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