This document discusses factors involved in the housing decision and home buying process. It covers evaluating different housing alternatives and the costs and benefits of renting vs buying. The home buying process is outlined in multiple steps, including determining affordability, finding a suitable property, negotiating the purchase, and obtaining financing. Various financing options for home purchases like mortgages, loans, and refinancing are also examined. The goal is to help readers make informed choices regarding their housing needs.

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AN-NAJAH
NATIONAL UNIVERSITY
Dr. Muath Asmar
Faculty of Economics and
Social Sciences
Department of Finance

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Chapter 09
The Housing Decision:
Factors and Finances

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Chapter 9
Learning Objectives
LO9-1 Evaluate available housing alternatives.
LO9-2 Analyze the costs and benefits associated
with renting.
LO9-3 Explain the home-buying process.
LO9-4 Calculate the costs associated with
purchasing a home.
LO9-5 Develop a strategy for selling a home.
9-3

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Housing Alternatives
LO9-1:
Evaluate available housing alternatives.
– YOUR LIFESTYLE AND YOUR CHOICE OF HOUSING
• How you spend your time and money affects your
housing choice
• Personal preferences for housing are modified by
financial factors
– A budget and other financial records can help
you determine an appropriate amount for your
housing expenses
9-4

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Housing for Different Life Situations
9-5

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Opportunity Costs of Housing Choices
– Interest earnings lost on money used for a down
payment on a home or the interest on a security
deposit for an apartment
– Time and cost of commuting to work when you live in
an area that offers less expensive 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
9-6

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Renting vs.
Buying
Housing
Exhibit 9-2
9-7

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Housing Information Sources
– This textbook
– Online sources and apps
– Friends
– Real Estate agents
– Government agencies
9-8

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Renting Your Residence
LO9-2:
Analyze the costs and benefits associated with renting.
– SELECTING A RENTAL UNIT
• An apartment is the most common rental
– Consider location, building exterior, building interior,
financial aspects, layout and facilities
• If needing more room, consider renting a house
– Increased space will cost more
– Responsible for some maintenance
• Check newspaper and online ads, real estate offices, and
people you know
9-9

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Housing Rental Activities
9-10

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Advantages of Renting
– Mobility: Moving is easier
– Fewer Responsibilities
• Renters usually do not have to be concerned with
maintenance and repairs
• Renters have fewer financial concerns and no
expenses for property taxes, property insurance, and
upkeep
– Lower initial costs
• Renters pay a security deposit which is much less
than the down payment and closing costs required
when buying
9-11

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Disadvantages and Costs of Renting
– Few Financial Benefits
• No tax deduction for mortgage interest and property
taxes that buyers get
– Restricted Lifestyle
• Limits regarding remodeling, pets, sound
– Legal Details
• Lease is legal document that defines the conditions
of the rental
– Costs include a security deposit, utilities, and renter’s
insurance
9-12

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Details of a Lease (1 of 2)
– 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
9-13

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Details of a Lease (2 of 2)
• Location where rent is paid
• Date and amount for late rent payments
• List of included utilities and appliances
• Restrictions on certain activities (pets,
remodeling)
• Tenant’s right to sublet the rental unit
• Charges for damages or for moving out later (or
earlier) than lease expiration date
• Conditions where landlord may enter rental unit
9-14

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Explain the Home-Buying Process
LO9-3:
Explain the home-buying process.
STEP 1: DETERMINE HOME OWNERSHIP NEEDS
– Benefits of Home Ownership
• Pride of ownership
– Stability of location
• 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 (decorating)
9-15

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The Home-Buying Process
9-16

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Drawbacks of Home Ownership
– Financial uncertainty
• Obtaining money for the down payment
• Qualifying for mortgage financing
• Changing property values
– Limited mobility
• May be difficult to sell your home quickly
– Higher living costs
• Home improvements, maintenance, repairs
• Rising real estate taxes
9-17

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Assess Types of Housing Available
– Single-family dwelling
– Multiunit dwelling
• Duplex, townhouse
– Condominium
• You own your individual unit in a building with
several units
• It is not a type of building structure but rather a legal
form of home ownership
– Cooperative housing
• Non-profit organization — members own shares and
rent a unit in a building with multiple units
9-18

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Housing Construction
– Manufactured homes
• Fully or partially assembled in a factory and then moved
to the housing site
• Prefabricated home has components built in the factory
and assembled at the housing site
• Mass production under factory conditions keeps costs
low
– Mobile homes
• A type of manufactured home; often has less than 1,000
square feet
• Offers same features as a conventional house
• Safety is debated and they tend to depreciate
9-19

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Building a Home
(1 of 2)
– Building a home
• Does the contractor have needed experience?
• Does contractor have a good working relationship
with architect, suppliers, electricians, plumbers,
carpenters, and others?
• What assurance do you have about quality of
materials?
• What are the payment arrangements during
construction?
9-20

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Building a Home
(2 of 2)
• What delays in the construction process will be
considered legitimate?
• Is the contractor licensed and insured?
• Is the contractor willing to provide names,
addresses, and phone numbers of satisfied
customers?
• Are there any complaints about this contractor?
• Written contract should have a time schedule,
cost estimates, description of work, and a
payment schedule
9-21

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Determine How Much You Can Afford
– Price and Down Payment
• Affected by down payment, income, and current living
expenses
• Consider mortgage rates and your ability to make monthly
mortgage, tax, and insurance payments
• Prequalification is provided without charge
– Size and Quality
• Purchase what you can afford
• Your second or third home can include more desired
features
• Handyman’s special needs work but lower price
9-22

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Step 2:
Find and Evaluate a Property to Purchase
– Selecting a Location
• Be aware of zoning laws
• Assess the school system if you have children
– 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
– Lenders may require an appraisal
9-23

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Conducting a Home Inspection
9-24

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Step 3: Price the Property
– Determining the Home Price
• Consider recent selling prices in the area, current
demand for housing, the length of time the home has
been on the market, the owner’s need to sell, financing
options, and features of the home
• You will make an offer in the form of a purchase
agreement
– Negotiating the Purchase Price
• Counteroffer
• Earnest money
• Contingency clauses, such as...
– Buyer must be able to obtain financing
– Sale contingent on the sale of the buyer’s current
home
9-25

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The Finances of Home Buying
LO9-4:
Calculate the costs associated with purchasing a home.
STEP 4: OBTAIN FINANCING
– Determine Down Payment
• Sources include personal savings, pension plan
funds, sale of investments/assets, assistance from
relatives
• Private Mortgage Insurance (PMI) is required if down
payment is less than 20%
9-26

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Qualifying for a Mortgage
– Qualifying For A Mortgage
• A mortgage is a long-term loan on a specific piece of
property such as a home or other real estate
• Consider various terms
• Sources include banks, savings and loan associations,
credit unions, mortgage companies
• Home is collateral for mortgage
• Factors considered include your income, debts, credit
history, down payment amount, length of the loan, job
stability, assets, and current mortgage rates
• Lenders use 33 and 38% of gross income as guidelines for
affordability of housing costs
9-27

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Affordable Monthly Mortgage Payment
– For Example,
Step 1: Determine your monthly gross income
$48,000 annual income / 12 = $4,000
Step 2: Multiply monthly gross income × 38%
(used by lenders when you have other debts, such as a car loan)
$4,000 × .38 = $1,520
Step 3: Subtract other debt payments:
car loan -380
estimated property taxes and
homeowners insurance -300
AFFORDABLE MONTHLY MORTGAGE AMT $840
9-28

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Evaluating Points
and Application Process
– Evaluating Points
• Points are prepaid interest charged by lender
• Each discount point is equal to 1% of the loan
amount and represents the premium you pay to
obtain a lower mortgage rate
– The Application Process
• Prequalification
• Fee payment and obtain commitment
• Finding a property
– Appraisal
9-29

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Fixed-Rate, Fixed-Payment Mortgages
– Conventional Mortgage
• Fixed rate, fixed payment home loan
• Equal payments over 10, 15, 20, 25, or 30 years
• Loan is amortized which means balance owed is
reduced with each payment
– Government financing programs
• Loans insured by Veterans Administration
• Loans insured by Federal Housing Authority
• Lower down payment and lower interest
9-30

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Adjustable-Rate,
Variable-Payment Mortgages
– Adjustable rate mortgages (ARM)
• During the life of the loan, the interest rate increases
or decreases due to market interest rates, but has a
rate cap
• A payment cap may limit the payment, resulting in
negative amortization and extension of loan period
9-31

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Interest-Only Mortgage
– Allows a homebuyer to have lower payments for
the first few years of a loan
– None of the mortgage payment goes toward the
loan amount
– Higher payments will occur later in the loan
– Can be especially dangerous if the value of the
property declines
9-32

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Comparison of Terms
– With a 15-year instead of a 30-year mortgage, a
homebuyer borrowing $200,000 can save over
$150,000 in interest over the life of the loan
– This faster equity growth and savings on interest
will also occur if a homebuyer pays an additional
amount toward principal each month
9-33

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Other Financing Methods
(1 of 2)
– Buy-Downs
• Interest rate subsidy from a home builder or a real
estate developer that reduces the mortgage
payments for the first few years
• Home price is often increased to cover the buy-down
– Second mortgage
• Allows homeowner to borrow on the paid-up value of
the property
• Home is collateral and interest may be tax deductible
• Known as a home equity loan
9-34

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Other Financing Methods
(2 of 2)
– Reverse mortgages
• Provides elderly (62 years old or older) homeowners
with tax-free income based on their home equity in
the form of a loan that is paid back (with interest)
when the home is sold or the homeowner dies
• Known as Home Equity Conversion Mortgages
– Refinancing
• Obtain a new mortgage if interest rate drops at
least 1%
9-35

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Should You Pay off Your
Mortgage Early?
– Considerations
• Make sure mortgage does not have a prepayment
penalty
• You may lose tax deductions
• You may lose earnings on the money you use to
retire this debt
• Before paying additional amounts on your mortgage,
be sure to pay off your credit card balances and
other high-interest debt
• Be aware of organizations that promise to set up
additional payments on your mortgage, which is
something you can do
9-36

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Step 5:
Close the Purchase Transaction
– Walk-through
– Closing involves meeting of buyer, seller, lender,
and signing of documents
– Closing costs (settlement costs) include...
• Title insurance and title search fee
• Attorney’s and appraisal fee
• Property survey; Termite inspection
• Recording fees; transfer taxes
• Lender’s origination fee
• Escrow account for tax and insurance reserve
• Pre-paid interest; Real estate commission
9-37

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The Main
Elements of
Buying a
Home
9-38

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Selling Your Home
(1 of 2)
LO9-5:
Develop a strategy for selling a home.
– PREPARING YOUR HOME FOR SELLING
• Repair, repaint, and clean
• Clear the garage
• Keep the lawn cut
• Keep kitchen and bathroom clean
• When showing home, turn on lights and open
drapes
• Consider energy-saving light bulbs and water-saving
faucets
9-39

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Selling Your Home
(2 of 2)
– DETERMINING THE SELLING PRICE
• Appraisal, an estimate of the current value of the
property
• Desirable improvements include energy-efficient
features, remodeled kitchen or bathroom, etc.
– SALE BY OWNER
• Use a lawyer or title company to assist with contract
and closing
– LISTING WITH A REAL ESTATE AGENT
9-40