1. THE COST
OF OWNING
UNIT 5, LESSON 1
ORCUTT ACADEMY HIGH SCHOOL
FINANCE & ACCOUNTING

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. PROPERTY MUST
APPRECIATE 15%
TO COVER EXPENSES

4. EXPENSES
• Mortgage costs
• Inspection expenses
• Moving costs
• Commissions
• Title insurance

5. BEFORE BUYING, ASK
YOURSELF…
Are you saving enough money monthly to reach your
retirement goals?

6. BEFORE BUYING, ASK
YOURSELF…
How much do you spend (and want to continue spending) on
fun things such as travel and entertainment?

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. BEFORE BUYING, ASK
YOURSELF…
How much of your children’s expected college educational
expenses do you want to be able to pay for?

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. 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. BUT… HOW MUCH YOU
CAN BORROW DEPENDS
ON INTEREST RATES
Set by the secondary market

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. 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. As rates fall, the monthly mortgage payment drops
Lower interest rates make buying real estate more affordable

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. TOTAL
HOUSING
COSTS
MORTGAGE, TAXES, INSURANCE AND MAINTENANCE

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. 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. 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. EXAMPLE
Go to Mortgage Math Workbook

21. TOTAL HOUSING COSTS
1. Mortgage Payment
2. Taxes
• The Cost and the Benefit
3. Insurance
4. Maintenance

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. 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. 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. 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. 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. HOMEOWNER’S
INSURANCE
• On average, between $45 and $75/month
• Varies depending on
• home’s value and location
• type and amount of insurance

28. TOTAL
HOUSING COST
PUTTING THE PIECES TOGETHER!
Total Housing Cost =
(Mortgage Payment + Property Taxes + Insurance + Maintenance) – (Tax Benefit)

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