Renting vs. Owning

1. Renting vs. Owning Family Economics and Financial Education Take Charge of your Finances

2. Introduction • Housing is the largest personal expenditure. • About 1/3 of a person’s income. • Choosing where to live is based upon a person’s goals, values, needs, and wants. • Places to live include: • House, apartment, condo, mobile home, etc.

3. Reasons for making a housing choice • Personal and financial goals • Personal values, needs, and wants • Amount of money available for housing costs • Financial resources and readiness • Credit history • Real estate prices • Location preference • Expected length of stay in particular place

4. Costs of renting • Monthly rent • Security deposit • Utilities – electricity, water, garbage, etc. • Renter’s insurance

5. Renting • A lease is a legal contract between the tenant and the landlord, specifying the responsibilities and rights of both parties. • Identifies the rent amount, security deposit amount and specifications, payment for utility bills, late payment penalties, length of lease, eviction terms, etc. • This is between the landlord and the tenant • Landlord • Owner of the rental property. • May perform management duties or hire a property manager. • Property manager - may charge a fee to the landlord to perform the management task • Duties may include: • May collect rent and deposits, pay utility bills, complete repairs and maintenance, watch over the property, respond to tenant complaints, assign new tenants, etc.

6. Renting continued • Tenant (renter) • The person who rents the property. • Renters are generally • People who choose not to own a home. • People who cannot afford to own a home. • The tenant pays rent to the landlord which allows them to live in the rental property. • Rent • The cost of using someone else’s property.

7. Moving into a rental • Upon moving into a new place, people are usually required to pay a security deposit and sign a lease. • Security deposit • An advance payment to cover anything beyond normal wear and tear on the unit.

8. Advantages of renting • Low move-in costs • Fixed monthly expenses • Easy to move • Location choices (may be close to work or school) • Less maintenance and repair work • Fewer responsibilities • May offer extra amenities such as a tennis court or pool • Typically less expensive than home ownership • May be able to save for other wants or needs if renting a less expensive apartment • Other expenses may be included in rent payment such as electricity, water, sewer, and/or garbage

9. Disadvantages of renting • Subject to terms of a lease • Rent may change with little notice • Less privacy and transient neighbors. • Restrictions on noise level, pets, etc. • Fewer opportunities to upgrade apartment such as new carpet, paint, or wallpaper. • When leaving a property, no equity is returned as it would be if selling a home. • No tax deductions • May lose rental if the property is sold.

10. Costs of ownership • Monthly mortgage payments • Down payment (one time cost) • Closing costs (one time cost) • Utilities – electricity, water, garbage, etc. • Homeowner’s insurance • Real estate property taxes • Maintenance

11. Home ownership • Home ownership - the buyer has purchased a housing unit as property • Goal of many Americans • A large financial decision • Owning a home is an investment because if a person sells a home for more than what it was bought for, the person makes money. • Financial planning and savings can assist a person in planning for the benefits of home ownership later in life.

12. Purchasing a home • 90% of buyers take out a mortgage • Mortgage-loan to purchase real-estate • Generally can last 15-30 years • Monthly payments include principal and interest, is an escrow account will include property insurance and property tax • Escrow account-also called a reserve account, is a fund where money is held by a financial institution to pay amounts that will come due during the year. • Fixed-rate mortgage & Adjustable-rate mortgage (changes with rates) • Balloon payments-mortgages • Collateral is an item promised to the lender if the borrower does not pay back the loan, usually the home. • Down payment • Amount of money paid on the home at time of purchase • Typically 10 – 20% (They want 20%) of the purchase price of the home • Recommended purchase price amount an individual should pay for a home • 2 ½ times their annual household income

13. Mortages • Graduated payment • Payments start low and go up for a person whose imcome 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 • Shared appreciation • Borrower agrees to share appreciated value of the home with lender

14. Refinancing • Replacing an existing debt obligation with another debt obligation under different terms. • Commonly for the purpose of going from a high APR to a lower APR. • Fixed APR that is high and the rate in the market is lower • Or switching from a variable rate to a fixed-rate loan • May have a penalty clause or having to pay “closing” fees • Transactions fees Some refinance to extend the term of the loan at the same interest rate Leads to paying more down the road

15. Value and Equity • Equity • Is the difference between the market value of property and the amount owed on it. • Increases as you make payments, or as you pay off your debt. • Example • Purchase a home at 150,000 and have a loan of 120,000 you initial equity is 30,000

16. Value • Market value • Highest value that the property will bring on the market • Appraised value • Examining the structure, size, features, and quality as compared to similar homes in the same geographic area. • Assessed value • Based on the cost and quality of the construction, the cost of improvements, and the cost of similar properties. This is set by the city or county in which you live.

17. Financial Analysis • Estimated value • Real estate agents also estimate the value of homes to help sellers establish a list price. They compare the house and its features • Appreciations- increase in market value • Most homes appreciate • Due to demand and population growth • Sales up 200% in Sioux Falls • Buyers vs sellers market

18. Buyer vs Sellers Market • Buyer’s Market: commonly used to describe real estate markets, but it applies to any type of market where there is more product available than there are people who want to buy it. • Sellers Market: a situation in which demand exceeds supply and owners have an advantage over buyers in price negotiations • http://www.investopedia.com/terms/b/buyersmarket.asp

19. Zoning • Types • City • Suburbs • Rural Areas • Zoning Laws • Laws set forth in a community that state what a homeowner can both do and not do. • Building or adding on • Adding homes of less value

20. Types/Styles of Home • http://www.bhg.com/home-improvement/exteriors/curb-appeal/house-styles/#page=12

21. Ending the Purchasing Process • Closing costs • Expenses incurred in transferring ownership form buyer to seller in a real estate transaction. • Fees • Credit report fee • Title search fee (make sure the seller is the real owner) • Loan origination fee • Loan assumption fee (take over another's mortgage • Closing fee for preparing the paperwork • Recording fee • His/Her portion of taxes and interest currently owed on the property • Property Taxes • Homeowners pay real estate property taxes based on the assessed value of land and buildings.

22. Advantages of ownership • Build equity which can be borrowed against if necessary • Pride of ownership • Feel more comfortable and have more privacy • Stable mortgage payments • More room and storage • Improvement of buyer’s credit rating • Income tax deductions for property taxes and mortgage interest • Potential for property to increase in value • Free to make home improvements and have pets (items typically not allowed in rentals)

23. Disadvantages of ownership • Large down payment • Move-in costs • Insurance costs • Possible for property to decrease in value • Time, money, and energy commitment • Repair and maintenance costs • Property taxes can raise substantially • Money is tied up in the home • May take several months to sell a home if trying to relocate

24. Keep In mind. . . People are always paying for a home. It’s just a matter of whether it is for themselves or their landlord.