Buying and owning a home

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Before we begin…

This content is provided as educational material only and is not intended to solicit you for any product or service

These materials are not a recommendation by HSBC for any product, service or financial strategy.

The suggestions and recommendations contained within are general in nature, and may or may not apply to your particular circumstances

Investments, annuity and insurance products: Are not a deposit or other obligation of the bank or any of its affiliates; not FDIC insured or insured by any federal government agency of the United States; not guaranteed by the bank or any of its affiliates; and subject to investment risk, including possible loss of principal invested.

All decisions regarding the tax implications of your investments should be made in connection with your independent tax advisor

Should you need further assistance, HSBC strongly recommends contacting an independent attorney, tax professional or financial consultant

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Goals for today

Today, we will answer some common questions about homeownership –

What are the advantages and disadvantages of owning and renting?

What are the steps in becoming a homeowner?

What are the costs of homeownership?

How do you maintain your home?

What do you do if you are unable to make your mortgage payment?

Part I – Steps to homeownership

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Benefits of homeownership

According to the Federal Reserve System’s 2010 Survey of Consumer Finances

Average net worth of homeowners is $174,500

Average net worth of renters is $5,100

Housing wealth (primary residence) accounts for 29.5% of total family assets in the survey

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Benefits

Homeownership Renting

Establish family traditions

Being a part of the community

May build equity and net worth

Build your credit history

Interest may be tax deductible

Your monthly rent payment may be lower

The security deposit is probably less than a down payment on a home

No long-term commitment

Landlord, not you, pays for repairs and maintenance on the building or yard

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Disadvantages

Homeownership Renting

Your decision to buy or rent will depend on your financial situation, as well as your lifestyle.

Insurance and tax bills may increase over time

You’ll have to pay for household repairs and maintenance

Fixing a leaky faucet

Replacing appliances

May require home improvements

Bedroom or bathroom addition for a growing family

Landscaping

You don’t have ownership and are not building equity in the property

Your rent may increase over time

Lack of stability (e.g., you may have to move if the building is sold)

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Steps in the home buying process

1. Review your finances

2. Determine what size mortgage you can afford

3. Compare lenders and mortgages

4. Get pre-qualified or pre-approved

5. Begin house hunting

6. Make an offer/negotiate with seller

7. Arrange for inspections

8. Closing/settlement

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The people in the process

Real estate agent

Mortgage broker

Appraiser

Home inspector

Lender

Servicer

Investor

Trustee

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How much do you need “up front”?

Down payment:

– Ranges from 3% up to 20% of a home’s purchase, required up front when you close on the home loan

– On a $100,000 home, that means a $3,000 to $20,000 down payment

Other costs:

– One-time costs may include loan application fee, appraisal fee, title search, attorney fee, home inspection fee and other fees/charges

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What factors influence total mortgage expense?

Total interest expense is influenced by three factors:

– Principal, or how much you borrow

– Interest rate, or what you pay for borrowing

– Term, or length of time you have to repay the loan

Other on-going costs include property taxes, homeowners insurance and (potentially) flood insurance premiums

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How does the mortgage term affect costs?

Term Monthly Payments

15 years $ 1,110

30 years $ 716

Term Total of Payments

15 years $ 199,716

30 years $ 257,804

Example based on a $150,000 mortgage and a 4.00% interest rate

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How do interest rates affect costs?

Each lender determines the interest rate it charges on a loan

The interest rate may be different, based on the time you get the mortgage

Term Monthly Payments 4.00% interest rate Monthly Payments 6.00% interest rate

15 years $ 1,110 $ 1,266

30 years $ 716 $ 899

TermTotal of Payments 4.00% interest

rateTotal of Payments 6.00% interest rate

15 years $ 199,716 $ 227,841

30 years $ 257,804 $ 323,757

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Why are interest rates different among lenders, and at different times?

Rates change to reflect the cost of borrowing in the economy as a whole

When interest rates in general are low, lenders also pay lower rates on the money they have to borrow to lend to home buyers

When rates in general are higher, the lenders’ costs to borrow money (to lend to home buyers) also are higher

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How does credit history affect the interest rate offeredto a borrower?

Lenders want to be sure that the borrower is able to make monthly payments on time

One factor lenders review is how a person has used credit in the past

– This is expressed in their credit score from their credit report

– The credit score is calculated based on many factors. Generally speaking, borrowers who have higher credit scores are offered lower interest rates

If your credit score is low, it does not necessarily mean you won’t qualify for a mortgage, but you may be offered a higher interest rate than a person who has a higher credit score

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What do lenders consider when evaluating you for a mortgage?

Common debt ratios:

– Front-end, or housing ratio of 28%

– Back-end ratio of 36%

You may be able to qualify for a mortgage with payments up to 28% of your gross income

– That includes payments towards:

Principal

Interest

Taxes

Insurance

No more than for mortgage28%W

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What do lenders consider when evaluating you for a mortgage?

Lenders will also evaluate your total debt, or back-end ratio, when qualifying you for a mortgage

Lenders will usually consider you qualified if you have a strong credit score and if your total debt payments, including mortgage payments, do not exceed 36% of your gross income

No more than for debt36%

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Where do you find a mortgage?

Start by inquiring at a financial institution you already have a relationship with

Typical mortgage lenders include:

– Banks

– Savings and loans

– Credit unions

– Mortgage finance companies

Some consumers choose to work with a mortgage broker who may represent more than one financial services organization.

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What is pre-approval?

You submit an application and go through the lender’s qualifying process before choosing a home

If you’re approved, the lender guarantees (for a certain period of time) you can borrow up to a specific amount

You enter the home-buying market knowing the amount you can afford

You may have to pay an application processing fee

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What is pre-qualification?

Alternative to pre-approval

Generally no fee; you are not applying for the loan at this time

Lender gives you an idea of how much you can borrow

– You can shop for a home within a well-defined price range

Doesn’t guarantee you’ll be able to borrow that amount because a full application evaluation has not been completed

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How does prepaying interest affect your mortgage payments?

Sometimes lenders offer you the option to prepay some of the interest on your mortgage by paying discount points

Each point is 1% of the principal, or amount you borrow

Each discount point you pay typically reduces your interest rate by a fraction of a percentage point

This means that you might have a lower monthly payment if you choose to “pay points”

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What are APR, interest rate, and finance charge?

Annual Percentage Rate (APR)

A yearly rate of interest that includes fees and costs paid to acquire the loan

Interest Rate The rate you are charged for the opportunity to borrow money

Finance Charge The amount that you pay for the loan, expressed in dollars

It is important to compare APR, in addition to interest rates, when comparing loan offers.

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What is a fixed interest rate mortgage?

Your interest rate and monthly payments do not change over the term of the loan

Your payments won’t increase even if interest rates in general go up

If interest rates go down, your payments will remain the same

Your interest rate and closing costs may be higher than they may be with an adjustable rate mortgage

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What is an adjustable rate mortgage (ARM)?

A loan that is tied to the interest rate of a financial product, such as U.S. Treasury Bills

The rate changes on a scheduled basis. The loan contract will describe exactly when the interest rate will change, and how

ARMs typically have a lower initial rate than a fixed-rate mortgage

If interest rates go down, your mortgage payments will probably drop. If interest rates go up, your payments will probably increase

The changing monthly payments may make it difficult to budget for housing costs

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What are hybrid mortgages?

Have a fixed-term portion, which is typically 3, 5, or 7 years, then there is an adjustable schedule for the remainder of the term

– Some may include a provision where you can convert to either a fixed or adjustable interest rate mortgage at some time during the loan term

It may be easier to qualify for this type of mortgage, since your initial monthly payments will be lower

When the fixed-rate period ends and the loan becomes an ARM, your payments will reflect current interest rates

The changing payments may make it hard to budget for housing costs

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What about interest-only or “balloon” mortgages?

In some cases, for a fixed period of time, your entire payment is applied toward the interest only

– In other words, none of your monthly payment is applied to the principal amount you owe on the loan

The final payment will likely be much larger than any of the monthly payments you made

In some cases, the entire principal is due, all at once, in the last payment, or “balloon payment”

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What does it mean to “close” on the loan?

You and the seller sign the documents that legalize the transfer of property

You sign the mortgage (this allows the lender to record a lien on the property) and note and loan agreement (the agreement between you and the lender regarding how you’ll repay the loan)

You pay for the balance of the selling price and the closing costs, some of which include:

– Title searches and title insurance

– Attorney fees

– Property taxes to reimburse the seller for amounts that have already been paid

– Transfer taxes

– Prepayment of property taxes and homeowners insurance

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How can you borrow against your home?

Equity is the value of your home, less the mortgage you owe

You may be able to borrow against the equity in your home by using a home equity loan or a home equity line-of-credit

A home equity loan lets you borrow up to 80% (or more) of your home’s value (less existing liens), either at a variable or fixed rate of interest

– For example, if you have a $100,000 home, and $60,000 remaining on your mortgage, you have $40,000 in equity. You may be able to borrow up to $20,000 or more ($100,000 * 80% = $80,000 - $60,000 = $20,000)

– Your home is the collateral for the loan, and you make monthly payments over a fixed term

You may also be able to borrow against your equity by using a home equity line of credit or HELOC

– Similar to the credit limit on a credit card, but tied to the amount of home equity the lender establishes as your maximum

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What is an escrow account?

Escrow accounts are quite common and are typically set up by the lender

Escrow accounts are created to hold the amounts collected for your property tax and homeowner insurance payments

Monthly amounts are included in your monthly loan payment and are set aside to help pay for items such as property taxes, mortgage insurance payments, fire and hazard insurance premiums and other items

Removes the risk of delinquent property taxes and unpaid homeowner’s insurance, which could lead to serious financial difficulties, such as:

– Financial loss due to property damage not covered by insurance

– Loss of property due to unpaid property taxes

The use of escrow accounts is encouraged, but not all lenders require them – so be sure to check!

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An overview of homeowners insurance

Lenders require borrowers to insure the home

Named perils policy offers limited protection to cover damage to your home’s structure and possessions that results from fire and theft – you may wish to ask about an open perils policy

Every policy has a deductible, which is the amount you pay for a loss before the insurance company covers any of the remaining damage

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What is PMI?

PMI stands for private mortgage insurance

Unlike homeowner’s insurance, PMI only benefits the lender, not the homeowner, when the borrower defaults

Typically required for borrowers who make less than a 20% down payment

Costs vary, but can range anywhere from 0.50% to 1% of total loan amount each year

Cancelling PMI payments

– Borrower can request PMI payments be stopped once LTV reaches 80%

– It must automatically be cancelled once LTV reaches 78% (although there are some exceptions to mortgages considered high-risk)

Ask about the need for PMI with potential lenders, as this will impact your monthly mortgage payment.

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How much insurance?

Insure your home for at least 80% of its replacement value, or what it would cost to rebuild your home in today’s dollars

– Some insurers will cover the cost of replacing your current home

– Others will cover the cost of building a home of the same size but not necessarily with the same features

When you’re calculating your home’s value for insurance purposes, you usually don’t include the value of the land on which it’s built

Part II – Successful homeownership

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The main cost of homeownership

Your mortgage payment generally consists of…

Principal – the amount you borrowed

Interest you’re paying on the loan

…and may also include escrow for…

Taxes

Insurance

– Insurance – homeowner’s, flood, hazard, etc.

– Private mortgage insurance (PMI)

If your mortgage payment doesn’t include amounts for taxes and insurance, you need to plan and budget for these on your own!

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What are some other costs of homeownership?

Let’s take a closer look at “routine maintenance”…

Utilities – gas, water, electric, fuel

Municipal services – garbage removal

Monthly assessments or association dues

Routine maintenance

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What are routine maintenance items?

Roof and gutters

Lawn care

Heating/air conditioning

Hot water heater

Windows

Siding, tuck pointing, painting

Deck or patio

Fences

Appliances

Garage door

Fireplace chimney

Safety items

Annual home inspection

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Budgeting for routine maintenance costs…

Set aside from 1% to 3% of your home’s value for routine maintenance and periodic improvements each year

Example:

Region Home Value (as of April, 2013) 1% of Home Value 3% of Home Value

Northeast $245,100 $2,451 ($204/mo) $7,353 ($613/mo)

Midwest $149,300 $1,493 ($124/mo) $4,479 ($373/mo)

South $168,700 $1,687 ($141/mo) $5,061 ($422/mo)

West $263,600 $2,636 ($220/mo) $7,908 ($659/mo)

Source: National Association of Realtors, May 22, 2013

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Activity: T&J’s Budget

Monthly Expenses:Mortgage $ 1,300

Auto loan 550

Utilities 125

Telephone 25

Cell phone 75

Cable TV 60

Savings 50

Personal care 200

Dry cleaning 50

Food 550

Transportation 80

Child care 500

Sears 50

J.C. Penney 50

Target 60

Macy’s 50

Entertainment 150

Clothing 75

Total Expenses: $ 4,000

Monthly Income:T’s income: $ 3,250

J’s income: 750

Total Income: $ 4,000

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Activity 1: T&J’s Budget Update

T&J recently attended a homeownership workshop and realize they should have been budgeting each month for home maintenance items

After talking it over, T&J decide to make a commitment to begin budgeting and saving for home maintenance and improvements

T&J’s home is currently valued at $150,000

Outline the steps T&J should take in order to meet their goal of budgeting for home maintenance expenses, including how much they should set aside each month

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Home improvements

When choosing a contractor –

Get multiple bids

Check contractor’s references

Use a licensed, insured and state registered contractor

Check with the Better Business Bureau (www.bbb.org) or your state Attorney General’s office

Read the contract carefully – understand what you’re signing

Determine exactly how you will be paying

If contractor offers financing, understand all costs and fees

Be vigilant

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What if problems happen?

What may cause you to have problems making your monthly mortgage payment?

Five Dreaded D’s1:

Death

Disability

Disease

Divorce

Downsizing

Note:1 Used with permission from Lynette Khalfani-Cox, The Money Coach – www.themoneycoach.net

Others:

Wrong mortgage product

Insufficient income

Unbalanced budget

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Assessing your situation

Review budget and cash flows

Ask yourself…

Are there ways to increase income?

What ways are there to decrease expenses?

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Activity 2: T&J’s Mortgage Payment Troubles

T&J have a fixed-rate mortgage with a payment of $1,300/month

J, who recently had to leave her job because of medical reasons, contributed $750 each month to the family’s income. She will be out of a job for about one year

T has tried to find additional part-time work to make-up for J’s lost income, but has been unsuccessful

While the small emergency fund the couple had saved allowed them to make last month’s mortgage payment, T&J have no other savings

What are some ways T&J can look to increase income, decrease expenses, or both?

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Stages of mortgage delinquency

It’s never too early or too late to contact your lender and ask for assistance!

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Help with solutions

Contact your lender at the first sign of trouble

Tell the whole story about your situation

Respond to all communications

Collections Loss Mitigation

Short-range solutions, focused on early-stage delinquency

Goal is to collect past due debt with “payment reminders”, and get customer to provide a “promise to pay” by a certain date

Automated – use “auto dialers” to make initial contact with customer – i.e., machine dials, then transfers call to Collector when customer answers

Longer-range solutions, focused on mid- to late- stage delinquency, up to and including foreclosure

Goal is to help borrowers by crafting solutions to provide maximum payment relief over longer periods of time

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Activity 3: T&J’s Troubles Worsen

It is now ten months later, and T loses hours at work, reducing the couple’s already lowered income by another $500 each month

The lost income will not allow T&J to make any further mortgage payments, and they have already fallen behind by one month

T&J have no savings left, and the money from the sale of their second car was used to make the previous months’ mortgage payments

T&J’s lender has been sending letters and calling, but they have avoided all contact with their lender for fear of losing their home

What should T&J do?

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Help with solutions (cont’d)

If you are uncomfortable contacting your lender, contact a trusted, third-party mortgage or housing counselor –

– Homeownership Preservation Foundation (HPF), 1-888-995-HOPE or www.995hope.org

– National Foundation for Credit Counseling (NFCC), 800-388-2227 or www.nfcc.org

– NeighborWorks® America, www.nw.org

Many organizations have housing counselors certified by the Department of Housing and Urban Development (HUD). Visit www.hud.gov for more information.

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Help with solutions (cont’d)

Whether you call your lender or a trusted, third-party, be:

– Prepared with copies of your major bills, including your mortgage statement

– Candid about your situation, explaining what happened, and when or if your situation may improve

– Realistic about any opportunities which may or may not allow you to either keep your home, or minimize the damage done to your credit caused by a foreclosure

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Some options which may be available

Your lender or servicer may be able to offer one or more forms of hardship assistance to help you keep your home…

Refinancing

Forbearance

Repayment Plan

Loan Modification

Stipulation agreement

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If keeping your home isn’t an option

Sell your home

Short sale

Assumption

Deed in lieu of foreclosure

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Be aware of scams

While sometimes referred to differently, watch out for scams such as…

“Phantom help” – the rescuer charges high fees for basic paperwork and telephone calls the homeowner could have made on their own. Another form of this scam is when the rescuer promises to represent them, collects the fees, but doesn’t follow through.

“Bailout” – involves the rescuer appearing to help the homeowner by getting rid of the house (bailing them out). The homeowner surrenders title to the house with the promise that they can rent it back once the problems are fixed. The scam ends with the homeowner not being able to buy the house back while the rescuer walks away with the equity.

“Bait and switch” – the rescuer tells the homeowner they are signing for a new loan that will solve their foreclosure problems, but they are really signing forged documents, usually a deed of some sort, that will give the scammer ownership of the home. In the end the homeowner no longer owns the home but will still be liable for the existing valid mortgage.

“Vanishing payment” – where you are convinced to make your mortgage payments to someone other than your lender.

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Protect yourself

Don’t provide any information to anyone with whom you did not initiate the contact

Never sign any papers under duress

Never sign agreements you don’t understand completely, or those with blank lines or spaces

Don’t sign over your deed to a third-party or agree to any deal that lets you rent the property and buy it back later

Don’t make your mortgage payment to anyone other than your lender or servicer

Get it in writing

When in doubt, call your mortgage company or an attorney

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Recap

Understand the benefits of homeownership

An investment; a way to help increase net worth

Place to start family traditions

Sense of stability and community

Know how to maintain and improve your home and property

The importance of routine maintenance – to maintain and improve your home’s value

Budgeting 1%-3% of your home’s value each year

Understand what to do if trouble happens

Call your lender or a trusted third-party counselor for available options

How to protect yourself against scams

Know all costs of homeownership

Mortgage (principal, interest, taxes, insurance)

Utilities, municipal services, and any monthly assessments or dues

Successful Homeownership!

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In Closing

Despite challenges, homeownership provides many benefits –

Over 2/3 of U.S. households are homeowners

The majority of all homeowners make their mortgage payments on time and never risk foreclosure

On average, the net worth of homeowners is substantially greater than that of a renter

Homeownership can be a source of shelter and security for families, and helps create stability in communities

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Wrap-up

Homeownership can be both a rewarding experience and a good path to creating wealth

Over the next 30 days –

– Review the type of mortgage you have and whether or not your payment can go up

– Fine-tune your budget, finding ways to save for routine home maintenance and improvement projects

Talk with your lender or a trusted, third-party counselor if you are having any difficulty making your mortgage payment

Visit www.YourMoneyCounts.com