housing PFM

8/7/2019 housing PFM

1/27

Ratnesh

Kunal Buchade

Swati khinchi

MBA(MS) 2yrs ,4th

SEM


2/27

Four aspects of housingA House is bought primarily to provide adequateaccommodation to the owner and family , the

investment aspect of house purchase is usually asecondary consideration.

y The problem of financing the acquisition of a home

y Is housing a good investment?

y Compare the cost of buying a home with the cost ofrenting a home

y The cost associated with maintaining a home in goodcondition


3/27

Importance of owning a homeHome ownership is important decision-

y It offer the security

y Status

y Independence

y Increased creditworthiness

y Peace of mind derived from living in ones own homey Sense of stability that ownership brings.


4/27

Rent Or Buy Decision:Rent or buy decision depends on three main factors:

1)Housing prices and mortgage interest rates,

2)T

ax write-offs for homeowners,3)The increase or decrease in home values over time.

It also depends on

-personal needs ,

-general condition of the housing market ,

-home appreciation rates in the area and

-the return you can earn on the funds you can invest(if yourent) rather than use toward a down payment on a house(ifyou buy).


5/27

Contd..Housing is a mediocre investment choice compared tomany other form of investment. Renting is likely to be

better economic option because-y Renting offers lower , more steady cash outflow

y Remove many of the burdens of ownership


6/27

Benefit of Owning a Home

y Tax shelter

y Inflation hedge

y Good return in long term

y Benefit of increased creditworthiness


7/27

Cost of Home OwnershipOne should Consider these five things when evaluating the

cost of home ownership-

1)The down payment-To determine the down paymentlender use the Loan-to-Value ratio ,which specifies themaximum percentage that the lender is willing to loan.

2)Closing cost- Expenses that borrower ordinarily pay likeloan application and loan origination fees

3)Mortgage payments-Mortgage payment is partly made upof principal repayment on the loan and partly of theinterest charges on the loan.

It also depend on affordability : How large a monthlymortgage payment can you afford.


8/27

Contd4)Property taxes and insurance-Property tax depend

on-

- The larger or more expensive the home

- Location and geographic area

Insurance varies with the factors like-age of the house,location , material used in construction and geographicarea.

5)Maintenance and operating expenses-Maintenancecost include painting , mechanical and plumbing repairs.

Operating expenses include cost of utilities such aselectricity ,gas , water and sewage


9/27

TYPES OF MORTGAGE


10/27

FIXED RATE MORTGAGE

y Offered for shorter period of time[2,3 or 5 yrs].

y Renewable.

y

Borrower has option available with him to negotiate a new loan withanother lending company.


11/27

VARIABLE RATE MORTGAGE [ARM]

y Rate of interest depends upon market rate.

y Rates are adjusted once or twice a year.

y Term of ARM can be 15 or 30 years.

y Borrower assumes the interest rate risk.

WHETHERBORROWERACTUALLYENDSUP PAYING LESSINTERESTDEPENDSON THEBEHAVIOROF MARKET INTERESTRATESDURING THETERM OF THE LOAN


12/27

VARIABLE ORFIXED RATE MORTGAGE tofinance the purchase of your home.

y Depends upon rate of interest offered.

y Advantage with fixed rate mortgage.

y When rates are high go for variable rate mortgage.

y When rates are low go for fixed rate mortgage.

y Convertible ARM.


13/27

REPAYMENT MORTGAGE

y Traditional form of mortgage.

y Interest is calculated on yearly basis.

y A very high proportion of early payments are made up of interest .

NOTE THAT IF YOU MOVE YOURHOME FREQUENTLY THAN THESERIES OF MORTGAGE THAT YOUWILL NEED TO BORROWMAYREPAY VERY LITTLE OF THE CAPITAL BETWEENEACH MOVE


14/27

ENDOWMENT MORTGAGE

y A bundled financial product.

y No capital is repaid over the period of mortgage.

y

Monthly payment is made up of two parts.


15/27

REPAYMENTOR ENDOWMENTMORTGAGE

y Endowment mortgage is more expensive than repayment mortgage buthas tax benefit.

y

In case of financial difficulties you can reduce the monthly payments.

y Surrender value of endowment mortgage can be less.


16/27

GRADUATED PAYMENT MORTGAGE

y Offer less payment for first few years.

y Available for those who expect their income to rise.


17/27

GROWING EQUITYMORTGAGE

y A fixed rate mortgage.

y Monthly payment increase.

y 30 year loan is paid off in 20 years.


18/27

BIWEEKLYMORTGAGE

y Payments are made every 2 weeks.

BYDOWNS

y Loans arranged by builder or seller.

y Reduced rate may be for a short period of time.


19/27

DEFERRED MORTGAGE

y Regular interest payments are rolled up.

y

Such mortgage are not preferred by borrower.


20/27

Is housing a Good Investmenty Primarily it provides adequate accommodation

y Secondarily its an investment option for future capitalgains.

y Powerful Prestige symbol as well as an index ofCreditworthiness.

y

Loan of 80% on the value of the house can be raised.y Housing price is governed by Inflation.

y Its a levered investment.


21/27


22/27

Attributes of Housing

y Housing is illiquid i.e. it generates high buying andselling cost.

y NotTransportable.

y Protection and maintenance cost are also high

y Basic insurance cost is relatively low as compared to

the value invested.y Possibility of stable cash flow, tax advantages are the

positive sides.


23/27

Buy orRent or Switching

y If the job location changes frequently.

y House seeker lacks sufficient capital.y It transfers the cost of maintaining the property on the

occupier.

y Opportunity Cost of the investment in housing should

be considered.


24/27

Cost of Maintaining the Housey It includes insurance, structural repairs, interior

decorations, drainage etc.

y Geographical location of house, climatic conditionsalso plays a major role in maintenance.

y Personal likes/dislikes.

y Maintenance Equalization Fund is set up into which aregular payment is made and out of which costs will bepaid.


25/27

Conclusion about Acquiring Housey One needs to find a suitable house without undue

pressure on financial resources.

yAcquiring house as an investment strategy should beara secondary role.

y Investment in housing can be a good hedge againstinflation over the years.

y It can generate stable cash flow over years/yA balanced portfolio would be created if you mortgage

some part for taking loans.


26/27

Role of housing in PFMHousing is an important part in personal financialplanning. Because everyone wants to provide a secured

place and sense of stability to ones family member .One should plan efficiently for investing in housing insuch a way so that-

y One can afford the cost of financing a home

y

Reduce his tax burdeny Use his house property efficiently to get maximum

return on his investment like make a part available togovt. for branch of nationalized bank or charitable

trust or use it for own business.


27/27

housing PFM

Documents

Transcript of housing PFM