Chapter 09 (topic 4 housing planning)

Chapter 9

The Housing Decision: Factors

and Finances

Chapter 9

The Housing Decision: Factors

and Finances

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 9Learning Objectives

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1. Evaluate available housing alternatives

2. Analyze the costs and benefits associated with renting

3. Implement the home-buying process

4. Calculate the costs associated with purchasing a home

5. Refinancing

6. Develop a strategy for selling a home

Housing Alternatives3

Objective 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 are modified by financial factors.

Traditional financial guidelines suggest you spend no more than 25-33% of take-home pay on housing, or no more than 2 1/2 times your annual income.

Housing Alternatives (continued)

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Opportunity costs of housing choices

Interest earnings lost on money used for a down payment or the interest on a security deposit for an apartment

Time and cost of commuting to live in an area that offers less costly 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

Renting your Residence5

Objective 2: Analyze the costs and benefits associated with renting

The search Select an area and rental cost for your needs

Compare costs and facilities between units

Talk to current and past residents

Advantages of renting Easier to move Fewer maintenance and repair responsibilities Lower initial costs

Renting your Residence (continued) 6

Disadvantages of renting

No tax benefits

Limitations regarding remodeling

Restrictions regarding pets and other activities

Legal concerns of a lease

Costs including a security deposit, utilities and renter’s insurance

Renting your Residence (continued)

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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

Renting your Residence (continued)

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Location where rent is due

Date and amount for late rent payments

List of included utilities, appliances

Restrictions on certain activities

The right to sublet the unit

Conditions where landlord may enter rental unit

Home Buying Process9

Objective 3: Implement the home-buying process

Step 1: DETERMINE THE HOMEOWNERSHIP NEEDS

Benefits of Home Ownership Pride of ownership

“American dream”

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

Home Buying Process (continued)

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Drawbacks of Homeownership

Financial uncertainty Obtaining money for the down payment Obtaining mortgage financing Home values could drop

Limited mobility Can take time to sell your home

Higher living costs Home improvements Rising real estate taxes


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Assess Types of Housing Available

Single-family dwelling

Multi-unit dwelling Duplex, townhomes

Condominium You own your unit in a building of units It is not a type of building structure, but

rather a form of homeownership

Cooperative housing Non-profit organization - members own shares

and rent a unit in a building with multiple units


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Manufactured homes Fully or partially assembled in a factory, and

then moved to the housing site Prefabricated type has components built in the

factory and assembled at the site Mass production under factory conditions keeps

costs lower than site built homes

Mobile homes A type of manufactured home, often <1,000 sq.

ft. Offer same features as a conventional house Safety is debated and they tend to depreciate


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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?

What are the payment arrangements?


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What delays will be considered legitimate?

Is the contractor licensed and insured?

Are there any complaints about this contractor?

Contract should have a time schedule, costestimates, description of work, and a payment schedule.


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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

Mortgage company will want an appraisal


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Step 3: PRICING THE PROPERTY

Determine the Home Price Price is affected by whether it is a seller’s or a

buyer’s market.

Negotiating the Purchase Price Counteroffers are common Earnest money Contingency clauses, such as...

Buyer must be able to obtain financing Sale contingent on the sale of the buyer’s

current home

The Finances of Home Buying

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Objective 4: Calculate the costs associated with purchasing a home

Step 4: OBTAIN FINANCINGThe types will be divided into Federal Treasury, Government of Malaysia and loan from commercial banks. The objective of Federal Treasury is to make sure the employees of the Government of Malaysia have their own house and to increase the comfortable life through Federal Treasury Housing Loan Scheme.

Type: 1) Treasury Housing Loan Scheme (SPPP)

2) Islamic Housing Financing Scheme (SPPPI)

The Islamic scheme is devised and implemented in accordance with the Syariah principle of al Bai’ Bithaman Ajil.

The Finances of Home Buying (continued)

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Type of loan or financing provided by the government:Buying a readymade houseBuild a house in the borrower’s land]Buy landBuy a house that is still under constructionHousing loan or financing settlement from bank or financial institution


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Loans from Commercial Banks Conventional Financing Offers various benefits and many facilities to

financing or refinancing housing plan Provide convenient repayment option that is

repayment through online banking, ATMs and internet

High financing margin up to 100% financing Insurance coverage to protect your house and

housing repayment Longer repayment period max 30 years up to age

60 Customer can revise monthly installment to suit

financial situation


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Islamic FinancingNo risk against fluctuated of interest rateHigh financing margin up to 100% financing

Fixed profit margin Customer will know the selling price Takaful coverage to cover owner’s

Takaful and Mortgage Plan Longer repayment period maximum 35

years.

There are two types of mortgage involved: Fixed Rate Mortgage (FRM)

Payment remain the same for the life of the loan

Tenor will be between 15 t0 30 years The rate is predictable therefore can easily

budget your finance Housing cost remains unaffected by the

interest rate changes and inflation FRM normally will suit those who expect to

remain in their homes for a number of years

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Adjusted Rate Mortgage (ARM) Payment increase or decrease on a regular schedule with

changes of interest rate, in case of increase there is a subject to limit

Balloon mortgage will offer very low rate for initial period, when the time has elapsed the balance due or being refinanced

Generally off lower initial interest rate, monthly payments can be lowered

It may allow borrower to qualify for the higher loan amount

The interest rate you pay will generally drop if prevailing interest rates go down

Low start rates can reduce your initial payments, making it easier to qualify for some mortgages

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Monthly InstallmentsHow much can you afford to pay for the monthly installments?

Fixed or Conventional RatesA fixed interest rate on home loan promises fixed installments throughout the loan tenure. It offers stability against fluctuating financing costs and also it offers stable financial planning for your financial commitments.

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The Finances of Home Buying (continued)Other costs associated with home buying:

Down Payment

Generally, if we want to buy a house, we need to pay a booking fee of 2% to 3% of the purchase price. This is non-refundable, but it can refund only if a person’s loan application is rejected by a bank.

In addition, the bank usually finances up to 90% of the price of the property meaning that we must have at least 10% in cash for the down payment. Some banks also offer up to 100% financing for eligible purchasers of low cost houses.

We also can withdraw a limited amount from our Employee Provident Fund (EPF) (Account 2) for the down payment.

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Stamp dutyStamp duty is levied on the document of transfer that is the Memorandum of Transfer if the title has been issued, or the Deed of Assignment of Principal Selling and Purchase Agreement (SPA) if the title has not been issued, the stamp duty is based on the purchase price of the house.

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Value of property Rate of stamp duty

RM1.00 to RM100,000.00 1 %

Next RM101,001.00 to RM500,000.00 Add another 2 %

RM501,000.00 and above Add another 3 %

Legal Fees

The first Schedule of the Solicitors Remuneration Order 1991 sets out the fees to be collected by lawyers for work done in handling the sale of purchase of house based on the purchase price as follows:

1% on the first RM100 000

0.5% on the next RM4 900 000

0.25% on the remainder

For each sale and purchase of a house, the solicitors can only collect fees based on the above from either the seller or the purchaser and not from both parties.

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Mortgage Reducing Term Assurance (MRTA)

A reducing term life assurance that provides home financing borrowers with financial protection in the event of premature death or total permanent disability.

A house buyer needs to buy Mortgage Reducing Term Assurance (MRTA) which ensures that your house will be paid for in full if anything happen to you as the buyer. The one-off premium payment is generally computed on the age of the borrower, loan amount, tenure and interest rate. It can be paid in cash up front or included in your loan to minimize the initial cash outlay required.

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Refinancing

As a house buyer or borrower we may want to refinance the house that we have bought, especially when the interest rates are low, refinancing can be a good move.

The major benefits of refinancing are lower monthly

installment payment and shorten the length or tenure of loan. Reasons of refinancing are to save interest cost by replacing their current loan with a more cost-efficient home loan package offered by their bank or another bank; reduce monthly mortgage payment; lessen or increase their loan tenure; and possibly, use funds for medical payments, children’s education or consolidate all their other debt into one that has the lowest interest charges

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Objective 5 : Refinancing

Refinancing

Things to consider before refinancing: What is the interest rate you are paying

now? What is the current interest rate? To get

the benefits of a lower rate, you may have to pay fees associated with the loan, unless if the lender is doing it without any fee. Discuss the fee option with your lender/loan officer.

Make comparison of both rates.

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Refinancing

How long are you going to stay/live in your home? It may not be worth refinancing when you have to pay cancellation fees to move your mortgage, if you plan to sell your house in few time, refinancing could be an excellent way to reduce your monthly payments. Or if you plan to move to a new house but retain the old house for rental, refinancing will be a good decision. You can lower your monthly mortgage payment and in turn, increase your rental income.

Is there any penalty for early settlement of your existing loan? And how many months notice do you have to give before refinancing?

Do you have other needs for cash for example to pay your other debts?

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Types of title

Freehold This type of title gives the owner the perpetual

ownership. If you purchase a freehold property, you will own the

home, the land it is built on, and you will have the right to live there for as long as you please. You can make moderations to the property within restrictions of the law and planning restrictions. You may need permission to make structural changes, particularly with listed buildings (old buildings). Most houses are sold freehold. Flats can be sold freehold, but very rarely, they’re usually leasehold. However, flats are increasingly becoming freehold because of a legislation that is making it easier for leaseholders to buy the freehold.

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Types of title

Leasehold

This type of title gives the owner to stay in possession for specified time period for example 99 years.

At maturity the ownership will be given back to the authority for example Selangor State Government.

If you buy a leasehold property you are actually buying the rights to live in a property for a set period of time. You won’t actually own the property, or the grounds it is situated on. Most flats are leasehold; with the lease, it means you are obligated to pay ground rent to the freeholder. The ground rent will cover the costs for communal maintenance repairs. The lease should stipulate how the service charge is worked out, and how it is divided between the other leaseholders. It’s important to calculate all these costs before committing to a leasehold property, as you may not have budgeted for the additional costs.

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Types of title

Leasehold

Once the set period in the lease expires, the ownership of the property is given back to the land owner. Most leases are roughly 99 years; however, you can get an extension. If anyone is buying a leasehold property, it is important to find out how long the lease is for as it will affect the value of the property.

Why do people get leasehold properties? Well, because most flats are leasehold, and it means everyone living with in the same building has to split maintenance costs in respect of the common parts of the building and the communal areas.

It is possible to extend the leasehold to up to 999 years, and you can actually purchase the freehold, but at a cost.

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Selling Your Home34

Objective 6: Develop a strategy for selling

Preparing your home Repair, repaint, and clean When showing home turn on lights and open

drapes. Bake bread or make coffee for a welcoming smell

Determining the selling price Appraiser estimates the current value Real estate agent markets your home

If “for sale by owner,” use a lawyer or Title Company

Listing with a real estate agent for services

Chapter 09 (topic 4 housing planning)

Business

Transcript of Chapter 09 (topic 4 housing planning)