5.0
7.9079
6.5996
5.8459
5.3682
5.5
8.1708
6.8789
6.1409
5.6779
6.0
8.4386
7.1643
6.4430
5.9955
6.5
8.7111
7.4557
6.7521
6.3207
7.0
8.9883
7.7530
7.0678
6.6530
7.5
9.2701
8.0559
7.3899
6.9921
8.0
9.5565
8.3644
7.7182
7.3376
8.5
9.8474
8.6782
8.0523
7.6891
9.0
10.1427
8.9973
8.3920
8.0462
9.5
10.4422
9.3213
8.7370
8.4085
10.0
10.7461
9.6502
9.0870
8.7757
Note: To use this table to calculate a monthly mortgage payment, divide the amount borrowed by 1,000 and
multiply by the appropriate figure in the table where the interest rate and the time period for the loan
intersect. For example, a $150,000 loan for 30 years at 9 percent would require a payment of $1,206.93
[($150.000/1,000) x 8.0462]; over 15 years it would require a payment of $1,521.41.
Effect of Down Payment
Effect of Down Payment Size on Monthly Payment for a $150,000 Home
(7 Percent Mortgage Loan for 30 Years)
Down
Payment
Amount
Of Loan
Monthly
Payment
$5,000
10,000
15,000
20,000
$145,000
140,000
135,000
130,000
$964.69
931.42
898.16
864.89
25,000
125,000
831.63
Type of Mortgages



Conventional
 fixed rate, amortized
 5, 10 or 20 percent down
 15, 20 or 30 years of fixed payments
Government guaranteed
 Veterans Administration
 Federal Housing Administration
Adjustable rate mortgages
 varies with the prime rate but has a rate cap
Type of Mortgages



(continued)
Graduated payment
 payments start lower and go up
 for persons whose income will increase
Balloon
 fixed monthly payments plus one large
payment, usually after 3, 5 or 7 years
Growing equity
 payment increases to allow loan to be
paid off more quickly
Type of Mortgages

(continued)
Shared appreciation
 borrower agrees to share appreciated
value of the home with the lender
 Home equity loans
 a second mortgage
 home is collateral and interest may be tax
deductible
 Reverse
 a loan based on the home equity
 Refinancing
Home Buying Process Step 5:
Closing the Purchase Transaction

Closing Costs









Title insurance and search fee
Attorney’s and appraisers fees
Property survey
Recording fees; transfer taxes
Credit report
Termite inspection
Lender’s origination fee
Tax and insurance reserves
Pre-paid interest
Real estate commission
The Main Elements of Buying a Home

Location
 Down payment
 Mortgage application
 Points
 Closing costs
 TIPI (taxes, insurance, principal, interest)
 Maintenance costs
Selling Your Home




Preparing your home
Determining the asking price
 Appraiser
 Realtor
For sale by owner or use a broker
Listing with a real estate agent
Make Sure Security
Deposit Is Returned






1. List damages/defects before moving in unit.
2. Maintain unit and promptly notify landlord of
any problems.
3. Give proper written notice of intent to move.
4. List all damages/defects after moving out of
unit.
5. Use certified mail to request return of
security deposit.
6. Use small claims court, if necessary.
Types of Real
Estate Agents

Listing agent

Selling agent

Buyer’s agent

Dual agent