UNIT 6

RENTING VS.

OWNING

ORCUTT ACADEMY HIGH SCHOOL

ACCOUNTING & FINANCE

THE FIRST

STEPS TO

HOME

OWNERSHIP

UNIT 6, LESSON 1

Renting vs. Owning

Are You Ready to Buy?

How Much Can You Borrow?

The Down Payment & Closing Costs

PREVIEW

RENTING VS. OWNING

ADVANTAGES OF

RENTING

Possibly lower cost

If you can save 10% or more of your earnings, you are on your way to meeting your financial goals.

No maintenance costs

Flexibility

Financial freedom: spend without obligation

Psychological freedom: move more easily

Liquidity

Wealth not tied up in home

COSTS OF RENTING

Monthly rent is subject to inflation

Consider your costs in the long-term

Cost of owning versus renting over 30 years

Year Ownership cost per

month

Rental cost per month

1 $920 $800

5 $980 $940

10 $1,080 $1,140

20 $1,360 $1,690

30 $1,800 $2,500

Comparing the costs of owning a home that costs $160,000

to renting that same home for $800/month.

COSTS OF RENTING

Owning becomes less expensive in the long run

As a homeowner, you build equity

ARE YOU READY TO BUY

ASSESSING YOUR

TIMELINE

Wait to buy a home until you plan on being there for at least 3 years (preferably five or more)

PROPERTY MUST

APPRECIATE 15%

TO COVER EXPENSES

BEFORE BUYING, ASK

YOURSELF Are you saving enough money monthly to reach your

retirement goals?

BEFORE BUYING, ASK

YOURSELF How much do you spend (and want to continue spending) on

fun things such as travel and entertainment?

BEFORE BUYING, ASK

YOURSELF How willing are you to budget your expenses in order to meet

your monthly mortgage payments and other housing

expenses?

BEFORE BUYING, ASK

YOURSELF How much of your childrens expected college educational expenses do you want to be able to pay for?

HOW MUCH CAN YOU BORROW

THE EFFECT OF DEBT

Existing debt will lower the amount you are eligible to borrow.

Monthly Debt Payments + Housing Expenses < 38%

of monthly gross income

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.

BUT HOW MUCH YOU CAN BORROW DEPENDS

ON INTEREST RATES

Set by the secondary market

EXPENSES

Mortgage costs

Inspection expenses

Moving costs

Commissions

Title insurance

WHATS 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

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

As rates fall, the monthly mortgage payment drops

Lower interest rates make buying real estate more affordable

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%

DOWN PAYMENT & CLOSING COSTS

THE DOWN PAYMENT

If you put down 20% of the purchase price of the home

Most favorable terms, including interest rate and closing costs

Dont have to pay mortgage insurance

For a $100,000 home, the down payment would be $20,000

(100,000)(.2) = $20,000

PMI: PRIVATE

MORTGAGE INSURANCE

If you put less than 20% down

Protects lenders if you default on your loan

Several hundred $ per year

Varies depending on the percent of the purchase price you put down

The higher the down payment, the lower the PMI

Visit http://www.goodmortgage.com/Calculators/PMI.html

PURCHASE PRICE

Purchase Price = Mortgage Loan + Down Payment

CLOSING COSTS

In addition to a down payment, you must have cash saved for closing costs

Includes escrow fees, inspection fees, title insurance, and other miscellaneous fees

On average from 2-3 percent of the price of the home

Could be anywhere from 1-8% of the price of the home

Your lender will give you a Good Faith Estimate

HELP WITH CLOSING

COSTS

You can request

Your seller pay part of the closing costs

Your lender add part of the closing costs to your mortgage loan

Interest rate will go up about .25%

1. How can you determine if you are ready to buy a home?

2. How do lenders decide how much money you can borrow to

purchase a home?

3. What factors should you consider when determining how

much money to save to buy a home?

ESSENTIAL QUESTIONS

WHAT ARE YOU LEARNING? WHY ARE YOU LEARNING IT? HOW WILL YOU USE IT?

TOTAL

HOUSING

COST UNIT 6, LESSON 2

Calculating Mortgage Payment

Taxes: The Cost and the Benefit

Insurance & Maintenance

Calculating Total Housing Cost

PREVIEW

TOTAL HOUSING

COST

1. Mortgage Payment

2. Taxes

The Cost and the Benefit

3. Insurance

4. Maintenance

CALCULATING MORTGAGE PAYMENT

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)

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

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

EXAMPLE

Go to Mortgage Math Workbook

TAXES: THE COST AND THE BENEFIT

TAXES: THE COST

Homeowners pay property tax, which helps support local governments.

Based on the assessed value of your home

Land + Improvements

May be higher or lower than the purchase price of the home

TAX RATES

Set by the county

Usually about 1-2%

Average property tax rates by state

Ex: Santa Barbara County

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

TAXES: THE BENEFIT

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

CALCULATING THE TAX

BENEFIT OF OWNING

TAX BENEFIT =

(Mortgage Payment + Property Taxes) (Tax Bracket)

EXAMPLE

Tylers 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+

HOMEOWNERS INSURANCE

HOMEOWNERS INSURANCE

On average, between $45 and $75/month

Varies depending on

Homes value

Location

Homeowners demographics

Type