Unit 6 Renting vs. Owning

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  • 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