6-1 The First Steps to Home Ownership
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Transcript of 6-1 The First Steps to Home Ownership
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THE FIRST STEPS TO HOME OWNERSHIPUNIT 6, LESSON 1
ORCUTT ACADEMY HIGH SCHOOL
FINANCE & ACCOUNTING
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Renting vs. Owning
Are You Ready to Buy?
How Much Can You Borrow?
The Down Payment & Closing Costs
PREVIEW
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RENTING VS. OWNING
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ADVANTAGES OF RENTING• Possibly lower cost
• If you can save 10% or more of your earnings, you are on your way to meeting your financial goals.
• No maintenance costs
• Flexibility
• Financial freedom: spend without obligation• Psychological freedom: move more easily
• Liquidity
• Wealth not tied up in home
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COSTS OF RENTING• Monthly rent is subject to inflation
• Consider your costs in the long-term
Cost of owning versus renting over 30 years
Year Ownership cost per month
Rental cost per month
1 $920 $800
5 $980 $940
10 $1,080 $1,140
20 $1,360 $1,690
30 $1,800 $2,500
Comparing the costs of owning a home that costs $160,000 to renting that same home for $800/month.
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COSTS OF RENTING• Owning becomes less expensive in the long run
• As a homeowner, you build equity
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ARE YOU READY TO BUY
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ASSESSING YOUR TIMELINEWait to buy a home until you plan on being there for at least 3 years (preferably five or more)
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PROPERTY MUST APPRECIATE 15% TO COVER EXPENSES
This will take at least 3 years
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BEFORE BUYING, ASK YOURSELF…Are you saving enough money monthly to reach your retirement goals?
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BEFORE BUYING, ASK YOURSELF…How much do you spend (and want to continue spending) on fun things such as travel and entertainment?
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BEFORE BUYING, ASK YOURSELF…How willing are you to budget your expenses in order to meet your monthly mortgage payments and other housing expenses?
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BEFORE BUYING, ASK YOURSELF…How much of your children’s expected college educational expenses do you want to be able to pay for?
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HOW MUCH CAN YOU BORROW
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THE EFFECT OF DEBTExisting debt will lower the amount you are eligible to borrow.
Monthly Debt Payments + Housing Expenses < 38% of monthly gross income
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CALCULATING HOW MUCH LENDERS WILL ALLOW YOU TO BORROWGeneral Rule: You can borrow up to three times (or two and a half times) your annual income when buying a home.
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BUT… HOW MUCH YOU CAN BORROW DEPENDS ON INTEREST RATESSet by the secondary market
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EXPENSES• Mortgage costs• Inspection expenses• Moving costs• Commissions• Title insurance
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WHAT’S THE APPROXIMATE MAXIMUM YOU CAN BORROW?
When mortgage rates are Multiply your gross income by this figure
4% 4.6
5% 4.2
6% 3.8
7% 3.5
8% 3.2
9% 2.9
10% 2.7
11% 2.5
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MULTIPLIER
The number you multiply by your gross income to determine how much money you can borrow for a home mortgage; determined by interest rates.
OR
The number you multiply by your mortgage expressed in thousands of dollars (divided by 1000) to determine your monthly mortgage payment
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As rates fall, the monthly mortgage payment drops
Lower interest rates make buying real estate more affordable
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CALCULATE
What is the maximum amount you can borrow?
1. Annual income $45,870
a) Interest rate 5%
b) Interest rate 11%
2. Annual income $68,900
a) Interest rate 4%
b) Interest rate 8%
3. Annual income $159,650
a) Interest rate 9%
b) Interest rate 6%
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DOWN PAYMENT & CLOSING COSTS
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THE DOWN PAYMENT
If you put down 20% of the purchase price of the home
• Most favorable terms, including interest rate and closing costs
• Don’t have to pay mortgage insurance
For a $100,000 home, the down payment would be $20,000
• (100,000)(.2) = $20,000
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PMI: PRIVATE MORTGAGE INSURANCE• If you put less than 20% down
• Protects lenders if you default on your loan
• Several hundred $ per year
• Varies depending on the percent of the purchase price you put down
• The higher the down payment, the lower the PMI
• Visit http://www.goodmortgage.com/Calculators/PMI.html
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PURCHASE PRICE
Purchase Price = Mortgage Loan + Down Payment
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CLOSING COSTS• In addition to a down payment, you must have cash saved
for closing costs
• Includes escrow fees, inspection fees, title insurance, and other miscellaneous fees
• On average from 2-3 percent of the price of the home
• Could be anywhere from 1-8% of the price of the home
• Your lender will give you a “Good Faith Estimate”
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HELP WITH CLOSING COSTS• You can request
• Your seller pay part of the closing costs• Your lender add part of the closing costs to your mortgage
loan• Interest rate will go up about .25%
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1. How can you determine if you are ready to buy a home?
2. How do lenders decide how much money you can borrow to purchase a home?
3. What factors should you consider when determining how much money to save to buy a home?
ESSENTIAL QUESTIONS
WHAT ARE YOU LEARNING? WHY ARE YOU LEARNING IT? HOW WILL YOU USE IT?