Presentation Transcript

1. CHAPTER 9OBTAINING AFFORDABLE HOUSING

   FIN 235 FALL 2012
2. I. LEARNING OBJECTIVES Decide whether renting or owning your home is better for you. Explain the up-front and monthly costs of buying a home. Describe the steps in the home-buying process. Distinguish among the conventional and alternative ways of financing a home and list the advantages and disadvantages of each. Identify the key considerations when selling a home
3. II. BUYING VERSUS RENTING A HOME Rented housing may be less expensive at first. Rent, deposits and related expenses Lease agreements protect all parties Tenants have rights even in the absence of a written lease Owned housing may be less expensive in the long term. Single-family dwellings Condominiums and Cooperatives Manufactured housing and mobile homes
4. II. BUYING VERSUS RENTING A HOME Who pays more—renters or owners? Based on initial cash flow, renters appear to win After taxes and appreciation, owners usually win See page 253 for an illustration of the rent versus buy decision
5. III. COSTS OF OWNING A HOME Pay up-front costs at the closing. The down payment. One or more points. Each equals one percent of the amount borrowed Attorney fees—Don’t buy a home without one Title search and insurance Miscellaneous fees such as a loan origination fee, home inspection and appraisal fee
6. III. COSTS OF OWNING A HOME Monthly ongoing payments include principal (P) and interest (I). Mortgage principal and interest are the first two items of the acronym PITI (T=taxes, I = insurance) Mortgage insurance is usually required if the loan-to-value ratio exceeds 80 percent Insurance programs are available for those who make a low down payment PMI FHA mortgage insurance VA mortgage insurance State/local mortgage assistance programs Home warranty insurance protects against some defects.
7. III. COSTS OF OWNING A HOME Some fees are paid both up-front and monthly. Real estate property taxes (T) are based on the assessed value of the home Homeowner’s insurance protect the home and personal property The realities of the market 2012 Mortgage rates are at historic lows Housing prices are significantly lower than in 2006 The housing crisis has made it more difficult to obtain financing Lenders want buyers to have more “skin in the game” = larger down payments
8. IV. preparing to buy a home Get your finances in order. Clean up your credit history Use internet resources to estimate monthly housing costs Fit the housing costs into your budget Prequalify for a mortgage. The front-end ratio: maximum allowable housing expense ratio ~ 25 – 29% of Gross Monthly Income The back-end ratio: maximum debt-service burden ~ 33 – 41% of GMI See page 262 to determine the income needed to qualify for a mortgage (read carefully)
9. IV. preparing to buy a home Search for a home on-line and in person. Agree to terms with a seller. Make an offer to buy backed by earnest money Respond to the counteroffer Negotiate and sign a purchase contract The role of real estate agents—buyer versus seller agents. Formally apply for a mortgage loan.
10. IV. preparing to buy a home Prepare for the closing. Hire your own inspector Hire an attorney * * The process may be slightly different when dealing with an online mortgage broker. These closing do not involve an attorney but are handled by an agent empowered by the lender to execute the closing in accordance with state and federal regulations.
11. V. FINANCING THE PURCHASE Mathematics of Mortgages Payments consist of Principal and Interest Over the life of the mortgage, principal portions will increase, interest proportion will decrease. See Figure 9-2 and Table 9-2 on page 269. Three Factors affect the magnitude of the monthly payment The amount borrowed The interest rate The length of the loan Table 9-4 can be used to estimate mortgage loan payments for various amounts borrowed Table 9-5 illustrates how changing the time period and interest rate affects the monthly payment on a mortgage loan
12. V. FINANCING THE PURCHASE Conventional Mortgages A fixed-rate, fixed-term, fixed-payment loan Typically require 10 to 20% cash down payment Loans offer good loan-to-value ratios for lenders Adjustable Rate Mortgages (ARM) Rates vary over time as interest rates vary Many have life time caps (typically 6%) All will have yearly limits to increases in rates (2 to 5% according to text)
13. V. FINANCING THE PURCHASE Other Types of Mortgages Graduated-Payment: payments get larger over time Seller financed (problematic for both seller and buyer) Reverse mortgage (older home owners needing additional monthly $$$)
14. OBTAINING AFFORDABLE HOUSING selling a home Using a real estate broker: commissions run 5 - 6% of sale price For Sale by Owner (FSBO) – typically online and much less costly to seller
15. homework Do the Math: 1 (parts a & b), 2 (parts a & b) On the Net: 1, 2 Be Your Own Personal Financial Planner 1 – Are you ready to buy a home? (w/s 37) 2 – Saving to buy a home (w/s 14) 3 – Can you afford a mortgage? (w/s 38)