Chapter 9 Chapter 9 Molecular Geometry and Bonding Theories.
Chapter 9
description
Transcript of Chapter 9
Garman/ForguePersonal Finance
Ninth Edition
Chapter 9
Buying a Home
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Learning Objectives
1. Decide whether renting or owning is better, both financially and personally.
2. Explain the up-front and monthly costs of buying a home.
3. Describe the steps in the home-buying process.
4. Distinguish among the traditional and alternative ways of financing a home and list the advantages and disadvantages of each.
5. Identify the important aspects of selling a home.
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IntroductionMortgage: Loan to purchase real estate in which
the property itself serves as collateral.
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Facts & Figures:
• 90% of young people rent• 80% of people 55-64 own homes
Is a home an investment or just a place to live?
CONSIDER
Housing values typically
increase less than 4% annually
Since 2006, home prices
have declined 20-50% in most
markets
Why the recent explosion in mortgage
foreclosures?
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Should you rent or buy? Short-term: renters win, based on
initial upfront costs
• Rent• Damage/security deposit• Lease contractPeriodic tenancyTenancy for specific timeSubleasing Your rights w/o a lease (pg 250)
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Long-term: homeowners win, when income taxes and
appreciation are considered
• Equity and Appreciation• Deductibility of items on taxesReal estate taxesMortgage interest
• Beware of flipping• Being “upside down” (under water)• Foreclosure• Strategic default (pg 253)
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Most up-front costs are due at the closing (PG 255)
** Closing costs can range 2-10% of loan ** Down payment Attorney fees Title search/insurance Home inspection Appraisal fee Points … and many more!
What does it cost to buy a home?
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Points• Homebuyers can “buy down” the interest rate on their loan• 1 point = 1% of loan amount• Homebuyer pays for points at closing• Lender receives money upfront as compensation for offering
a lower rate
When does it make sense for a buyer to do
this?
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Important Terms to Understand• Monthly payments include principle & interest • Property taxes & homeowners insurance may be
ESCROWED: PITI• Loan-to-value ratio (LTV) (Lenders expect 80%)
– Ex: $80,000 mortgage ÷ $100,000 home value = 80%• PMI if LTV is too high (pg 257)
– Protects who? Paid for by who?
The New Realities of Home Buying (pg 258)Historically
Low Interest Rates
Tougher Lending
StandardsA Buyer’s
MarketLarger Down
Payments
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How are property taxes determined? (pg 259)
• Based on the ASSESSED VALUE of buildings and land
• Many people appeal their assessed value… and win!
• How does NY compare? http://www.osc.state.ny.us/localgov/pubs/research/propertytaxes.pdf
ADVICE:Decide Based on ALL Costs!
(Average 30-40% added to loan payment for all other housing costs)
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Steps in Home Buying
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1. Get your finances in order• Clean up your credit! • Use Internet to Estimate Housing Costs
2. Prequalify for Loan (Determine your own affordability first!)Front-end ratio: PITI compared to gross income
– PITI should not exceed 25-29% of gross incomeBack-end ratio: PITI + all other monthly debt (car, student loans, etc) compared to gross income
– Should not exceed 33-41% of gross income
3. Search for home online and in person
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4. Agree to terms with seller (NEGOTIATE!)• Make offer; counteroffer• Specify conditions (contingency clauses)• Sign purchase contract
5. Formally apply for Mortgage Loan• Good faith estimate• Mortgage lock-in rate
6. Prepare for closing• Hire your own inspector• Hire your own attorney
7. Closing Day! Uniform Settlement Statement
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Financing a Home The mathematics of mortgage loans
• A mortgage is a collateralized loan– Lender has a lien on the real estate
• A mortgage is an amortized loan (pg 269)• How are monthly payments divided between P & I?
– See chart page 268
• Equity = Market Value of Home - Loan Balance• Some people made additional payments on loan
– Affect of this?
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Amortization Table for Fixed Rate LoansMonth Payment Loan
Balance Interest Principal
1 790$ 677 1132 790$ 124,887 676 1143 790$ 124,773 676 1144 790$ 124,659 675 1155 790$ 124,544 675 1156 790$ 124,429 674 1167 790$ 124,313 673 1178 790$ 124,196 673 1179 790$ 124,079 672 118
10 790$ 123,961 671 11911 790$ 123,842 671 11912 790$ 123,723 670 12024 790$ 122,240 662 12860 790$ 117,169 635 155
120 790$ 106,185 575 215180 790$ 90,996 493 297360 790$ 786 4 786
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3 Factors Affect the Mortgage Payment
• The Amount Borrowed (see chart pg 270)• The Interest Rate
– SHOP AROUND! Even tiny increments make a HUGE difference
• The Length of the Loan
• Conventional Fixed-Rate• ARMs (variable-rate loans)
• Teaser Rate• Rate Caps
<= where is the risk?
Types of Mortgages
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• Fixed-Rate, Fixed-Payment Mortgage– Various terms: 10, 15, 20 or 30 years– fixed interest rate, fixed monthly payment– Each payment consists partly of principle and interest – Payments made in early years mainly go toward interest, with very
small reductions in loan principal• Adjustable-rate mortgages (ARMs)
– Interest rate varies over life of the loan– Why are the initial interest rates typically lower than most fixed-rate
mortgages to start?– Caps helps to reduce some risk– Considerations when evaluating Fixed vs. ARMs
What’s the best choice for you?
The Main Types of Mortgages
Locale rates
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• Growing Equity • Goal is to reduce interest costs
by paying off loan early• Bi-weekly mortgage option
– Reverse Mortgage– Second Mortgage
• Home Equity Loan or Home Equity Line of Credit• Rates slightly higher than first mortgages• “Eating one’s house”• Fin PP pg 276
– Mortgage Refinancing
Alternative Mortgages
Traditional limit for HELs and HELOCs: 80% of MV less loan
balance (pg 274).