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Understanding Mortgages: Pre-qualification, Types, and Financial Considerations

This resource covers essential learning objectives for homebuyers and those considering vehicle financing. It explains the advantages of mortgage pre-qualification, various mortgage types like fixed and adjustable-rate mortgages, and how to determine affordability, down payment options, and closing costs. It also evaluates refinancing profitability, the process of property tax assessments, and car financing choices, including leasing versus buying decisions. Equip yourself with the necessary knowledge to navigate the mortgage process effectively.

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Understanding Mortgages: Pre-qualification, Types, and Financial Considerations

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Presentation Transcript

  1. Chapter 9

  2. Learning Objectives (part 1 of 2) • Explain the advantages of pre-qualification • Describe the different types of mortgages available • Ascertain how much you could afford to pay for a house • Decide how much of a down payment you would like to make

  3. Learning Objectives (part 2 of 2) • Estimate your closing costs • Evaluate whether it would be profitable to refinance your current mortgage • Describe the process by which property taxes are determined • Evaluate automobile financing choices • Analyze an auto lease proposal.

  4. Advantages of Pre-qualification • Identifies maximum mortgage one would be able to obtain • Reduces uncertainty about qualifying for a mortgage • Adds creditability to a bid (if two bids are otherwise equal, the one with the prequal. letter should be chosen

  5. Different types of mortgages (1 of 2) • fixed rate mortgage • 15-year • 30-year • Adjustable rate mortgage (ARM) • 1/1, 3/1, 5/1, 7/1, 10/1 • 5/25, 7/23

  6. Different types of mortgages (1 of 2) • Conventional mortgage • FHA-insured mortgage • VA-guaranteed mortgage • Jumbo mortgage • Reverse annuity mortgage (RAM)

  7. Elements of an ARM • Teaser rate • Convertibility • Margin • Index tied to, & availability of index • Caps • Per each change • Lifetime

  8. Obtaining a mortgage • Get as many quotes as possible • Lock period & application fees • Miscellaneous fees

  9. Maximum size of mortgage • Ultimately, lender’s choice, but they all follow certain rules • PITI not exceed 28% of gross income • PITI and other monthly debt payments not exceed 36% of gross income

  10. Selection of down payment (1 of 2) • Standard is 20% of purchase price • If less, then will need some form of default insurance • Any form of insurance is expensive • If income constraints are a problem then a larger down payment may make it easier to get a mortgage

  11. Selection of down payment (2 of 2) • Putting more down is equivalent to investing money risk-free at the mortgage rate • Putting more down may create a liquidity problem later, that could only be solved with a home equity loan or through refinancing

  12. Closing Costs • Prepaid interest (for first month) • Title insurance • Start escrow account • Tax Stamps • Credit report • Survey • Potentially many more

  13. Choosing a mortgage (1 of 2) • Fixed vs. ARM depends on risk tolerance, income constraints, expected period of occupancy • 15-year vs. 30-year depends on reduction in interest rate vs. opportunity cost of money

  14. Choosing a mortgage (2 of 2) • Paying points to get a lower rate • Great if paid by employer • Foolish if occupancy less than five years (typically) • Depends on opportunity rate of return • Reduces the value of refinancing the mortgage should interest rates drop

  15. Refinancing a mortgage • Sometimes done to get at equity in the house • Popular rule of thumb of 2% reduction vastly overstates when it can be profitably done • Depends on closing costs and the magnitude of reduction in the monthly payment

  16. Appraised vs assessed value • Appraised value = what an appraiser thinks a home would sell for • Required by all lender’s before a mortgage is closed • Required for any home-equity loan or HELOC • Assessed value = an arbitrary value assigned to a home to set property taxes. Unrelated to appraised value.

  17. Property Taxes • Assessed valuation established • Each taxing authority establishes a millage rate (property tax per $1,000 assessed valuation • Some states establish state equilization factors

  18. Financing a Car • Rebate or below market interest rate: both are built in price adjustments, and true value of BMIR needs to be estimated • Amount of down payment • Opportunity cost of money • Reduction in liquidity • May affect ability to obtain a loan

  19. Factors in a lease rate • Selling price of vehicle • Expected value of vehicle at end of lease • Money factor (interest rate) • Monthly depreciation charge • Other taxes and fees

  20. Down payment on a lease • Destination charge • Acquisition fee • Security deposit • refundable

  21. Borrow & buy vs. lease decision • Monthly down payments lower with a lease • Leases usually require less out of pocket cash • Time Value of Money analysis usually favors a purchase

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