Ch09

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Ch09

  1. 1. Chapter 9 Purchasing and Financing a Home
  2. 2. Chapter Objectives <ul><li>Explain how to select a home to purchase </li></ul><ul><li>Explain how to conduct a valuation of a home </li></ul><ul><li>Describe the transaction costs of purchasing a home </li></ul><ul><li>Identify the characteristics of a fixed-rate mortgage </li></ul>
  3. 3. Chapter Objectives <ul><li>Describe the characteristics of an adjustable-rate mortgage </li></ul><ul><li>Show how to compare the costs of purchasing versus renting a home </li></ul><ul><li>Explain the mortgage refinancing decision </li></ul>
  4. 4. Selecting a Home <ul><li>Purchasing a home may be the single biggest investment you will ever make and requires serious consideration </li></ul><ul><li>Relying on a realtor can be helpful, but make decisions that meet your needs </li></ul><ul><li>Using online realtor services usually saves money in commission charges </li></ul>
  5. 5. Selecting a Home <ul><li>How much can you afford? </li></ul><ul><ul><li>Affordable down payment </li></ul></ul><ul><ul><ul><li>Down payment usually 10 – 20 percent of purchase price </li></ul></ul></ul><ul><ul><ul><li>What is the market value of the assets you will use to make your down payment? </li></ul></ul></ul><ul><ul><ul><li>You also need to allow for closing costs and some unanticipated expenses </li></ul></ul></ul>
  6. 6. Financial Planning Online: How Much Money Can You Borrow? <ul><li>Go to: http://www.financenter.com/products/sellingtools/calculators </li></ul><ul><li>Click on: “Home,” then “How much can I borrow?” </li></ul><ul><li>This Web site provides an estimate of how much you could borrow to finance a home. </li></ul>
  7. 7. Selecting a Home <ul><ul><li>Affordable monthly mortgage payments </li></ul></ul><ul><ul><ul><li>Refer to your cash flow statement </li></ul></ul></ul><ul><ul><ul><li>Your mortgage payment may replace a rent payment but there are other expenses to consider </li></ul></ul></ul><ul><ul><ul><li>Allow for continued saving </li></ul></ul></ul><ul><li>Criteria used to select a home </li></ul><ul><ul><li>Price </li></ul></ul><ul><ul><li>Convenient location </li></ul></ul>
  8. 8. Financial Planning Online: Recent Sales Prices of Nearby Homes <ul><li>Go to: http://realestate.yahoo.com/re/homevalues/ </li></ul><ul><li>This Web site provides sales prices of homes on a street in a city that you specify over a recent period. </li></ul>
  9. 9. Selecting a Home <ul><ul><li>Maintenance </li></ul></ul><ul><ul><li>School system </li></ul></ul><ul><ul><li>Insurance </li></ul></ul><ul><ul><li>Taxes — usually between 1 and 2 percent of market value of home </li></ul></ul><ul><ul><li>Homeowner’s Association </li></ul></ul><ul><ul><li>Resale value — consider real estate commission </li></ul></ul><ul><ul><li>Personal preferences </li></ul></ul>
  10. 10. Financial Planning Online: Listing of Homes Nearby for Sale <ul><li>Go to: http://www.realtor.com </li></ul><ul><li>This Web site provides a listing of homes for sale in an area that you specify and homes in the price and size range that you specify. </li></ul>
  11. 11. Selecting a Home <ul><li>Focus on Ethics: Disclosing Defects </li></ul><ul><ul><li>Most state laws require disclosure of any defect that may effect the value of the home </li></ul></ul><ul><ul><li>Disclosure is not only legal, but moral </li></ul></ul><ul><ul><li>Failure to disclose can result in a lawsuit for misrepresentation </li></ul></ul>
  12. 12. Valuation of a Home <ul><li>Market analysis: an estimate of the price of a home based on the prices of similar homes in the area </li></ul><ul><ul><li>Usually based on price per square foot </li></ul></ul><ul><ul><li>Information can be obtained from a real estate broker or appraiser </li></ul></ul>
  13. 13. Valuation of a Home Exhibit 9.1: Using a Market Analysis to Purchase a Home
  14. 14. Valuation of a Home <ul><li>Effects on business activity and zoning laws </li></ul><ul><ul><li>Business activity nearby increases demand for housing in an area </li></ul></ul><ul><ul><li>Zoning laws may affect desirability </li></ul></ul><ul><li>Obtaining a second opinion on your valuation </li></ul><ul><ul><li>Remember that brokers represent sellers! </li></ul></ul>
  15. 15. Valuation of a Home <ul><li>Negotiating a price </li></ul><ul><ul><li>Most sellers will accept less than their asking price </li></ul></ul><ul><ul><li>Seller may accept your offer, reject it, or suggest a revision </li></ul></ul><ul><ul><li>A contract will stipulate the agreed upon price and any other conditions </li></ul></ul>
  16. 16. Transaction Costs of Purchasing a Home <ul><li>Down payment </li></ul><ul><ul><li>Usually 10 to 20 percent </li></ul></ul><ul><ul><li>Serves as collateral </li></ul></ul><ul><ul><li>Lower down payment may be required for government backed loans </li></ul></ul><ul><ul><ul><li>Federal Housing Administration (FHA) </li></ul></ul></ul><ul><ul><ul><li>Veterans’ Administration (VA) </li></ul></ul></ul>
  17. 17. Transaction Costs of Purchasing a Home <ul><li>Closing costs </li></ul><ul><ul><li>Loan application fee — from $100–$500 </li></ul></ul><ul><ul><li>Points: a fee charged by the lender when a mortgage loan is provided — from 1–2% of the loan </li></ul></ul><ul><ul><li>Loan origination fee — about 1% of the mortgage amount </li></ul></ul><ul><ul><li>Appraisal fee — from $200–$500 </li></ul></ul><ul><ul><li>Title search and insurance </li></ul></ul>
  18. 18. Financial Planning Online: Applying For a Mortgage <ul><li>Go to: http://www.bloombert.com/money/loan/mtge_calc.html </li></ul><ul><li>This Web site provides access to mortgage applications, and a guide for assessing whether to refinance a mortgage. </li></ul>
  19. 19. Characteristics of a Fixed-Rate Mortgage <ul><li>Fixed-rate mortgage: a mortgage in which a fixed interest rate is specified until maturity </li></ul><ul><li>Preferred when interest rates are expected to rise </li></ul><ul><li>May be assumable under some conditions </li></ul>
  20. 20. Financial Planning Online: Average Mortgage Rates <ul><li>Go to: http://biz.yahoo.com/b/r/m.html </li></ul><ul><li>This Web site provides national averages for mortgage rates, as well as average mortgage rates for specific regions and states. </li></ul>
  21. 21. Characteristics of a Fixed-Rate Mortgage <ul><li>Amortization table </li></ul><ul><ul><li>Basis for monthly mortgage payment amount for a fixed-rate mortgage </li></ul></ul><ul><ul><li>Allocation of the mortgage payment — each payment represents a partial payment of principal and a partial payment of interest </li></ul></ul>
  22. 22. Characteristics of a Fixed-Rate Mortgage Exhibit 9.2: Amortization Schedule for a 30-Year (360-Month) Fixed-Rate Mortgage for $72,000 at an 8 Percent Interest Rate
  23. 23. Characteristics of a Fixed-Rate Mortgage Exhibit 9.3: Allocation of Principal versus Interest Paid per Year on a $72,000 Mortgage
  24. 24. Characteristics of a Fixed-Rate Mortgage Exhibit 9.3 (continued)
  25. 25. Characteristics of a Fixed-Rate Mortgage <ul><li>Impact of the mortgage amount on the monthly payment </li></ul><ul><ul><li>The larger the mortgage amount, the larger the mortgage payment </li></ul></ul><ul><li>Impact of the interest rate on the monthly payment </li></ul><ul><ul><li>The larger the interest rate, the larger the mortgage payment </li></ul></ul>
  26. 26. Characteristics of a Fixed-Rate Mortgage <ul><li>Impact of the mortgage maturity on the monthly payment </li></ul><ul><ul><li>The longer the maturity, the lower the monthly payment </li></ul></ul><ul><ul><li>The longer the maturity, the more interest you pay over the live of the loan </li></ul></ul>
  27. 27. Characteristics of a Fixed-Rate Mortgage <ul><li>Impact of the interest rate on the monthly payment </li></ul><ul><ul><li>The higher the interest rate, the higher the payment </li></ul></ul><ul><li>Impact of the mortgage maturity on the monthly payment </li></ul><ul><ul><li>The longer the maturity, the higher the payment </li></ul></ul>
  28. 28. Characteristics of a Fixed-Rate Mortgage Exhibit 9.4: Monthly Mortgage Payments Based on Different Mortgage Amounts (30-Year Fixed-Rate Mortgage; Interest Rate = 8 Percent)
  29. 29. Characteristics of a Fixed-Rate Mortgage Exhibit 9.5: Comparison of Monthly Payments for a 30-Year versus a 15-Year Mortgage of $72,000 Based on Different Interest Rates
  30. 30. Characteristics of a Fixed-Rate Mortgage Exhibit 9.6: Comparison of Mortgage Balance for a 15-Year versus a 30-Year Mortgage (Initial Mortgage Amount = $72,000; Interest Rate = 8 Percent)
  31. 31. Characteristics of a Fixed-Rate Mortgage <ul><li>Estimating the monthly mortgage payment </li></ul><ul><ul><li>Many mortgage loan Web sites offer mortgage calculators to estimate monthly payments based on a specific mortgage amount, interest rate, and maturity </li></ul></ul>
  32. 32. Financial Planning Online: Estimating Mortgage Payments <ul><li>Go to: http://www.bloomberg.com/money/loan/mtge_calc.html </li></ul><ul><li>This Web site provides the monthly payment on a mortgage based on the loan amount, interest rate, and the loan maturity. </li></ul>
  33. 33. Financial Planning Online: Should You Obtain a 15-Year or a 30-Year Mortgage? <ul><li>Go to: http://www.financenter.com/products/ sellingtools /calculators </li></ul><ul><li>Click on: “Home,” then “Which is better: 15-or-30 year term?” </li></ul><ul><li>This Web site provides a comparison of payments on a 15-year versus a 30-year mortgage. </li></ul>
  34. 34. Characteristics of an Adjustable-Rate Mortgage <ul><li>Adjustable-rate mortgage (ARM): a mortgage where the interest owed changes in response to movements in a specific market-determined interest rate </li></ul><ul><li>Initial rate — usually relatively low </li></ul><ul><li>Interest rate index — determines whether mortgage rate goes up </li></ul><ul><li>Frequency of rate adjustments — varies </li></ul>
  35. 35. Characteristics of an Adjustable-Rate Mortgage <ul><li>Caps on adjustable-rate mortgages </li></ul><ul><ul><li>Caps: maximum and minimum fluctuations in the interest rate on an ARM </li></ul></ul><ul><ul><li>Limits the fluctuations in interest rate </li></ul></ul><ul><li>Financing with a fixed- versus an adjustable-rate mortgage </li></ul><ul><ul><li>Depends on you expectation of future interest rates </li></ul></ul>
  36. 36. Financial Planning Online: Should You Obtain a Fixed- or an Adjustable-Rate Mortgage? <ul><li>Go to: http://www.financenter.com/products/ sellingtools /calculators </li></ul><ul><li>Click on: “Home,” then “Which is better: fixed or adjustable?” </li></ul><ul><li>This Web site provides a comparison of payments on a fixed-rate versus an adjustable-rate mortgage. </li></ul>
  37. 37. Decision to Own a Home versus Rent <ul><li>Consider financial assessment before considering personal preferences </li></ul><ul><li>Estimating the total cost of renting and owning </li></ul><ul><ul><li>Renting — rent payment, security deposit </li></ul></ul><ul><ul><li>Owning — down payment, mortgage payment, closing costs, maintenance, taxes and insurance </li></ul></ul><ul><ul><ul><li>Owning also has tax advantages </li></ul></ul></ul>
  38. 38. Financial Planning Online: Should You Rent or Buy? <ul><li>Go to: http://loan.yahoo.com/m/ </li></ul><ul><li>Click on: Calculators </li></ul><ul><li>This Web site provides a recommendation on whether you would buy a home, based on your rent versus the expenses of the home you are considering. </li></ul>
  39. 39. Decision to Own a Home versus Rent Exhibit 9.7: Comparing the Total Cost of Renting versus Buying a Home over a Three-Year Period
  40. 40. Special Types of Mortgages <ul><li>Graduated payment mortgage: a mortgage where the payments are low in the early years and then rise to a higher level over time </li></ul><ul><li>Balloon payment mortgage: a mortgage where the monthly payments are relatively low, but one large payment is required after a specified period to pay off the loan </li></ul>
  41. 41. Mortgage Refinancing <ul><li>Mortgage refinancing: paying off an existing mortgage with a new mortgage that has a lower interest rate </li></ul><ul><li>Refinancing analysis — compare the monthly savings to the cost of refinancing </li></ul><ul><ul><li>Must pay additional closing costs </li></ul></ul>
  42. 42. How a Mortgage Fits within Your Financial Plan <ul><li>Key mortgage loan decisions for your financial plan are: </li></ul><ul><ul><li>What mortgage amount can you afford? </li></ul></ul><ul><ul><li>What maturity should you select? </li></ul></ul><ul><ul><li>Should you consider a fixed-rate or an adjustable-rate mortgage? </li></ul></ul>
  43. 43. Integrating the Key Concepts
  44. 44. Integrating the Key Concepts <ul><li>Part 1: Financial Planning Tools </li></ul><ul><li>Part 2: Liquidity Management </li></ul><ul><li>Part 3: Financing </li></ul><ul><ul><li>In Chapter 8 we learned about personal loans </li></ul></ul><ul><ul><li>In Chapter 9 we learned about purchasing and financing a home </li></ul></ul><ul><li>Part 4: Protecting Your Wealth </li></ul><ul><li>Part 5: Investing </li></ul><ul><li>Part 6: Retirement and Estate Planning </li></ul>

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