Unit10:AcquiringaHome

PersonalFinancialLiteracy

Objectives

•  Comparetheadvantagesanddisadvantagesofrentingandowningahome.

•  Definetermsrelatedtofinancingahouse.•  Distinguishamongtypesofmortgages•  Arrangeinorderthestepsinbuyingahome.•  Stateguidelinesforestimatingabudgetforhousing.

AdvantagesofRenting

•  Greaterflexibilityinmoving •  Notresponsibleforhomerepairsorimprovements

•  Nodownpayment •  Nohugemortgage •  Nopropertytaxes

AdvantagesofRenting-Continued

•  Noworryaboutpropertyvalues •  Limitedresponsibilities •  Predictablecosts

AdvantagesofOwning

•  Costmaybelessoverperiodoftime•  Hasmorecontrolofproperty•  Maybuildupequity•  Taxadvantages:interestandpropertytaxesaredeductible

•  Privacy

DisadvantagesofOwning

•  Hugeresponsibility•  Downpayment•  Mustbeapprovedforfinancing•  Mustpayforhomemaintenanceandrepairs•  Coststendtobehigher•  Hardertomove•  Higherinsurancepremiums•  Propertytax

DisadvantagesofRenting

•  Securitydeposit•  Notaxdeductions•  Rentersinsuranceneededtoprotectbelongings•  Nosenseofownership•  Unabletomakepermanentchangestoresidence•  Oftenaren'tallowedtohavepets •  Lackofprivacy•  Noequity

Mortgage

•  Financialandlegalagreementbetweenborrowerandlender

•  Lendergivesloaninexchangeforlienonproperty

•  Ifborrowercan’tmakepayments,lendercantotakehouse

ChoosingtheRightMortgage

•  Howlongdoyouexpecttohavemortgage?•Whatkindofmonthlypaymentcanyouafford?

•Willingtotakeariskwithfluctuatinginterestrate?

•MemberoftheArmedForces?

TypesofMortgages

•  Fixedratemortgages– Notinsuredorguaranteed– LendermayrequirePrivateMortgageInsurance(PMI)untilaborrowerhas20%equity– Fixedinterestrateforlifeofloan

ARMs

•  Adjustableratemortgages– Rateincreasesordecreasesaccordingtoeconomicindicators– Maystartwithlowerinterestratethanconventionalloan– Interestratecanrise

BalloonMortgages

•  30-yearamortization•  Requiresbalanceofmortgageatendofmuchshorterterm

SpecialLoans

•  Insuredorguaranteedbyfederalgovernment•  Lowerinterestrates•  Lowdownpayment– VA(VeteransAdministration)forveteransandactivedutymilitarypersonnel

– FHA(FederalHousingAdministration)basedonincome

ReverseMortgages

•  Usuallyretireeswithalotofequity•  Lender“purchases”housebymakingpaymentstoseller•  Attimeofdeath,lenderownshome•  Verycostly,highfees

TypesofHousing

•  Single•  Condominium•  Townhouse•  Duplex

WhatareYouLookingFor?

•  Location•  Size•  Type•  Amenities•  Needvs.optional•  Budget•  Buyer’smarketvs.seller’smarket

Pre-Approval

•  Tellsyouexactlywhatlenderwillloan•  Onlyanestimate•  Morereliableindicatorofwhatyoucanaffordthanprequalifying

•  Shoparound

PurchaseAgreement

•  Describesproperty,includinglocationandfurnishingsorequipment

•  Conditionsandtermsofsale•  Bothbuyerandsellersign•  Buyerdepositsearnestmoney

AppraisalandTitleSearch

•  Appraisalassessesvalueofproperty•  Includessurveyofpropertylines•  Titlesearch– Titlegiveshistoryofproperty;warnsofpotentialproblems

CostsRelatedtoClosing•Downpayment•Originationfeeforprocessingloanapplication•Titlesearch•Surveyfees•Titleinsurance•Appraisals•Creditreports•Filingorrecordingfee•Inspections(paidatinspection,notclosing)

HousingExpenseRatio

•  Borrowerscanaffordupto28%onhousingpayments(includingpropertytaxesandhomeownersinsurance)

•  Basedongrossincome

DebtRatioFormula

•  Debtpayments,includinghousingpayments,shouldnotexceed36%.

UnitReview1.  Distinguishbetweenadvantagesand

disadvantagesofrentingahome.2.  Discussthecostsandbenefitsofowninga

home.3.  Explainwhatamortgageis.4.  Howisamortgagepaymentcalculated?5.  Whatarethetypesofquestionsyoushould

askyourselfbeforeshoppingforamortgage?

UnitReview-Continued6.  Whatmortgagetermwouldallowyoutobuildequity

inahomefaster?7.  Compareandcontrastfixedratemortgageswith

adjustableratemortgages.8.  Ifahomebuyerwithafixedratemortgageof

$100,000wantedtoavoidpayingPMI,howmuchwouldheorsheneedforadownpayment?

9.  Discussspecialmortgageloansandtheagenciesaffiliatedwiththem.

10. Discusstypesofhousingahomebuyermightconsider.

UnitReview-Continued11. Distinguishbetweenprequalifyingand

preapprovalforhomefinancing.12. Whataretheadvantagesofusingarealtorto

buyahome?13. Discusswhatoccursduringtheapprovalprocess

ofbuyingahome.14. Listatleastfiveofthefeesassociatedwitha

closing.

15. Distinguishbetweenthehousingexpenseratioandthedebtratioformulaestimatingahousingbudget.