Ch 15 Home Purchase Decisions

Outline

1. Rent vs. Buy Decisions 2. How Much Can You Afford?

3. Choosing the property: a) Choosing the Area b) Evaluating the Home c) Making the Deal

1. Rent vs. Buy Decisions

 Consider: - Emotional factors - Financial Analysis: Monthly payments & value appreciation  Variables to consider: - Tax consequences - Alternative investments - Inflation and home prices* - Impact of mortgage interest rates - Period of ownership

1. Rent vs. Buy Decisions

Buy vs.

Rent

monthly payment:

monthly mortgage payment + monthly property tax + monthly insurance + monthly maintenance fees - monthly tax saving (interest + tax) x tax rate

monthly payment:

monthly rent compounded monthly difference over holding horizon

+

home value appreciation:

net sales price - loan amount outstanding - down payment and closing costs - opportunity cost - taxes (note: fist $250,000 or $500,000 in capital gain are exempt)

2. How Much House Can You Afford?

    Use qualifying ratios to get your maximum mortgage payment allowed range of ratios: 28/36 for conventional loans 31/(41->50) for FHA loans 1st figure: mortgage debt ratio MDR = PITI / GMI 2nd figure: total debt ratio TDR = (PITI + other contractual expenses)/GMI

2. How Much House Can You Afford? Cont’d

   Example: Assume your gross monthly income (GMI) is $8,000, the maximum mortgage debt ratio (MDR) allowed by the lender is 25%. Your monthly property taxes are $300 and monthly property insurance is $90.

What is the maximum monthly debt payment you can afford? Given 5% interest (APR) and a 30-year monthly payment loan, how much can you borrow?

 Assume an LTV ratio of 0.8, how much can you offer for the house?

3. Choosing a Property

a) Choosing an area       Property taxes (see county’s property appraisers web site) Quality of public services Proximity to recreational facilities/park/downtown Quality of school system Crime statistics Overall quality of the community

3. Choosing a Property Cont’d

b) Evaluating the individual home (note: take pictures!!)  Create and prioritize a list of features • # Bed & bathrooms • Ability to add-on • Repairs needed • Pool/hot tub • Water access  Check out/have inspector (CRI) evaluate: • Attic • Walls, ceilings and floors • Basement or crawl space • Electrical and mechanical systems (HV/AC systems) • Water supply and waste disposal • Roof • Mold • Termites

3. Choosing a Property Cont’d

c) Making and Closing the Deal - Real estate agents - Negotiating the price (remember: no emotions!) - Dealing with the lender - Closing attorneys and escrow agents