Bài giảng Personal Financial - Chapter 7: Selecting and Financing Housing

7 Selecting and Financing Housing Evaluating Renting and Buying AlternativesYour lifestyle and your choice of housingHow you spend your time and moneyEvery buying decision = lifestyle statementPersonal preferences vs. financial factorsTraditional financial guidelines:Spend no more than 25-30% of take-home pay on housing, or No more than 2 1/2 times your annual incomeMore difficult to do in inexpensive urban areas7-*1 Choice should be based on: Lifestyle (do you like or want to do maintenance tasks?)Financial factors (e.g., affordability, tax deductions, equity) Mobility vs. permanence (are you able to “settle down”?)Renting = less costly in short run (monthly payment)Home ownership =long-term financial advantages (tax deductions and equity growth over time)Objective1Assess Costs and Benefits of Renting7-*2Renting vs. Buying Housing7-*3Selecting a rental unitApartment or houseAdvantages of rentingEasier to moveFewer maintenance responsibilitiesMinimal financial commitmentsDisadvantages of rentingNo tax benefits“Money down the drain” (not building equity)Limitations regarding remodelingRestrictions regarding pets and other activitiesRental Activities7-*4 Description and address of propertyName and address of the owner/landlord (lessor)Name of tenant (lessee)Effective date and length of the leaseAmount of security depositAmount and due date of rentDate and amount for late rent paymentsList of included utilities, appliances, etc.Restrictions on certain activities (e.g., pets, remodeling)The right to sublet the unit; transfer clauseConditions under which landlord may enter unitLegal Details of a Lease7-*5Objective 2Implement the Home-Buying Process7-*6Evaluate Home Ownership Stability of ResidenceAmerican dream/norm (personalized living location)Financial BenefitsDeduct property taxes, mortgage interestPotential increase in value of your homeBuilding equity in your homeLifestyle Flexibility – Can Express Your IndividualityDrawbacks of HomeownershipFinancial UncertaintyObtaining money for the down paymentObtaining mortgage financingHome values could drop; can go “underwater” and lose moneyLimited MobilityCan take time to sell your homeHigher Living Costs (Than Renting)Maintenance, repainting, repairs, and home improvementsRising real estate taxesHome Buying Activities Step 1: Determine Homeownership Needs7-*7Home Buying Activities Types of Housing Available Single-Family DwellingMulti-Unit DwellingDuplex (two homes)Townhouse (2, 4, or 6 units)CondominiumIndividual ownership of a unit in a building“Condominium” ≠ a type of building structure“Condominium” = a legal form of homeownershipCooperative HousingUnits owned by a non-profit organization Shareholders purchase stock for right to live in unit in building with multiple unitsManufactured HomesFully or partially assembled in a factory, and then moved to the housing sitePrefabricated = components factory-built and assembled at the siteMass production under factory conditions keeps costs lower than site-built homes7-*8Home Buying Activities Types of Housing Available Mobile HomesType of manufactured home, often 20%) downpayment makes the process easierMortgage insurance if 22%Required by Homeowners Protection ActFeature of a mortgage: LEVERAGE (using other people’s money; magnifies a home’s gain or loss)Objective 3Determine Costs Associated with Purchasing a Home 7-*14Long-term loan on a specific piece of property (e.g., primary home or other real estate)Usually 10, 15, 20, 25, or 30 yearsThree main phasesComplete application and meet with lender to provide evidence of qualificationLender obtains credit report and verifies applicationMortgage is approved or deniedLender commits to make loan for a set period; check lender’s interest-rate lock-in rulesHome Buying ActivitiesThe Mortgage7-*15Qualifying for a mortgage includes:IncomeDebtsCredit history (700+ score)Down payment amountLength of the loanCurrent mortgage rates“Points” = prepaid interest as a % of loan amountEach point =1% of the loan amountPremium paid to obtain a lower mortgage rateHome Buying ActivitiesThe Mortgage7-*16Loan for which you qualify will be greater when rates are lowerCalculating the monthly principal and interest payment:Exhibit 7-7 = Mortgage payment factors (page 230)Example: 30-year, 7%, $223,000 mortgageMonthly payment = 223 X $6.65 = $1,482.95Payment = Principal repayment + interestPITI = payment + taxes + insuranceFixed-Rate, Fixed-Payment MortgageFixed rate, fixed payment, amortized5%, 10% or 20% down15, 20 or 30 years of fixed paymentsGovernment-Guaranteed Financing ProgramsVeterans Administration (VA)Federal Housing Authority (FHA)Lower down payment than conventionalHome Buying ActivitiesThe Mortgage7-*17Adjustable Rate Mortgage (ARM)Flexible-rate or variable-rate mortgageInterest rate varies over the life of the loanRate cap restricts amount of change in ratePayment cap restricts amount of change in paymentCan result in negative amortizationConvertible ARMAllows conversion to a fixed rate during a certain periodBalloon MortgageFixed monthly payments Large final payment after 3, 5, or 7 yearsGrowing-Equity Mortgage (GEM)Payments increase to allow loan to be paid off more quicklyInterest-Only MortgageLower payments for the first few yearsPayments go towards interest onlyHome Buying Activities Types of Mortgages7-*18Shared Appreciation Mortgage (SAM)Borrower gets a lower interest rate Agrees to share appreciated value of home with the lenderSecond MortgageHome equity loan (fixed payments) or HE Line of credit to tap Home = collateral Interest may be tax deductibleReverse mortgagesHome equity conversion mortgageProvides homeowners who are 62+ with tax-free income based on home equity; high up-front costsMortgage Repayment StrategiesRefinancing Consider costs of refinancing in decisionMaking extra paymentsReduces payoff time & interest paidHome Buying Activities Other Financing Options7-*19Make arrangements for a walk through Last-minute items for negotiationClosing Meeting including buyer, seller, lawyers (if any) and sometimes lenderDocument signingLast-minute details settled; expense paymentsClosing costs = settlement costsReal Estate Settlement Procedures ActRequires buyers be given closing costs estimate before the closingHome Buying ActivitiesStep 5: Close the Purchase Transaction7-*20Title insurance and search feeAttorney’s and appraisers feesProperty surveyPest inspectionRecording feesTransfer taxesCredit reportLender’s origination feeEscrow account for tax and insurance reservePre-paid interest Real estate broker’s commissionTitle InsuranceTitle company defines boundaries of propertyTitle search to insure property is free of claimsProtects against future defects in titleDeedDocument that transfers ownershipWarranty deed guarantees the title is goodSeller is true owner with right to sell the propertyNo outstanding claims against the titleEscrow AccountMoney deposited with lending institution for payment of taxes and insuranceHome Buying ActivitiesClosing Costs7-*21 Preparing your homeRepair, repaint, clean, reduce clutter When showing home, “Stage It”:Turn on lights Open draperies Bake bread or make coffee for welcoming smell“Curb appeal”Lawn and landscapingOutdoor clutterExterior paintObjective 4Develop a Strategy for Selling a Home7-*22Selling Your HomeDetermining the selling priceAppraisal = estimate of the current value“For Sale by Owner” Use a lawyer or title companyTime consuming for sellerListing with a Real Estate AgentConsider agent’s knowledge of the communityVarious services and marketing effortsScreens potential buyers7-*23Wrap UpChapter QuizConcept Check 7-1- Rent or Buy?Concept Check 7-2- Quality of School for Childless Home Buyers?Concept Check 7-3- Main Sources of Money for Downpayment? and Type of Home Financing Action?24