Unit10:AcquiringaHome
PersonalFinancialLiteracy
Objectives
• Comparetheadvantagesanddisadvantagesofrentingandowningahome.
• Definetermsrelatedtofinancingahouse.• Distinguishamongtypesofmortgages• Arrangeinorderthestepsinbuyingahome.• Stateguidelinesforestimatingabudgetforhousing.
AdvantagesofRenting
• Greaterflexibilityinmoving • Notresponsibleforhomerepairsorimprovements
• Nodownpayment • Nohugemortgage • Nopropertytaxes
AdvantagesofRenting-Continued
• Noworryaboutpropertyvalues • Limitedresponsibilities • Predictablecosts
AdvantagesofOwning
• Costmaybelessoverperiodoftime• Hasmorecontrolofproperty• Maybuildupequity• Taxadvantages:interestandpropertytaxesaredeductible
• Privacy
DisadvantagesofOwning
• Hugeresponsibility• Downpayment• Mustbeapprovedforfinancing• Mustpayforhomemaintenanceandrepairs• Coststendtobehigher• Hardertomove• Higherinsurancepremiums• Propertytax
DisadvantagesofRenting
• Securitydeposit• Notaxdeductions• Rentersinsuranceneededtoprotectbelongings• Nosenseofownership• Unabletomakepermanentchangestoresidence• Oftenaren'tallowedtohavepets • Lackofprivacy• Noequity
Mortgage
• Financialandlegalagreementbetweenborrowerandlender
• Lendergivesloaninexchangeforlienonproperty
• Ifborrowercan’tmakepayments,lendercantotakehouse
ChoosingtheRightMortgage
• Howlongdoyouexpecttohavemortgage?•Whatkindofmonthlypaymentcanyouafford?
•Willingtotakeariskwithfluctuatinginterestrate?
•MemberoftheArmedForces?
TypesofMortgages
• Fixedratemortgages– Notinsuredorguaranteed– LendermayrequirePrivateMortgageInsurance(PMI)untilaborrowerhas20%equity– Fixedinterestrateforlifeofloan
ARMs
• Adjustableratemortgages– Rateincreasesordecreasesaccordingtoeconomicindicators– Maystartwithlowerinterestratethanconventionalloan– Interestratecanrise
BalloonMortgages
• 30-yearamortization• Requiresbalanceofmortgageatendofmuchshorterterm
SpecialLoans
• Insuredorguaranteedbyfederalgovernment• Lowerinterestrates• Lowdownpayment– VA(VeteransAdministration)forveteransandactivedutymilitarypersonnel
– FHA(FederalHousingAdministration)basedonincome
ReverseMortgages
• Usuallyretireeswithalotofequity• Lender“purchases”housebymakingpaymentstoseller• Attimeofdeath,lenderownshome• Verycostly,highfees
TypesofHousing
• Single• Condominium• Townhouse• Duplex
WhatareYouLookingFor?
• Location• Size• Type• Amenities• Needvs.optional• Budget• Buyer’smarketvs.seller’smarket
Pre-Approval
• Tellsyouexactlywhatlenderwillloan• Onlyanestimate• Morereliableindicatorofwhatyoucanaffordthanprequalifying
• Shoparound
PurchaseAgreement
• Describesproperty,includinglocationandfurnishingsorequipment
• Conditionsandtermsofsale• Bothbuyerandsellersign• Buyerdepositsearnestmoney
AppraisalandTitleSearch
• Appraisalassessesvalueofproperty• Includessurveyofpropertylines• Titlesearch– Titlegiveshistoryofproperty;warnsofpotentialproblems
CostsRelatedtoClosing•Downpayment•Originationfeeforprocessingloanapplication•Titlesearch•Surveyfees•Titleinsurance•Appraisals•Creditreports•Filingorrecordingfee•Inspections(paidatinspection,notclosing)
HousingExpenseRatio
• Borrowerscanaffordupto28%onhousingpayments(includingpropertytaxesandhomeownersinsurance)
• Basedongrossincome
DebtRatioFormula
• Debtpayments,includinghousingpayments,shouldnotexceed36%.
UnitReview1. Distinguishbetweenadvantagesand
disadvantagesofrentingahome.2. Discussthecostsandbenefitsofowninga
home.3. Explainwhatamortgageis.4. Howisamortgagepaymentcalculated?5. Whatarethetypesofquestionsyoushould
askyourselfbeforeshoppingforamortgage?
UnitReview-Continued6. Whatmortgagetermwouldallowyoutobuildequity
inahomefaster?7. Compareandcontrastfixedratemortgageswith
adjustableratemortgages.8. Ifahomebuyerwithafixedratemortgageof
$100,000wantedtoavoidpayingPMI,howmuchwouldheorsheneedforadownpayment?
9. Discussspecialmortgageloansandtheagenciesaffiliatedwiththem.
10. Discusstypesofhousingahomebuyermightconsider.
UnitReview-Continued11. Distinguishbetweenprequalifyingand
preapprovalforhomefinancing.12. Whataretheadvantagesofusingarealtorto
buyahome?13. Discusswhatoccursduringtheapprovalprocess
ofbuyingahome.14. Listatleastfiveofthefeesassociatedwitha
closing.
15. Distinguishbetweenthehousingexpenseratioandthedebtratioformulaestimatingahousingbudget.
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