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  • 1. C HAPTER 9 Personal Finance The Housing Decision: Factors and Finances Kapoor Dlabay Hughes 7e 9-1
  • 2. Evaluating Housing Alternatives
    • Your lifestyle and your choice of housing.
      • How you spend your time and money, your lifestyle, affects your housing choice.
      • Personal preferences are modified by financial factors.
        • Traditional financial guidelines suggest you spend no more than 25-30% of take-home pay on housing, or no more than 2 1/2 times your annual income.
  • 3.
    • Opportunity costs of housing choices include some common trade-offs.
      • Interest earnings lost on money used for a down payment or the interest on a security deposit for an apartment.
      • Time and cost of commuting to live in an area that offers less costly housing or more space.
      • Renters lose tax advantages and equity growth.
      • Time and money you spend to repair and improve a lower-priced home.
      • Time and effort when you have a home built to your personal specifications.
    Evaluating Housing Alternatives 9-3 (continued)
  • 4. Rent versus Own: Evaluating Housing Alternatives
    • Advantages of renting.
      • Fewer maintenance and repair responsibilities.
      • Easier to move.
      • Lower initial costs.
    • Disadvantages of renting.
      • No tax benefits.
      • Limitations regarding remodeling.
      • Restrictions regarding pets and other activities.
      • Legal concerns of a lease.
      • Costs including a security deposit, utilities and renter’s insurance.
  • 5. Housing Rental Activities
    • The search.
      • Select an area and rental cost for your needs.
      • Compare costs and facilities between units.
      • Talk to current and past residents.
    • Before signing a lease.
      • Make sure the lease dates, costs, and facilities are clearly represented.
      • Talk to a lawyer about unclear lease aspects.
      • Note in writing, signed by the landlord, the condition of the rental unit.
      • Any person who signs a lease can be held responsible for the full rent.
  • 6. Legal Details of a Lease
    • Description and address of property.
    • Name and address of the owner/landlord (lessor).
    • Name of tenant (lessee).
    • Effective date and length of the lease.
    • Amount of security deposit.
    • Amount and due date of rent.
    • Location where rent is due.
    • Date and amount for late rent payments.
    • List of included utilities, appliances.
    • Restrictions on certain activities.
    • The right to sublet the unit.
    • Conditions under which landlord may enter the rental unit.
  • 7. Housing Rental Activities (continued)
    • Living in rental property.
      • Keep all appliances and facilities in good condition.
      • Contact the owners regarding needed repairs.
      • Respect the rights of others (stereo and parties).
      • Obtain renter’s insurance.
    • At the end of the lease.
      • Clean and leave unit in same condition you got it.
      • Provide landlord with new address for deposit.
      • Require than any deductions from your security deposit be documented.
  • 8. Home Buying Process Step 1: Determine Homeownership Needs
    • Benefits of Home Ownership
      • Pride of ownership.
        • American dream/norm.
      • Financial benefits.
        • Deduct property taxes and mortgage interest.
        • Potential increase in value of your home.
        • Building an equity in your home.
      • Lifestyle flexibility - express your individuality.
  • 9. Home Buying Process Step 1: Determine Homeownership Needs (cont.)
    • Drawbacks of Homeownership.
      • Financial uncertainty.
        • Obtaining money for the down payment.
        • Obtaining mortgage financing.
        • Home values could drop.
      • Limited mobility.
        • Can take time to sell your home.
      • Higher living costs.
        • Maintenance, repainting,repairs, and home improvements.
        • Rising real estate taxes.
  • 10. Home Buying Process Step 1: Determine Homeownership Needs
    • Assess Types of Housing Available
      • Single-family dwelling.
      • Multi-unit dwelling.
        • Duplex (two homes).
        • Townhouse (2, 4, or 6 units).
      • Condominium.
        • You own your unit in a building of units.
        • It is not a type of building structure, but rather a form of homeownership.
      • Cooperative housing.
        • Non-profit organization - members own shares and rent a unit in a building with multiple units.
  • 11. Assess Types of Housing Available
    • Manufactured homes.
      • Fully or partially assembled in a factory, and then moved to the housing site.
      • Prefabricated type has components built in the factory and assembled at the site.
      • Mass production under factory conditions keeps costs lower than site built homes.
    • Mobile homes.
      • A type of manufactured home, often <1,000 sq. ft.
      • Offer same features as a conventional house.
      • Safety is debated and they tend to depreciate.
    (continued) 9-11
  • 12.
    • If building a home to your specifications, …
      • Does the contractor have needed experience?
      • Does contractor have a good working relationship with architect, suppliers, electricians, plumbers, carpenters and others?
    Assess Types of Housing Than Can be Purchased 9-12
  • 13. Assess Types of Housing Than Can be Purchased
      • What assurance do you have about quality?
      • What are payment arrangements?
      • What delays will be considered legitimate?
      • Is the contractor licensed and insured?
      • Are there any complaints about this contractor?
      • Contract should have a time schedule, cost estimates, description of work, and a payment schedule.
    (continued) 9-13
  • 14. Home Buying Process Step 1: Determine Homeownership Needs
    • Calculate how much you can afford.
      • Consider both price and quality.
      • Look at your income, your current living expenses, and how much you have for a down payment.
      • Have a loan officer prequalify you. There is no charge to have this done.
      • Purchase what you can afford - you can always move up.
      • You can buy a handyman’s special to get a lower price, if you have the time, skills, and money to fix it up.
  • 15. Home Buying Process Step 2: Finding and Evaluating a Property to Purchase
    • Select a location, location, location.
      • Be aware of zoning laws.
      • Assess the school system if you have children.
    • Consider using a real estate agent.
      • They present your offer, negotiate the price, assist you in obtaining financing, and represent you at the closing.
    • Conduct a home inspection or hire an inspector.
    • Mortgage company will want an appraisal.
  • 16. Home Buying Process Step 3: Pricing the Property
    • Determine an appropriate market price.
    • Price is affected by whether it is a seller’s or a buyer’s market.
    • Negotiate an agreement price via a purchase agreement or contract. Counteroffers are common.
    • Earnest money if part of your offer.
    • Contingency clauses, such as...
      • Buyer can obtain financing.
      • Sale contingent on the sale of the buyer’s current home.
  • 17.
    • Determine the amount of the down payment.
      • Mortgage insurance if less than 20% down.
    • Investigate the rates and conditions of mortgages.
    • Apply for a mortgage and evaluate types of mortgages. Guidelines for affordability of housing costs are 28% to 36% of gross income.
    • Qualifying for a mortgage includes your income, debts, credit history, down payment amount, length of the loan, and current mortgage rates.
    • Points are prepaid interest as a % of the loan amount.
    Home Buying Process Step 4: Obtaining Financing 9-17
  • 18.
    • Conventional.
      • Fixed rate, fixed payment, amortized.
      • 5%, 10% or 20% down.
      • 15, 20 or 30 years of fixed payments.
    • Government-guaranteed financing programs.
      • Veterans Administration.
      • Federal Housing Authority.
      • Lower down payment than conventional.
    • Adjustable rate mortgages.
      • During the life of the loan the interest rate varies with the prime rate, but has a rate cap.
    Type of Mortgages 9-18
  • 19. Type of Mortgages
    • Graduated payment.
      • Payments start lower and go up.
      • For persons whose income will increase.
    • Balloon.
      • Fixed monthly payments plus one large payment, usually after 3, 5 or 7 years.
    • Growing-equity.
      • Increases in payments to allow the loan to be paid off more quickly.
    (continued) 9-19
  • 20. Type of Mortgages
    • Shared appreciation.
      • Borrower gets a lower interest rate and agrees to share appreciated value of the home with the lender.
    • A second mortgage.
      • Home is collateral and interest may be tax deductible. Home equity loans are an example.
    • Reverse mortgages.
      • Provides elderly with tax-free income based on the home equity.
    • Refinancing if interest rate drops at 2-3%.
    (continued) 9-20
  • 21.
    • Make arrangements for a walk through and a closing date.
    • Closing involves a meeting between the buyer, seller and lender, and document signing.
    • Closing costs include...
      • Title insurance and search fee.
      • Attorney’s and appraisers fees.
      • Property survey; Pest inspection.
      • Recording fees; Transfer taxes.
      • Credit report; Lender’s origination fee.
      • Escrow account for tax and insurance reserve.
      • Pre-paid interest; Real estate commission.
    Home Buying Process Step 5: Close the Purchase Transaction 9-21
  • 22. Overview of the Main Elements of Buying a Home
    • Location.
    • Down payment.
    • Mortgage application.
    • Points.
    • Closing costs.
    • PITI (principal, interest, taxes, insurance).
    • Maintenance costs.
  • 23. Selling Your Home
    • Preparing your home.
      • Repair, repaint, clean, reduce clutter.
      • When showing home turn on lights and open drapes. Bake bread or make coffee for awelcoming smell.
    • Determining the selling price.
      • Appraiser estimates the current value.
      • Real estate agent markets your home.
    • If “for sale by owner,” use a lawyer or title co.
    • Listing with a real estate agent for services.