The cost of owning

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The cost of owning

  1. 1. THE COST OF OWNING UNIT 5, LESSON 1 ORCUTT ACADEMY HIGH SCHOOL FINANCE & ACCOUNTING
  2. 2. ASSESSING YOUR TIMELINE Wait to buy a home until you plan on being there for at least 3 years (preferably five or more)
  3. 3. PROPERTY MUST APPRECIATE 15% TO COVER EXPENSES
  4. 4. EXPENSES • Mortgage costs • Inspection expenses • Moving costs • Commissions • Title insurance
  5. 5. BEFORE BUYING, ASK YOURSELF… Are you saving enough money monthly to reach your retirement goals?
  6. 6. BEFORE BUYING, ASK YOURSELF… How much do you spend (and want to continue spending) on fun things such as travel and entertainment?
  7. 7. BEFORE BUYING, ASK YOURSELF… How willing are you to budget your expenses in order to meet your monthly mortgage payments and other housing expenses?
  8. 8. BEFORE BUYING, ASK YOURSELF… How much of your children’s expected college educational expenses do you want to be able to pay for?
  9. 9. CALCULATING HOW MUCH LENDERS WILL ALLOW YOU TO BORROW Existing debt will lower the amount you are eligible to borrow. Monthly Debt Payments + Housing Expenses < 38% of monthly gross income
  10. 10. CALCULATING HOW MUCH LENDERS WILL ALLOW YOU TO BORROW General 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 YOU CAN BORROW DEPENDS ON INTEREST RATES Set by the secondary market
  12. 12. WHAT’S THE APPROXIMATE MAXIMUM YOU CAN BORROW? When mortgage rates are Multiply your gross income by this figure 4% 4.6 5% 4.2 6% 3.8 7% 3.5 8% 3.2 9% 2.9 10% 2.7 11% 2.5
  13. 13. MULTIPLIER The number you multiply by your gross income to determine how much money you can borrow for a home mortgage; determined by interest rates. OR The number you multiply by your mortgage expressed in thousands of dollars (divided by 1000) to determine your monthly mortgage payment
  14. 14. As rates fall, the monthly mortgage payment drops Lower interest rates make buying real estate more affordable
  15. 15. CALCULATE What 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. TOTAL HOUSING COSTS MORTGAGE, TAXES, INSURANCE AND MAINTENANCE
  17. 17. CALCULATE MORTGAGE USING MULTIPLIER Interest Rate 15-year mortgage Multipliers 30-year mortgage 4% 7.4 4.77 4.5% 7.65 5.07 5% 7.91 5.37 5.5% 8.17 5.68 6% 8.44 6.00 6.5% 8.71 6.32 7% 8.99 6.65 8% 9.56 7.34 9% 10.14 8.05 10% 10.75 8.78 Multiply the multiplier by your mortgage expressed in thousands of dollars (divided by 1000)
  18. 18. EXAMPLE Skye is taking out a $100,000 30-year mortgage at 6.5%. What will be her monthly mortgage payment? The multiplier is 6.32, so Monthly mortgage payment = 6.32 x 100,000/1,000 = 6.32 x 100 = $632
  19. 19. CALCULATE MORTGAGE USING FORMULA M = P [ i(1 + i)n ] / [ (1 + i)n - 1] M = The monthly payment P = The principal, or the amount of money being borrowed i = The interest for each compounding period, or the interest per month for a standard mortgage n = The number of compounding periods, or the number of months for a standard mortgage
  20. 20. EXAMPLE Go to Mortgage Math Workbook
  21. 21. TOTAL HOUSING COSTS 1. Mortgage Payment 2. Taxes • The Cost and the Benefit 3. Insurance 4. Maintenance
  22. 22. 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% • Based on the value of your home
  23. 23. CALCULATING TAX COSTS The value of a home in Greenwood County is $285,000. Property taxes in Greenwood are 1.25%. What is the monthly property tax bill for the home? Annual property tax bill: (285,000)(.0125) = $3562.50 Monthly property tax bill: (3562.50)/12 = $296.88
  24. 24. TAXES: THE BENEFIT • Interest paid on mortgages is tax deductible • You can deduct • Interest paid to buy, build, or improve your home • Interest paid on a home equity loan • Property taxes • You can deduct a second home • Learn more about Tax Deductions on Mortgage Interest
  25. 25. CALCULATING THE TAX BENEFIT OF OWNING TAX BENEFIT = (Mortgage Payment + Property Taxes) (Tax Bracket) EXAMPLE Tyler’s gross annual income is $83,000. His mortgage payment is $1,200/month and he pays $260/month in property taxes. What is his tax benefit from owning. (1200+260)(.25) = $365 Tax Brackets 2012 (Estimated) Single (Est) Married Filing Jointly (Est) Head of Household 10% Bracket $0 – $8,700 $0 – $17,400 $0 – $12,400 15% Bracket $8,700 – $35,350 $17,400 – $70,700 $12,400 – $47,350 25% Bracket $35,350 – $85,650 $70,700 – $142,700 $47,350 – $122,300 28% Bracket $85,650 – $178,650 $142,700 – $217,450 $122,300 – $198,050 33% Bracket $178,650 – $388,350 $217,450 – $388,350 $198,050 – $388,350 35% Bracket $388,350+ $388,350+ $388,350+
  26. 26. MAINTENANCE About %1 of the home’s value on average Example: A home with a value of $475,000 Annual maintenance = (475,000)(.01) = $4,750 Monthly maintenance = 4,750/12 = $395.83
  27. 27. HOMEOWNER’S INSURANCE • On average, between $45 and $75/month • Varies depending on • home’s value and location • type and amount of insurance
  28. 28. TOTAL HOUSING COST PUTTING THE PIECES TOGETHER! Total Housing Cost = (Mortgage Payment + Property Taxes + Insurance + Maintenance) – (Tax Benefit)
  29. 29. EXAMPLE 1 Taylor is an actor living in Los Angeles, California where the property tax is 1.25%. Her gross annual income is $71,500 and the value of her property is $367,000. Her monthly mortgage payment is $1,200 and she pays $40/month for insurance. Estimate her total housing costs. Total Housing Cost = (Mortgage Payment + Property Taxes + Insurance + Maintenance) – (Tax Benefit) Mortgage Payment = $1,200 Property Taxes = (367,000)(.0125)/12 = $382.29 Insurance = $40 Maintenance = (367,000)(.01)/12 = $305.83 Tax Benefit = (Mortgage Payment + Property Taxes)(Tax Bracket) (1200 + 382.29)(.25) = 395. 57 Total Cost = 1200 + 382.29 + 40 + 305.83 - 395.57 = $1532.55

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