HUSC 3366 Chapter 7 Selecting and Financing Housing

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Fundamentals of Family Financial Planning Course PowerPoint Lectures

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  • 1. Chapter 7 Selecting and Financing Housing
  • 2. Objectives
    • In this chapter you will learn to:
    • Assess costs and benefits of renting
    • Implement the home-buying process
    • Determine costs associated with purchasing a home
    • Develop a strategy for selling a home
  • 3. Lesson: 1 Evaluating Renting and Buying Alternatives
  • 4. Evaluating Housing Alternatives
    • Your lifestyle and your choice of housing.
      • How you spend your time and money, affects your housing choice.
      • Personal preferences are modified by financial factors.
        • Traditional financial guidelines suggest you spend no more than 25-33% of take-home pay on housing, or no more than 2 1/2 times your annual income.
    9-2
  • 5.
    • 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)
  • 6. 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.
    9-4
  • 7. 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.
      • Verify the lease dates, costs, and facilities.
      • Talk to a lawyer about unclear lease clauses.
      • Note in writing, signed by the landlord, the condition of the rental unit.
      • Any person who signs a lease is responsible for the full rent.
    9-5
  • 8. 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 where landlord may enter rental unit.
    9-6
  • 9. Housing Rental Activities
    • 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 security deposit be documented.
    9-7 (continued)
  • 10. Lesson: 2 Home-Buying Activities
  • 11. Steps in Home Buying Process pg 215
    • Determine Home Ownership Needs
    • Find and Evaluate a Home
    • Price the Property
    • Obtain Financing
    • Closing the transaction
  • 12. Home Buying Process Step 1: Determine Homeownership Needs
    • Benefits of Home Ownership
      • Pride of ownership.
        • American dream
      • Financial benefits.
        • Deduct property taxes and mortgage interest.
        • Potential increase in value of your home.
        • Building equity in your home.
      • Lifestyle flexibility - express your individuality.
    9-8
  • 13. Home Buying Process Step 1: Determine Homeownership Needs
    • 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.
        • Home improvements.
        • Rising real estate taxes.
    9-9 (continued)
  • 14.
    • Assess Types of Housing Available
      • Single-family dwelling.
      • Multi-unit dwelling.
        • Duplex, townhouse
      • 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.
    Home Buying Process Step 1: Determine Homeownership Needs 9-10 (continued)
  • 15. 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.
    9-11
  • 16.
    • Building a home
      • 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
  • 17. 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.
    9-13 (continued)
  • 18. 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.
      • Pre-qualify for a loan
      • Purchase what you can afford - you can always move up.
    9-14
  • 19. Question
    • Duane Miller wants to know what price home he can afford. His annual gross income $60,000, has no other debt expenses and expects property taxes and insurance to cost $400 per month.
    • He knows he can get a 6%, 15 year mortgage so that his mortgage payment factor is 8.43 He expects to make a 10% down payment.
    • What is Duane’s affordable home purchase price (Round your answer to the nearest $100).
  • 20. Answer
    • $164,800
  • 21. Home Buying Process Step 2: Finding and Evaluating a Property to Purchase
    • 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.
    9-15
  • 22. 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. Counteroffers are common.
    • Contingency clauses, such as...
      • Buyer must be able to obtain financing.
      • Sale contingent on the sale of the buyer’s current home.
    9-16
  • 23. Lesson: 3 The Finances of Home Buying
  • 24.
    • Determine the amount of the down payment.
      • Mortgage insurance (PMI) if less than 20% down.
    • Investigate the rates, types, & terms of mortgages.
    • Apply for a mortgage and evaluate types of mortgages. Guidelines for affordability of housing costs are 33% to 38% 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
  • 25.
    • 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
  • 26. Type of Mortgages
    • Graduated payment.
      • Payments start lower and go up.
      • Income should increase over time.
    • 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
  • 27. 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.
    • Refinance if interest rate drops at 2-3%.
    (continued) 9-20
  • 28.
    • Documents signed; meeting of buyer, seller, and lender
    • 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
  • 29. Overview of the Main Elements of Buying a Home
    • Location.
    • Down payment.
    • Mortgage application.
    • Points.
    • Closing costs.
    • PITI (principal, interest, taxes, insurance).
    • Maintenance costs.
    9-22
  • 30. Lesson: 4 A Home-Selling Strategy
  • 31. Selling Your Home
    • Preparing your home.
      • Repair, repaint, and clean.
      • When showing home turn on lights and open drapes. Bake bread or make coffee for a welcoming 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.
    9-23
  • 32. Comparison of 15 and 30 Year Mortgages
    • $100,000 6% loan for 30 years: Payment of $600 per month; 360 months X $600 = $216,000
    • $100,000 6% loan for 15 years: Payment of $843 per month: 180 months X $843 = $151,740
    • Savings of $64,260 with shorter loan
    9-24
  • 33. Comparison of Different Rates
    • $100,000 loan for 30 years at 6%; payment of $600 per month X 360 months = $216,000
    • $100,000 loan for 30 years at 7%; payment of $665 per month X 360 months = $239,400
    • Savings of $23,400 by lowering the rate by 1%.
    9-25
  • 34. Online Activity
    • Go to www.bankrate.com to determine the best mortgage rates in your area.
    • Would you prefer a fixed-rate or adjustable rate mortgage? Why?
    9-26