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Buying a house. Chapter 22. Advantages of Home Ownership. Value and Equity. Market Value — the highest price that the property will bring on the market what a ready buyer and seller would agree upon as the price.
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Buying a house Chapter 22
Value and Equity • Market Value—the highest price that the property will bring on the market • what a ready buyer and seller would agree upon as the price. • Appraised Value—examine the structure, size, features, and quality as compared to similar homes in the same area • the recent selling price of a similar home in your area is a good estimate of the current value of your home.
Value and Equity • Assessed Value—the county in which you live sets an assessed value for purposes of computing property taxes owed on your home • based on the cost to build, the cost of improvements, and the cost of similar properties. • usually a percentage of market value. • Estimated Value—Real estate agents also estimate the value of homes to help sellers establish a list price. • They compare your house and its features to similar ones that have sold in your area, called comps, and it gives a general idea of a property’s value.
Value and Equity • The value of most homes appreciates, or increases in market value, over time. • Appreciation is one way that the equity –the difference between the market value of property and the amount owed on it—increases. • Equity also increases because each loan payment you make decreases your debt. • Equity turns into cash when you sell your home.
Quality of Life • Home ownership generally offers more privacy, more space, and more personal freedom not available to renters. • In your own home, you can make the changes you choose to accommodate your own needs and personal style. • Owning a home also provides a feeling of security and independence.
Quality of Life • You also get a sense of stability and belonging to your community. • Neighborhood associations - groups of homeowners in geographic areas that meet and work to set quality-of-life standards for the area, working with local government groups to be sure the area is being provided with needed services.
Tax Savings • The interest you pay on your home loan, along with the property taxes, is tax-deductible. • These deductions lower the cost of home ownership. • Because of these tax savings, owning real estate is a tax shelter. • Even though your equity in your home may be increasing each year, you do NOT pay tax on the equity until you sell your home.
Down Payment • Mortgage lenders usually require that borrowers pay a certain amount down toward the purchase price (Down-payment). They will then provide a loan for the balance of the price. • A conventional loan is a mortgage agreement that does not have government backing and that is offered through a commercial bank or mortgage broker. • This type of loan requires a down payment of 10-30%.
Buying a home math • Lauren & John bought a house two years ago for $175,000. They put 15% down. Their payments have reduced their debt by $6,000. Houses in the area have been appreciating at 4% each year. • Down Payment = $175,000 x .15 = $26,250 • Initial Loan= $175,000 - $26,250 = $148,750 • Current Debt= $148,750 - $6,000 = $142,750 • Current Market Value = ($175,000 x 1.04) x 1.04 = $189,280 • Current Equity = $189,280 - $142,750 = $46,530
Down Payment • An FHA loan • government-sponsored loan • carries mortgage insurance • borrowers pay a monthly insurance premium and their loan payments are guaranteed through the Federal Housing Administration insurance program. • Down payments for FHA loans can be as little as 3 percent and are often available for first-time homebuyers, veterans, and low-income buyers.
Mortgage Payments • Mortgage is a loan to purchase real estate. • A trust deed is similar to a mortgage, it is a debt security instrument that shows as a lien against property. • Payments on a mortgage or trust deed are made over 15-30 years. • Monthly loan payments include principal AND interest. If the borrower is required to have an escrow account, the payment includes property tax and insurance.
Mortgage Payments • Escrow account - a fund where money is held to pay amounts that will come due during the year. • Mortgage lenders often allow borrowers to buy discount points, which are used to lower the mortgage interest rate. • Typically, one point equals one percent of the loan amount. • Points are essentially extra interest that borrowers must pay at closing. • They increase the cost of the loan, but lenders usually offer lower interest rates in exchange for higher points. • Depends on how long you keep your house for whether it is a good tradeoff. • Points are often charged in addition to a loan origination fee, the amount charged by a bank or lender to process the loan papers.
How to calculate your payment • The formula we will use is below: • Where • A = the estimated monthly mortgage payment. • P = the amount initially borrowed for the house. • r = the annual interest rate (expressed as a decimal). • n = the total number of monthly payments that will be made to pay the mortgage.
Example • Suppose you obtain a 30-year fixed-rate mortgage for $100,000 at a rate of 5.5%. Then we have • P= 100,000 (the mortgage amount) • r = 0.055(the interest rate expressed as a decimal) • n= 360(30 years multiplied by 12 months gives 360 mortgage payments)
Closing Costs • Closing costs - referred to as settlement costs. • Expenses incurred in transferring ownership from buyer to seller in a real estate transaction. • Closing costs can add $3000 - $5000 to the purchase price of your home. • The buyer usually pays for the title search to make sure the seller is the legal owner and that no one else has a claim on the property. • The buyer may also pay for a credit report, loan origination fee, loan assumption fee (to take over someone else’s mortgage), closing fees, recording fee, and their share of taxes and interest owed on the property.
Property Taxes • The real estate property tax is a major source of funding for local governments. • Homeowners pay property tax based on the assessed value of the property. • A local taxing authority determines the assessed value, usually a percentage of the market value. • Property taxes are tax-deductible.
Property Insurance • A homeowner must have property insurance covering the structure. • Usually a requirement of the loan agreement to protect the interests of the mortgage lender as well as the homeowner. • Standard homeowners’ insurance includes both fire and liability protection.
Utilities • Because most homes are larger than apartments, the utility bills are usually higher. • The homeowner pays for all utilities and garbage services, water and sewer charges, storm drain assessments, lighting fees, gas, electricity. • They are responsible for costs to repairs to things like water and sewer lines that are on their property.
CCRs • Many housing subdivisions or planned unit developments have covenants, conditions, and requirements that were agreed upon when the subdivision was built. • They are rules to maintain property values and protect the interests of all property owners and include things like • maintaining your lawn • specifying where cars can and can’t be parked • controlling the kind of fences or storage buildings that can be built • types of roof that can be installed • etc.
Zoning Laws • You must obey all zoning laws and local ordinances, like obtaining a building permit and when you add or modify your home, following setback requirements, adhering to restrictions regarding the kinds and types of buildings that can be constructed in the area.
Maintenance and Repairs • You will be responsible for maintenance and repairs inside and outside of your home. • Before you buy, make sure you are willing to spend the time and money needed to keep your home in good condition. • Ongoing maintenance includes painting, mowing, weeding, and fixing things that break. • There will be occasional expensive repairs, like a new roof, furnace, water heater, appliances.
Working With a Real Estate Agent • Before selecting a home to buy, look at many houses. • You can look by yourself or work with a real estate agent. • Agents know the market, can help you find the right home, and will assist you with the purchasing, financing, and closing processes. • One of the first things an agent will have you do is go to a mortgage lender and prequalify for a real estate loan. • You fill out an application to see how much money you would be qualified to borrow. • This will help you find houses in your price range.
Working With a Real Estate Agent • Real estate agents earn commission income. • The commission is a percentage of the home sale price, usually 5 – 7% • The SELLER pays the commission, and the agents working for the buyer and seller split it. • As the purchaser, you do not pay the agents’ commission.
Working With aReal Estate Agent • If you are buying directly from an owner without the assistance of an agent, you might be able to negotiate a lower price because the seller would not have to pay this fee. • However, you should still seek advice from a professional, such as a lawyer, to be sure your interests are protected. • You can find homes for sale online or in the newspaper. • The Multiple Listing Service is a real estate marketing service in which agents from many agencies pool their home listings and agree to share commissions on their sales. Sellers gain wide exposure for their properties this way. • After you have narrowed your choices to a small number of homes in your price range, you should visit them with your agent.
Making an Offer • To let the homeowner know of your interest in buying the home and the price you are willing to pay, you will sign an agreement called an offer. • An offer is a serious intent to be bound to an agreement. When you make an offer it is called an earnest-money offer. It is accompanied by a deposit called earnest money, which is held in escrow until the transaction is completed. This protects the seller in case you fail to meet the terms of the agreement.
Making an Offer • If you and the seller agree to terms, the seller will take the house off of the market until the deal is completed. • During that time, the house cannot be sold to anyone else. • If you later back out of the deal, you will likely forfeit your earnest money to the seller. • One way to avoid losing that money is to make your offer contingent (dependent) on obtaining financing and the property passing an inspection. • So if you don’t qualify for a mortgage, you have not violated the contract and can get your money back.
Making an Offer • The seller may not accept your initial offer. • When they agree to it, you have an acceptance. • If the seller wants to change any part of the offer, they will make a counteroffer—a rejection of the original offer with a listing of what would be acceptable, and they offer a new offer. • The buyer and seller will negotiate until an agreement is made or decide not to complete the transaction.
Down Payment Sources • The most common sources of down payment money are • personal savings • informal loans from parents or relatives. • Most lending institutions will not allow mortgage applicants to formally borrow their down payment. • In other words, you must invest a substantial amount of your own cash in the property.
Qualifying for a Mortgage • To qualify for a mortgage, you must complete an extensive loan application. • The financial institution will check your credit history, employment, and references. • They will look for evidence that you can meet your current bills and look at the type and amount of your current debts, the amount and source of your income, and your creditworthiness.
Types of Mortgages • There are 2 types of mortgages: • Fixed-rate mortgage -- is a mortgage on which the interest rate does not change during the term of the loan. • Adjustable-rate mortgage (ARM) - is a mortgage for which the interest rate changes in response to the movement of interest rates in the economy as a whole. • The rate for an ARM usually starts lower than the current rates for a fixed-rate mortgage. • The lender than adjusts the ARM rate based on the ups and downs of the economy, but rates usually go up.
Taking Title to Property • After you and the seller reach an agreement and you have arranged your financing, the next step is to prepare for the closing. • An escrow closer is an independent person who gathers and verifies information. • The closer also prepares the closing statement that lists what you owe and what credits will be applied to you.
Taking Title to Property • You will meet with the closer to sign documents and pay the balance you owe. • Once the sellers receive their money, the escrow closer makes sure that title passes to you. • Title is legally established ownership. • A deed is the legal document that transfers title of real property from one party to another. • Before you take ownership, you will want to make sure that the title is clear—free of any liens, which is a financial claim against the property.
Taking Title to Property • To ensure that the property has a clear title • the escrow closer orders a title search • which is the search of public records to check for ownership and claims to a piece of property. • When the title insurance company confirms that title is clear and all is represented, it will issue title insurance • a policy that protects the buyer from any claims arising from a defective title.
Taking Title to Property • Before the closing, the lending institution prepares the loan papers and sends them to the escrow closer. • If any problems arise, the closer or the lender will notify the buyer and seller. • When all procedures are complete, they will be notified of the closing date. • In this meeting, you and the seller sign the papers and pay all related closing costs and the ownership is transferred from the seller to the buyer.
