The cost of owning

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The cost of owning

  1. 1. THE COSTOF OWNINGUNIT 5, LESSON 1ORCUTT ACADEMY HIGH SCHOOLFINANCE & ACCOUNTING
  2. 2. ASSESSING YOURTIMELINEWait to buy a home until you plan on being therefor at least 3 years (preferably five or more)
  3. 3. PROPERTY MUSTAPPRECIATE 15%TO COVER EXPENSES
  4. 4. EXPENSES• Mortgage costs• Inspection expenses• Moving costs• Commissions• Title insurance
  5. 5. BEFORE BUYING, ASKYOURSELF…Are you saving enough money monthly to reach yourretirement goals?
  6. 6. BEFORE BUYING, ASKYOURSELF…How much do you spend (and want to continue spending) onfun things such as travel and entertainment?
  7. 7. BEFORE BUYING, ASKYOURSELF…How willing are you to budget your expenses in order to meetyour monthly mortgage payments and other housingexpenses?
  8. 8. BEFORE BUYING, ASKYOURSELF…How much of your children’s expected college educationalexpenses do you want to be able to pay for?
  9. 9. CALCULATING HOWMUCH LENDERS WILLALLOW YOU TO BORROWExisting debt will lower the amount you are eligible to borrow.Monthly Debt Payments + Housing Expenses < 38%of monthly gross income
  10. 10. CALCULATING HOWMUCH LENDERS WILLALLOW YOU TO BORROWGeneral Rule: You can borrow up to three times(or two and a half times) your annual income when buying a home.
  11. 11. BUT… HOW MUCH YOUCAN BORROW DEPENDSON INTEREST RATESSet by the secondary market
  12. 12. WHAT’S THE APPROXIMATEMAXIMUM YOU CAN BORROW?When mortgage rates are Multiply your gross income by this figure4% 4.65% 4.26% 3.87% 3.58% 3.29% 2.910% 2.711% 2.5
  13. 13. MULTIPLIERThe number you multiply by your gross income to determinehow much money you can borrow for a home mortgage;determined by interest rates.
  14. 14. As rates fall, the monthly mortgage payment dropsLower interest rates make buying real estate more affordable
  15. 15. CALCULATEWhat is the maximum amount you can borrow?1. Annual income $45,870 a) Interest rate 5% b) Interest rate 11%2. Annual income $68,900 a) Interest rate 4% b) Interest rate 8%3. Annual income $159,650 a) Interest rate 9% b) Interest rate 6%
  16. 16. MORTGAGE, TAXES, INSURANCE AND MAINTENANCETOTALHOUSINGCOSTS
  17. 17. CALCULATE MORTGAGEUSING MULTIPLIERMultiply the multiplier by your mortgage expressedin thousands of dollars (divided by 1000)Interest Rate 15-year mortgage 30-year mortgage Multipliers4% 7.4 4.774.5% 7.65 5.075% 7.91 5.375.5% 8.17 5.686% 8.44 6.006.5% 8.71 6.327% 8.99 6.658% 9.56 7.349% 10.14 8.0510% 10.75 8.78
  18. 18. EXAMPLESkye is taking out a $100,000 30-year mortgage at 6.5%. Whatwill be her monthly mortgage payment?The multiplier is 6.32, soMonthly mortgage payment = 6.32 x 100,000/1,000 = 6.32 x 100 = $632
  19. 19. CALCULATE MORTGAGEUSING FORMULAM = P [ i(1 + i)n ] / [ (1 + i)n - 1]M = The monthly paymentP = The principal, or the amount of money being borrowedi = The interest for each compounding period, or the interestper month for a standard mortgagen = The number of compounding periods, or the number ofmonths for a standard mortgage
  20. 20. EXAMPLEGo to Mortgage Math Workbook
  21. 21. TAXES: THE COST• Homeowners pay property tax, which helps support local governments.• Property taxes vary according to the rate set by the county. Ex: Santa Barbara County• Usually about 1-2%
  22. 22. TAXES: THE BENEFITInterest paid on mortgages is tax deductible
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