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Chapter 9

Chapter 9. Buying a Home. Learning Objectives. Decide whether renting or owning is better, both financially and personally. Explain the up-front and monthly costs of buying a home. Describe the steps in the home-buying process.

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Chapter 9

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  1. Chapter 9 Buying a Home

  2. Learning Objectives • Decide whether renting or owning is better, both financially and personally. • Explain the up-front and monthly costs of buying a home. • Describe the steps in the home-buying process. • Distinguish among the traditional and alternative ways of financing a home and list the advantages and disadvantages of each. • Identify the important aspects of selling a home.

  3. Introduction Mortgage: Loan to purchase real estate in which the property itself serves as collateral.

  4. 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 Why the recent explosion in mortgage foreclosures?

  5. Should you rent or buy? Short-term: renters win, based on initial upfront costs • Rent • Damage/security deposit • Lease contract • Periodic tenancy • Tenancy for specific time • Subleasing • Your rights w/o a lease (pg 250)

  6. Long-term: homeowners win, when income taxes and appreciation are considered • Equity and Appreciation • Deductibility of items on taxes • Real estate taxes • Mortgage interest • Beware of flipping • Being “upside down” (under water) • Foreclosure • Strategic default (pg 253)

  7. What does it cost to buy a home? • 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!

  8. 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?

  9. 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)

  10. 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)

  11. Steps in Home Buying

  12. Get your finances in order • Clean up your credit! • Use Internet to Estimate Housing Costs • Prequalify for Loan (Determine your own affordability first!) • Front-end ratio: PITI compared to gross income • PITI should not exceed 25-29% of gross income Back-end ratio: PITI + all other monthly debt (car, student loans, etc) compared to gross income • Should not exceed 33-41% of gross income • Search for home online and in person

  13. Agree to terms with seller (NEGOTIATE!) • Make offer; counteroffer • Specify conditions (contingency clauses) • Sign purchase contract • Formally apply for Mortgage Loan • Good faith estimate • Mortgage lock-in rate • Prepare for closing • Hire your own inspector • Hire your own attorney • Closing Day! Uniform Settlement Statement

  14. Financing a HomeThe 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?

  15. Amortization Table for Fixed Rate Loans

  16. 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 Types of Mortgages <= where is the risk?

  17. The Main Types of Mortgages • 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? Locale rates

  18. Alternative Mortgages • 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 Traditional limit for HELs and HELOCs: 80% of MV less loan balance (pg 274).

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