Chapter 6

1. Chapter 6 Own a Home or Car

2. 6.1 Borrowing to Buy a Home • Goals • Calculate the down payment, closing costs, and mortgage loan amount • Calculate the total interest cost of a mortgage loan • Calculate the savings from refinancing mortgages

3. 6.1 Borrowing to Buy a Home • The Total Cost of buying a home includes the purchase price, the cost of borrowing money for the purchase, and the closing costs • Most people make a cash down payment, or a percentage of the total cost of the house paid at the time of purchase, to their lender.

4. 6.1 Borrowing to Buy a Home • A mortgage loan is a loan taken with a bank or other lender for the purchase of a new home. • The money borrowed is called the Principal • A mortgage gives the lender the right to take the property if the loan is not repaid as agreed. • Common terms of mortgages are 15, 20, and 30 years

5. 6.1 Borrowing to Buy a Home • Closing Costs are fees and expenses paid to complete the transfer of ownership of a home. • Closing costs typically include legal fees, recording fees, title insurance, loan application fees, appraisal and inspection fees, land surveys, prepaid taxes, and prepaid interest charges known as points. • Interest rates and closing costs vary among lenders, so it pays to compare when looking for a lender.

6. 6.1 Borrowing to Buy a Home • To calculate the amount of a loan you need, subtract the down payment from the purchase price. • Mortgage Loan = Purchase Price – Down Payment • To calculate the amount of money you need to buy a home, add the down payment and the closing costs. • Cash Needed to Buy a Home = Down Payment + Closing Costs

7. 6.1 Borrowing to Buy a Home • Hilda Mikon is buying a home for $74,000. She will make a 20% down payment and estimates closing costs as: legal fees, $950; title insurance, $140; property survey, $250; inspection, $175; loan processing fee, $84; recording fee, $740. What amount of mortgage loan will she need? What amount of cash will she need when she buys the house? • Find the Down Payment • $74,000 x .20 = $14,800 • Find the amount of the mortgage loan • $74,000 - $14,800 = $59,200 • Find the total closing costs • $950 + $140 + $250 + $175 + $84 + $740 = $2,339 • Find the cash needed to buy a house • $14,800 + 2,339 = $17,139

8. 6.1 Borrowing to Buy a Home • Check for Understanding - Page 223 A & B Get out Whiteboards

9. 6.1 Borrowing to Buy a Home • Homework • Workbook pg. 77 #1-5

10. 6.1 Borrowing to Buy a Home – Con’t • There are many different types of mortgages. The two most common are… • Fixed Rate – Same Interest Rate for the Life of the Loan • Variable Rate – The Rate of Interest is based on the Interest Rate Economy • Most mortgages are repaid in equal monthly payments • Part of the payment goes to principal and part goes to interest

11. 6.1 Borrowing to Buy a Home – Con’t • Get a computer and log onto www.google.com. In the search type Mortgage Amortization and click on the first link. (bankrate.com) • Your screen should look like this

12. 6.1 Borrowing to Buy a Home – Con’t • Enter • Mtg Amt • 120,000 • Term • 30 years • Rate • 5.25 • Start Date • Jun 1, 2009 • Monthly Pmts? • $662.64

13. 6.1 Borrowing to Buy a Home – Con’t • Homework • Mortgage Amortization Worksheet

14. 6.2 Renting or Owning a Home • Goals • Calculate the costs of home ownership • Calculate the costs of renting a home or apartment • Compare the costs of renting vs. owning

15. 6.2 Renting or Owning a Home COST OF HOME OWNERSHIP • After a home is bought, homeowners have many outgoing expenses. These include • Property Taxes • Repairs • Maintenance • Utilities • Insurance • Mortgage Interest • And special services such as trash pickup

16. 6.2 Renting or Owning a Home • Two other less obvious expenses include depreciation and loss of income on the money invested in the home. • Depreciation is the loss in value of property cause by aging and use. • Examples of depreciation • Weathering of a roof • Change of Home Styles • Home becoming too expensive to heat and cool • Most homes depreciate about 1% to 4% of its original value per year

17. 6.2 Renting or Owning a Home • Loss of Income occurs because the money initially invested in buying the property (down payment and closing costs) could have been deposited into an investment account and earned interest. • One financial benefit homeowners have is that they may include the interest they pay on their home mortgage and their property taxes as itemized deductions on their income tax returns.

18. 6.2 Renting or Owning a Home • Take a look at Example 1 on page 230

19. 6.2 Renting or Owning a Home • The Krafts want to buy a home. Their estimated first year expenses are: mortgage interest, $6,848; Property Taxes, $3,782; Insurance, $560; Depreciation, $1,790; Utilities, $1,300; Maintenance and Repairs, $2,050. They estimate lost interest income on savings to be $1,562. Income tax savings are estimated to be $1,320. Find their net cost home ownership for the first year.

20. 6.2 Renting or Owning a Home • The Sutter family is building a home for $87,000 on a lot they own. They estimate their expenses for the first year to be: Mortgage Interest, $5,788; Property Taxes, $1,904; Insurance, $347; Lost Interest Income, $1,140; Depreciation, 2% of their home’s cost; Maint. and Repairs, $900. The cost of heating, electricity, and water is estimated to be $1,860. The Sutter’s expect to save $1,050 in income taxes as a result of owning a home. What will be the net cost of the home the first year?

21. 6.2 Renting or Owning a Home COST OF PROPERTY RENTAL • Financial Advantages of Rental • Not having to pay a significant down payment • Earning interest on money that would be used for a down pmt • More predictable housing costs • No maintenance costs • Financial Disadvantages of Rental • No federal income tax benefits • Do not build equity • Usually pay a one time security deposit and is not guaranteed in return.

22. 6.2 Renting or Owning a Home • Take a look at Example 2 on page 231

23. 6.2 Renting or Owning a Home • Rick Cassell rented an apartment for one year and paid $625 monthly rent. His other apartment-related costs for the year were: security deposit of $625; insurance, $85; utilities, $1,210; replacement of lost mailbox key, $10. What was the cost of renting the apartment for the one year? Add the Expenses

24. 6.2 Renting or Owning a Home • Terrell Pryor’s monthly rent on a house he is leasing is $1,250. The security deposit is one month’s rent. Terrell is responsible for mowing the lawn and clearing the snow and estimates he will spend $100 a month to have this done. His other annual costs include $136 for insurance and $1,700 for utilities. What will be his first-years costs of renting this home? Add the Expenses

25. 6.2 Renting or Owning a Home COMPARING RENTING & OWNING HOMES • Whether you buy or rent a property, some expenses are similar, such as insurance and utilities. Some expenses are different, such as taxes and loss of income.

26. 6.2 Renting or Owning a Home • Look at Example 3 on page 232 $12,930 - $9,959 = $2,971 Buying is $2,971 less expensive than Renting

27. 6.2 Renting or Owning a Home • Look at CYU E on page 232 $10,986- $10,885= $101 Renting is $101 less expensive than Buying

28. 6.2 Renting or Owning a Home • Look at CYU F on page 233 $12,930 - $9,959 = $2,971 Buying is $2,971 less expensive than Renting

29. 6.2 Renting or Owning a Home • Homework • Page 233 – 234 • # 9 – 13 • Make sure you have charts for all the problems as shown in the previous examples. • Ex.

30. 6.3 Property Taxes • Goals • Calculate the decimal tax rate • Calculate property taxes for tax rates per $100 or $1,000 • Calculate property taxes for tax rates in mills or cents per $1

31. 6.3 Property Taxes DECIMAL TAX RATE • Property taxes are taxes on the value of real estate such as homes, business property, or farm land. • Taxes are collected annually or semiannually by the tax departments of local tax districts such as cities or townships where the property is located. • The amount of property tax paid is based on the assessed value of a property.

32. 6.3 Property Taxes • Assessed values are generally less than their market values. • Local tax districts then determine the decimal tax rate, which is the tax rate at which the property is to be taxed. • Decimal Tax Rate = Total Property Tax Income Needed (to cover expenses) Total Assessed Value (of all properties in the district)

33. 6.3 Property Taxes The Columbia School District’s total budgeted expenses last year were $6,000,000. Estimated income from other sources was $1,800,000. The total assessed value of all taxable property in Columbia last year was $39,000,000. Find the decimal tax rate needed to meet expenses. Tax Income Needed ($) $6,000,000 – $1,800,000 = $4,200,000 Decimal Tax Rate = Total Assessed Value $39,000,000 Decimal Tax Rate = 0.10769

34. 6.3 Property Taxes Elk County’s budget for a year is $6,750,000. Of that, $650,000 is raised from other income, and the rest from property taxes. The total assessed value of the county’s property is $80,000,000. What is the decimal tax rate, rounded to three decimal places. Tax Income Needed ($) $6,750,000 – $650,000 = $6,100,000 Decimal Tax Rate = Total Assessed Value $80,000,000 Decimal Tax Rate = 0.07625 = 0.076 (Rounded)

35. 6.3 Property Taxes The Happy Valley District must raise $1,950,000 from property taxes. The assessed value of property in the district is $48,200,000. What is the decimal tax rate needed, to four decimal places? Tax Income Needed ($) $1,950,000 Decimal Tax Rate = Total Assessed Value $48,200,000 Decimal Tax Rate = 0.040456 = 0.0405 (Rounded)

36. 6.3 Property Taxes TAX RATES per $1,000 of ASSESSED VALUE The Watson’s property is valued at $120,000 and is assessed at 50% of its value. Calculate the property tax due on if their tax rate is stated as $62 per $1000. $60,000 / $1,000 = 60Number of $1,000 units in the Assessed Value 60 x $62 = $3,720 Property Tax Due

37. 6.3 Property Taxes What tax must Art pay on his home, assessed for $67,500 if his tax rate is $50.08 per $1,000 $67,500 / $1,000 = 67.5Number of $1,000 units in the Assessed Value 67.5 x $50.08 = $3,380.40 Property Tax Due

38. 6.3 Property Taxes The Smiley family owns a cabin and land with an assessed value of $13,500. What property tax do they pay if the tax rate on the property is $25.83 per $1,000? $13,500 / $1,000 = 13.5Number of $1,000 units in the Assessed Value 13.5 x $25.83= $348.71 Property Tax Due

39. 6.3 Property Taxes TAX RATES in MILLS A mill is one tenth of a cent, or one thousandth of a dollar. There are ten mills in one cent and 1,000 mills in one dollar. Example: Calculate the tax due on the Watson’s property ($60,000 assessed value) if their tax rate is stated as 62 mills 62 mills / 1,000 = $0.062 (mills rate in $) $60,000 x $0.062 = $3,720

40. 6.3 Property Taxes • The city tax rate in Lakeview is 52 mills of the assessed value. Find the tax rate to be paid on property assessed at $38,400. 52 mills / 1000 = $0.052 (mills rate in $) $38,400 x $0.052 = $1,996.80

41. 6.3 Property Taxes • What tax must Michelle Nolan pay on a condominium assessed at $32,100 if her tax rate is 38 mills? 38 mills / 1,000 = $0.038 $32,100 x $0.038 = $1,219.80

42. 6.3 Property Taxes • Homework • Worksheet • From Workbook pg 81 – 82 • #1 - 8

43. 6.4 Property Insurance • Goals • Calculate property insurance premiums for homeowners • Calculate property insurance premiums for renters • Calculate how much can be collected on insurance claims

44. 6.4 Property Insurance PROPERTY OWNERS INSURANCE PREMIUMS • A policy that covers your home and protects you against other risks is called homeowners insurance. • Basic homeowners insurance covers • Dwelling – your home • Other Structures – such as garages • Personal Property – contents of your home • Additional Living Expenses – cost of living expenses • Personal Liability – protection against lawsuits • Medical Payments to Others – medical expenses for injury

45. 6.4 Property Insurance • Other Insurance Notes • Off Premises insurance covers personal property when you are away from home. • For example, if the luggage and clothes you take on vacation are stolen, their loss would be covered • Usually about 10% of the amount of your policy • Replacement Cost Policies • The Insurance Co. will pay the cost of replacing your property at current prices • Ex. If a $600 leather chair is destroyed in a fire, the insurer will pay for a replacement even if it costs $900 now • Premiums are about 10%-15% higher than a standard policy

46. 6.4 Property Insurance • The money paid to an insurance company for property insurance is called the insurance premium. • Your premium will vary depending on • Kind of coverage you buy • How your house or apartment is built (Brick, Wood) • Where it is located (Close to Fire Dept)

47. 6.4 Property Insurance • David Duval insured his house for $89,000 at an annual rate of $0.51 per $100. Find his Premium. Solution: Find the number of $100 units in the insured amount $89,000 / $100 = 890 units Multiply the rate per $100 by number of units 890 x $0.51 = $453.90

48. 6.4 Property Insurance • Vijay Singh insured his home for $61,000. Find the annual premium, to the nearest dollar, he will pay for a policy that costs $0.46 per $100. $61,000 / $100 = 610 units 610 x $0.46 = $281

49. 6.4 Property Insurance • Chi Chi Rodriguez insures his home for $43,000. What annual premium will he pay if the policy cost is $0.74 per $100 43,000 / 100 = 430 units 430 x $0.74 = $318

50. 6.4 Property Insurance RENTERS INSURANCE PREMIUMS • A renters policy provides nearly the same coverage as a homeowners policy except for loss of the dwelling and other structures. • Annual premiums for a renters policy are based on the amount of insurance on the contents of your apartment or rental home.