The Housing Expenditure

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.

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, 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.

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

Build an equity pay down the loan price appreciation

Builds your credit rating Hedge against inflation Lifestyle flexibility

can express your individuality

(continued)

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

Based on cash flow, renters appear to win

After taxes and appreciation, owners usually win

WHO PAYS MORE:

Renting versus Buying Place of Residence

RENTAL COSTS EXAMPLE YOUR FIGURES

Annual Rent Payments $15,000

Renter’s Insurance 210

Interest Lost on Security Deposit (amount of security deposit times after-tax savings account rate) 36

Total annual cost of renting $15,246

Annual mortgage payments $15,168

Property taxes (annual) 4,800

Homeowner’s insurance (annual) 600

Estimated maintenance and repairs (1%) 2,000

After-tax interest lost on down payment and closing costs 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%) (3,000)

Total annual cost of buying $14,806

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 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)

InterestRate (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)

DownPayment

AmountOf Loan

MonthlyPayment

$5,000 $145,000 $964.69

10,000 140,000 931.42

15,000 135,000 898.16

20,000 130,000 864.89

25,000 125,000 831.63

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

Type of Mortgages

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

(continued)

Type of Mortgages 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

(continued)

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

Home Buying Process Step 4: Obtaining Financing

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

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

Home Buying Process Step 5: Closing the Purchase Transaction

Closing Costs

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 RealEstate Agents

Listing agent

Selling agent

Buyer’s agent

Dual agent

Risk Management & Property/Liability Insurance

Risk Management

A plan to protect accumulated resources and assets from the possibility of financial loss.

CONSIDER…

Coverage and Type of Risk

Pure Risk Insurable Accidental, unintentional Always results in a loss Can be personal, property

or liability risk.

Speculative Risk Loss or gain possible Uninsurable Such as investing in stocks or gambling

RiskAvoidance

RiskShifting

RiskAssumption

RiskReductionWays to

ManageRisk

Gather information

Evaluate risk and potential losses

Choose mechanisms

Administer program

Evaluate and adjust

Risk and Risk Management

RISK MANAGEMENT PROCESS:

Decision Making Matrix

Risk and Risk Management

Risk avoidance

Risk retention

Loss control

Transferring risk

Risk reduction

CHOOSE MECHANISMS:

What is Insurance?Insurance is strange. It's a product that most consumers buy, but few want to use. And many people find insurance confusing. It's unlike any other consumer product on the market. You can't see it, touch it, smell it, hear it or taste it. But without it, the world would be a much different place. Just think about it. Would you casually drive to the grocery store knowing that everything you ever worked for could be at risk if you were involved in an accident? How much would you be willing to spend on a home without insurance to cover it? Who would dare start a new business without the safety net of insurance? Insurance allows people to take risks, make investments, protect their hard-earned assets and provides peace of mind. Insurance and other risk management techniques have been around in some form for thousands of years. Insurance has its roots in ancient China. Shipping merchants in 2500 B.C. were the first to introduce a concept vital to the role and purpose of insurance -- spreading the risk of loss from the individual to a group of individuals. Before sailing through dangerous waters, merchants gathered and divided their goods so that each boat carried some of the contents of the others. That way no one merchant shouldered the risk alone, protecting themselves from a potential total loss of goods. Today's insurance business still bases its practices on this simple concept of spreading risk. Through a wide array of products and services, insurance companies provide citizens and businesses with the economic security necessary to survive the unpredictable and sometimes devastating events of modern everyday life.                                               The Insurance Institute of America defines insurance as three things. First, insurance is a transfer technique whereby the insured transfers the risk of financial loss to another party, the insurance company or insurer. Second, it is a contract between the policyholder and the insurer that states what financial consequences of loss are transferred and expresses the insurer's promise to pay for those consequences. Third, insurance is a business and, as such, needs to be conducted in a way that earns a reasonable profit for its owners. The money a policyholder pays an insurer is small compared to the potential for loss. If a family's house were to burn down, they probably could not afford to replace it without insurance. The insurance system enables someone to transfer the financial consequences of this loss to an insurance company. The insurance company, in turn, pays for covered losses and distributes the costs among all of its policyholders. In that way, your fellow policyholders share the cost of your loss, as you share in theirs.                                               

What is Insurance? (cont.)                                             

Private companies and state and federal governments provide insurance. There are three major types of private property/casualty insurers: mutual, stock and reciprocal exchanges. The primary difference among these types of insurers is in who owns them. A stock company is a corporation owned by individuals or stockholders who contribute capital in the hope of earning a profit through the sale of insurance. The stockholders direct the company's operations and share in any profits earned. A mutual insurance company is a corporation owned by its policyholders, who may receive dividends if the firm is profitable. A reciprocal insurance exchange is similar to a mutual company in that the policyholders are both the insurers and the insured. The exchange is a collection of individuals, firms and/or corporations that exchange insurance coverage on one another. Each member pays for a portion of the coverage on every other member.                                               One of the most critical decisions any consumer must make when purchasing a product or service is how they will purchase the product. When buying insurance, consumers have several choices. They can work with an independent agent, an exclusive agent, an insurance broker or deal directly with a company. An independent insurance agent is a self-employed businessperson who typically represents a number of different insurance companies through contractual relationships and is paid on a commission basis. An exclusive agent represents only one insurance company and may be a salaried employee or work on a commission basis. An insurance broker is an intermediary between a customer and an insurance company. A broker typically searches the market for coverage appropriate to their clients' needs. While purchasing insurance through an independent or exclusive agent are the most popular methods of buying insurance, consumers also have the option of direct purchase. A number of companies sell their insurance products directly to customers through the use of a toll-free telephone service or the Internet.

Physical

Morale

Moral

What is Insurance? HAZARDS:

Fortuitous

Financial

Personal

What is Insurance?

FINANCIAL LOSS:

Types of insurers Stock Mutual

Essence of insurance Insurable interest Principle of indemnity Factors that affect cost

Deductibles Co-insurance

What is Insurance?

Reimbursement Formula

Homeowner’s Insurance

Coverages

Property Liability

Types

Buying

Homeowner’s Insurance

Dwelling coverage

Personal property coverage

Liability losses

Homeowner’s insurance pricing

BUYING:

Types of Home Insurance Policies

Basic form (HO-1) Broad form (HO-2) Special form (HO-3) Tenant’s form (HO-4) Comprehensive form HO-5) Condominium form (HO-6) Country home form (HO-7) Modified coverage form (HO-8)

How Much Coverage Do You Need?

Look for a policy with full coverage rather than a coinsurance clause

What would it cost to replace your home? Have sufficient liability coverage Include protection for specific items such

as collections, cameras, and jewelry Determine the value of the contents of

your home

Items Covered in a Renter’s Policy

Personal property Personal liability Additional living

expenses

A landlord’s insurance usually won’t cover your personal belongings! Only 40% of

renters have renter’s Insurance

Replacement Cost vs.Actual Cash Value

Actual cash value coverage Insurer will cover the cost of what the

burned or stolen item would cost at a garage sale or if you sold it through a newspaper ad.

Replacement cost coverage Insurer will cover what ever it costs you

to replace the burned or stolen item with a new one.

Actual Cash Value Reimbursement Calculation

Value of a Home Inventory

Proof of belongings and their value

Helps you remember

Helps you determine needed coverage

What Affects the Cost ofHomeowner’s or Renter’s Policies?

Location of home or apartment Type and age of the structure Amount of coverage and deductibles Discounts - alarm system, smoke detector Varies company to company - compare If you also insure your car with the same

company

Automobile Insurance

Financial responsibility law 40 states have one

Requires you to carry certain minimum coverage if you damage someone’s person or property

Automobile Insurance

Liability

Medical

Uninsured/underinsured

Physical damage

Other

LOSSES COVERED:

Auto Liability Coverage

$100,000 lim it thatw ill be paid to one

person in an accident

$300,000 lim it thatw ill be paid to all

persons in an accident

$50,000 limit forpaym ent for dam ageto property of others

100/300/50

bodily injury liability property damage liability

Auto Insurance Coverages

Bodily injury coverages Bodily injury liability -

covers people in other cars

Medical payments -covers people in your car

Auto Insurance Coverages

Uninsured motorist Your vehicle is hit by one of the many

people who don’t have car insurance

Underinsured motorist Your car is hit by a person who doesn’t

have enough insurance to cover the damage they did to you and your car

(continued)

Property Damage Liability Coverage

Covers damage to others person’s car when you are at fault during a snow storm you might

accidentally slide your vehicle into a neighbor’s mailbox

Collision Coverage

When your car is in an accident, collision insurance pays for damage to your automobile, regardless of who is at fault. However, if you are not at fault they will try and collect from the other driver’s property damage liability first.

Comprehensive Physical Damage

Covers damage to your car that is not caused by a collision, such as theft vandalism glass breakage hail, sand, or wind storm your car rolls downhill into a tree

No-Fault Insurance

Each driver collects from their own insurance company medical expenses lost wages related injury costs

Intent is to reduce time and costs No-fault systems vary from state to state

Auto Insurance Premium Factors

Automobile type year, make and model

Rating territory accident, theft, and vandalism rates

Driver classification age, sex, marital status driving record

Assigned risk pool

Other Property/Liability Loss Exposures Floater policies

Antique/specialty cars

Professional liability

Comprehensive personal liability

Umbrella liability

To Lower Your Auto Premium

Find out how much it will cost to insure a car before you buy it

Compare companies Have larger deductibles Look for discounts

non-smoker good driving record airbags car alarm or other security

Umbrella Policy

$1,000,000 inliability coverage

Covers you inyour home, car,office etc.

Document loss

File claim

Sign release

Collecting on Property/Liability Losses

Make Sense of anInsurance Policy

Perils covered

Property covered

Types of losses

People covered

Locations covered

Time period of coverage

Loss control

Amount of coverage

Save on Property or Liability Insurance

Shop around

Select appropriate coverages/limits

Assume affordable risk

Take advantage of discounts

Engage in loss control

Be properly classified