Home Buying - Quick review


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Home buying tips for beginners

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Home Buying - Quick review

  1. 1. Are you ready to BUY? <ul><li>Decision to buy </li></ul><ul><li>Is it time? </li></ul><ul><li>slump in home market </li></ul><ul><li>Job security </li></ul><ul><li>Future plans, MBA, moving to India </li></ul><ul><li>Is buying a home worth it? </li></ul><ul><li>Owning will be less expensive than renting </li></ul><ul><li>Rent that you pay will increase in future due to inflation </li></ul><ul><li>Cost of purchasing a home increases every year but once purchased, the housing cost is not exposed to inflation </li></ul>
  2. 2. Are you ready to BUY? <ul><li>Decision to buy </li></ul><ul><li>Personal Preference – Avoiding landlords, etc </li></ul><ul><li>“ Nailing” not allowed </li></ul><ul><li>Slow in fixing problems </li></ul><ul><li>Choice of paint – home décor </li></ul><ul><li>NOTE: In the process of decorating your house, do not make it unpleasant for majority of people. You will have to re-sell at some point of time and you would want majority of people to like your house </li></ul><ul><li>Exercise </li></ul><ul><li>Home buyers – </li></ul><ul><ul><li>List four points that you do not like about renting a house </li></ul></ul><ul><ul><li>Can those be improved by buying a home? </li></ul></ul><ul><li>Home owners – </li></ul><ul><ul><li>List four points that you do not like about home owning? </li></ul></ul><ul><ul><li>Is it worth it? </li></ul></ul>
  3. 3. Exercise How rent increases with inflation? See excel 4.00 in 60 years $7,363.74 10.52 $700.00 4.00 in 50 years $4,974.68 7.11 $700.00 4.00 in 40 years $3,360.71 4.80 $700.00 4.00 in 30 years $2,270.38 3.24 $700.00 4.00 in 20 years $1,533.79 2.19 $700.00 4.00 in 10 years $1,036.17 1.48 $700.00 Annual Inflation rate Projected Rent Annual Inflation Rate Your Current Monthly Rent
  4. 4. Home Buying - Tips <ul><li>Renting because it seems cheaper now </li></ul><ul><li>In the longer run, owning a house will turn out to be cheaper </li></ul><ul><li>Job Security </li></ul><ul><li>Being insecure about job is normal </li></ul><ul><li>Give example </li></ul><ul><li>Buying when you expect to move soon </li></ul><ul><li>Going back to India </li></ul><ul><li>Ideally stay put for 3-5 years if you are planning to buy a house </li></ul><ul><li>Pushed by Salesperson </li></ul><ul><li>Buy a home that you can afford and not what the salesperson thinks you can afford </li></ul><ul><li>You are the one who can determine what you can afford </li></ul><ul><li>Take your time in buying the home. There is no rush </li></ul>
  5. 5. Home Buying - Tips <ul><li>Do not ignore the logistics – things to consider </li></ul><ul><li>Location, location, location </li></ul><ul><li>Personal preference (time to travel to office, etc) </li></ul><ul><li>Neighborhood </li></ul><ul><li>Over-buying/Under-buying </li></ul><ul><li>House Investment – Adult thing to do? </li></ul><ul><li>Statistics says – Average growth of house from 1965 = 6 % </li></ul><ul><li>Stocks = 10 – 11 % </li></ul><ul><li>Tax breaks – Home owner </li></ul><ul><li>Get property tax and interest on your mortgage deducted </li></ul><ul><li>When you sell the house, you get to exclude up to $ 500,000 in capital gains if you are married and up to $ 250,000 if you are single </li></ul>
  6. 6. Home Buying – Best Advantage Coming back to home after a long day of work, PRICELESS !!!???? - You get to live and enjoy, while it grows.
  7. 7. Home Buying – Calculations $ 244098 extra amount over 30 years $ 104630.40 extra amount over 15 years $ 469098 total payment $ 329630.4 total payment $ 1303.05 per month $ 1831.28 per month 5.68% 5.44% 30 year Mortgage 15 year Mortgage Loan Amount = $ 225 000
  8. 8. Calculations – That’s Not All <ul><li>Property Taxes </li></ul><ul><ul><li>If you make a small down payment (less than 20 %), lenders insist upon paying the property tax and insurance with your monthly payments </li></ul></ul><ul><ul><li>Usually about 1.5 % the purchase price of the house per year </li></ul></ul><ul><ul><li>Make sure community contributions are not included in your tax </li></ul></ul><ul><ul><li>Previous owner – check with Tax Collector in your city </li></ul></ul><ul><li>Insurance </li></ul><ul><ul><li>Need to have before you purchase the home </li></ul></ul><ul><ul><li>If down payment less than 20 %, required to take PMI (Private Mortgage Insurance) </li></ul></ul><ul><ul><li>Make sure you bargain and get the best insurance possible (important step) </li></ul></ul><ul><li>Maintenance and other costs </li></ul><ul><ul><li>Essential Maintenance Cost = 1 % of purchase price per year </li></ul></ul><ul><li>Closing Cost </li></ul><ul><ul><li>Typically about 2-5% of Loan Amount </li></ul></ul>
  9. 9. Calculations – That’s Not All At max 5 % $11,250 One Time Closing Cost Based on Tax Bracket  -$ 4847.36 p.a Tax saving (31 % * yearly mortgage)   $1,771.80 Total Monthly payments   $187.50 Maintenance Cost   $281.25 Insurance     ??? Property Tax (if applicable)   $1,303.05 Mortgage Payment   Loan Amount $ 225000
  10. 10. Calculations – If you are interested <ul><li>Monthly Payment = P * (r / 1 – (1/1+r) n ) </li></ul>
  11. 11. Calculations – If you are interested 0 $0 30 Year 30 30.1878089 $67,922.57 25 Year 25 52.9274133 $119,086.68 20 Year 20 70.0565022 $157,627.13 15 Year 15 82.9593511 $186,658.54 10 Year 10 92.6786978 $208,527.07 5 Year 5 100 $225,000 0 Year 0 Remaining Balance in Percent Balance Amount       $225,000   Total Payment
  12. 12. Calculations – If you are interested
  13. 13. Calculations – If you are interested 15,165.96 470.65 30 9,107.15 6,529.46 25 8,605.43 7,031.18 20 6,482.22 9,154.38 15 4,882.87 10,753.74 10 3,678.13 11,958.48 5 0 0 0 Principal Amount Interest Amount Years
  14. 14. Calculations – If you are interested
  15. 15. Selecting a Mortgage <ul><li>Fixed Rate Mortgage </li></ul><ul><li>Adjustable Rate Mortgage (ARM) </li></ul><ul><li>Hybrid </li></ul><ul><ul><li>5/1 ARM </li></ul></ul><ul><ul><li>7/1 ARM </li></ul></ul><ul><li>http:// www.quoteserv.com/mortgage/mortgage_calculator.php </li></ul>
  16. 16. Selecting a Mortgage <ul><li>How much can you afford to pay each month for the next N number of years? </li></ul><ul><li>How long are you going to be in the house? </li></ul><ul><li>Answer to Question 1 – 15-year Vs 30-year decision </li></ul><ul><li>Answer to Question 2 – Fixed VS Adjustable rate decision </li></ul>
  17. 17. Fixed Rate Mortgage <ul><li>Popular time period 30 year/15 year </li></ul><ul><li>Locks you for same the rate of interest for the number of years you choose </li></ul><ul><li>Advantage/Disadvantage </li></ul><ul><li>Pay premium, higher interest rate </li></ul><ul><li>If interest rates fall, you will be still fixed at the same rate </li></ul><ul><li>If you sell house before you pay-off your fixed rate mortgage, buyers probably won’t be able to assume responsibility </li></ul><ul><li>Fixed rate mortgages may have prepayment penalties (if you try to pay the loan earlier than the 30 years, you will have penalties associated with it). Make sure you chose 30 year mortgage without pre-payment penalties </li></ul>
  18. 18. Adjustable Rate Mortgage (ARM) <ul><li>Has an interest that varies. Typically adjusts every 6 to 12 months, but it may change as frequently as every month </li></ul><ul><li>Advantage/Disadvantage </li></ul><ul><li>Lower interest rate (may be???) </li></ul><ul><li>If interest rates fall, it is advantageous. But, if the interest rates increases, you will end up paying more than you intend to. </li></ul><ul><li>Very difficult to monitor or predict the interest rates </li></ul>
  19. 19. More popular - Hybrid <ul><li>Start as fixed rate for some pre-planned period of time (say 5, 7, 9 years) and then loan converts to an ARM. </li></ul><ul><li>Advantage/Disadvantage </li></ul><ul><li>Interest rate between ARM and FRM. Higher the FRM period, more the interest rate. </li></ul><ul><li>If you are planning to move, this might be the option. </li></ul><ul><li>Make sure at the end of the FRM period you evaluate your finances </li></ul>
  20. 20. Loan Approval <ul><li>Choose the mortgage option after evaluating your finances </li></ul><ul><li>Credit score report </li></ul><ul><li>Loan points?? </li></ul><ul><li>Lender fees </li></ul><ul><ul><li>Application Processing Fee </li></ul></ul><ul><ul><li>Appraisal </li></ul></ul><ul><li>Avoid ARM with negative amortization </li></ul><ul><ul><li>You pay some interest but not all of the interest that you owe </li></ul></ul><ul><ul><li>Like paying minimum balance in Credit card </li></ul></ul>
  21. 21. Last and least important for us – Balloon loans <ul><li>Fixed Rate for certain period of time and works similar to Hybrid </li></ul><ul><li>HOWEVER, at the end of the period, the whole balance amount is to be paid. </li></ul><ul><li>If you are not able to refinance at the end of the period, you are DEAD. </li></ul><ul><li>Refinancing is never a sure thing </li></ul>
  22. 22. Other Mortgage options - <ul><li>Interest-Only loan </li></ul><ul><ul><li>You pay the interest only </li></ul></ul><ul><ul><li>Good for people who get regular commission instead of flat salary </li></ul></ul><ul><li>Buy-down Mortgage </li></ul><ul><ul><li>Please research </li></ul></ul>
  23. 23. Mortgage Refinance <ul><li>Borrower uses the money from a refinanced loan to pay off an existing home loan </li></ul><ul><li>3 types </li></ul><ul><ul><li>Extend their home loan periods </li></ul></ul><ul><ul><li>Apply for a lower interest rate </li></ul></ul><ul><ul><li>Use some money of their equity </li></ul></ul><ul><li>Home Equity loans </li></ul><ul><ul><li>Allows a home owner to receive a cash loan based on the current value of their property minus the amount of the loan still left to be paid </li></ul></ul>
  24. 24. Escrow – What does it mean? <ul><li>Documents or something else of value, often money, held by a neutral party in order to be used at a later date to fulfill obligations (settle any arbitration) </li></ul><ul><li>Escrow officer </li></ul><ul><ul><li>Referee between seller and buyer </li></ul></ul><ul><ul><li>Responsibility </li></ul></ul><ul><ul><ul><li>Preparing and reviewing papers related to transfer of title </li></ul></ul></ul><ul><ul><ul><li>Getting them properly signed, delivered and made a matter of public record </li></ul></ul></ul><ul><ul><ul><li>Complying to your lender’s funding instruction </li></ul></ul></ul><ul><ul><ul><li>Ordering a title search </li></ul></ul></ul><ul><ul><ul><li>Accounting to buyer and seller for your respective money </li></ul></ul></ul><ul><ul><li>While closing in on a deal, be in close touch with the Escrow officer </li></ul></ul>