Selecting and Financing Housing

2. 7 Selecting and Financing Housing

3. Selecting and Financing HousingChapter Objectives • Assess costs and benefits of renting • Implement the home-buying process • Determine costs associated with purchasing a home • Develop an strategy for selling a home

4. Objective1: Assess costs and benefits of renting • Your lifestyle and your choice of housing. • How you spend your time and money, your lifestyle, affects your housing choice. • Personal preferences are modified by financial factors. • Traditional financial guidelines suggest you spend no more than 25-30% of take-home pay on housing, or no more than 2 1/2 times your annual income.

5. Renting vs. Buying Housing (continued) • Opportunity costs of housing choices include some common trade-offs. • Interest earnings lost on money used for a down payment or the interest on a security deposit for an apartment. • Time and cost of commuting to live in an area that offers less costly housing or more space. • Renters lose tax advantages and equity growth. • Time and money you spend to repair and improve a lower-priced home. • Time and effort when you have a home built to your personal specifications.

6. Rent versus Own: Evaluating Housing Alternatives • Advantages of renting. • Fewer maintenance and repair responsibilities. • Easier to move. • Lower initial costs. • Disadvantages of renting. • No tax benefits. • Limitations regarding remodeling. • Restrictions regarding pets and other activities. • Legal concerns of a lease. • Costs including a security deposit, utilities and renter’s insurance.

7. Housing Rental Activities • The search. • Select an area and rental cost for your needs. • Compare costs and facilities between units. • Talk to current and past residents. • Before signing a lease. • Make sure the lease dates, costs, and facilities are clearly represented. • Talk to a lawyer about unclear lease aspects. • Note in writing, signed by the landlord, the condition of the rental unit. • Any person who signs a lease can be held responsible for the full rent.

8. Legal Details of a Lease • Description and address of property. • Name and address of the owner/landlord (lessor). • Name of tenant (lessee). • Effective date and length of the lease. • Amount of security deposit. • Amount and due date of rent. • Location where rent is due. • Date and amount for late rent payments. • List of included utilities, appliances. • Restrictions on certain activities. • The right to sublet the unit. • Conditions under which landlord may enter the rental unit.

9. Housing Rental Activities (continued) • Living in rental property. • Keep all appliances and facilities in good condition. • Contact the owners regarding needed repairs. • Respect the rights of others (stereo and parties). • Obtain renter’s insurance. • At the end of the lease. • Clean and leave unit in same condition you got it. • Provide landlord with new address for deposit. • Require than any deductions from your security deposit be documented.

10. Objective 2: Implement the home-buying processHome Buying Process Step 1: Determine Homeownership Needs • Benefits of Home Ownership • Pride of ownership. • American dream/norm. • Financial benefits. • Deduct property taxes and mortgage interest. • Potential increase in value of your home. • Building an equity in your home. • Lifestyle flexibility - express your individuality.

11. Home Buying Process Step 1: Determine Homeownership Needs (continued) • Drawbacks of Homeownership. • Financial uncertainty. • Obtaining money for the down payment. • Obtaining mortgage financing. • Home values could drop. • Limited mobility. • Can take time to sell your home. • Higher living costs. • Maintenance, repainting,repairs, and home improvements. • Rising real estate taxes.

12. Home Buying Process Step 1: Determine Homeownership Needs (continued) • Assess Types of Housing Available • Single-family dwelling. • Multi-unit dwelling. • Duplex (two homes). • Townhouse (2, 4, or 6 units). • Condominium. • You own your unit in a building of units. • It is not a type of building structure, but rather a form of homeownership. • Cooperative housing. • Non-profit organization - members own shares and rent a unit in a building with multiple units.

13. Assess Types of Housing Available (continued) • Manufactured homes. • Fully or partially assembled in a factory, and then moved to the housing site. • Prefabricated type has components built in the factory and assembled at the site. • Mass production under factory conditions keeps costs lower than site built homes. • Mobile homes. • A type of manufactured home, often <1,000 sq. ft. • Offer same features as a conventional house. • Safety is debated and they tend to depreciate.

14. Assess Types of Housing Than Can be Purchased • If building a home to your specifications, … • Does the contractor have needed experience? • Does contractor have a good working relationship with - architect, - suppliers, - electricians, - plumbers, - carpenters - and others?

15. Assess Types of Housing Than Can be Purchased (continued) • What assurance do you have about quality? • What are payment arrangements? • What delays will be considered legitimate? • Is the contractor licensed and insured? • Are there any complaints about this contractor? • Contract should havea time schedule, costestimates, description of work, and a payment schedule.

16. Home Buying Process Step 1: Determine Homeownership Needs • Calculate how much you can afford. • Consider both price and quality. • Look at your income, your current living expenses, and how much you have for a down payment. • Have a loan officer prequalify you. There is no charge to have this done. • Purchase what you can afford - you can always move up. • You can buy a handyman’s special to get a lower price, if you have the time, skills, and money to fix it up.

17. Home Buying Process Step 2: Finding and Evaluating a Property to Purchase • Select a location, location, location. • Be aware of zoning laws. • Assess the school system if you have children. • Consider using a real estate agent. • They present your offer, negotiate the price, assist you in obtaining financing, and represent you at the closing. • Conduct a home inspection or hire an inspector. • Mortgage company will want an appraisal.

18. Home Buying Process Step 3: Pricing the Property • Determine an appropriate market price. • Price is affected by whether it is a seller’s or a buyer’s market. • Negotiate an agreement price via a purchase agreement or contract. Counteroffers are common. • Earnest money if part of your offer. • Contingency clauses, such as... • Buyer can obtain financing. • Sale contingent on the sale of the buyer’s current home.

19. Objective 3: Determine costs associated with purchasing a home Home Buying Process Step 4: Obtaining Financing • Determine the amount of the down payment. • Mortgage insurance if less than 20% down. • Investigate the rates and conditions of mortgages. • Apply for a mortgage and evaluate types of mortgages. Guidelines for affordability of housing costs are 28% to 36% of gross income. • Qualifying for a mortgage includes your income, debts, credit history, down payment amount, length of the loan, and current mortgage rates. • Points are prepaid interest as a % of the loan amount.

20. Type of Mortgages • Fixed-Rate, Fixed-Payment Mortgage • Fixed rate, fixed payment, amortized. • 5%, 10% or 20% down. • 15, 20 or 30 years of fixed payments. • Government-guaranteed financing programs. • Veterans Administration. • Federal Housing Authority. • Lower down payment than conventional. • Adjustable rate mortgages. • During the life of the loan the interest rate varies with the prime rate, but has a rate cap.

21. Type of Mortgages (continued) • Graduated payment. • Payments start lower and go up. • For persons whose income will increase. • Balloon. • Fixed monthly payments plus one large payment, usually after 3, 5 or 7 years. • Growing-equity. • Increases in payments to allow the loan to be paid off more quickly.

22. Type of Mortgages (continued) • Shared appreciation. • Borrower gets a lower interest rate and agrees to share appreciated value of the home with the lender. • A second mortgage. • Home is collateral and interest may be tax deductible. Home equity loans are an example. • Reverse mortgages. • Provides elderly with tax-free income based on the home equity. • Refinancing if interest rate drops at 2-3%.

23. Home Buying Process Step 5: Close the Purchase Transaction • Make arrangements for a walk through and a closing date. • Closing involves a meeting between the buyer, seller and lender, and document signing. • Closing costs include... • Title insurance and search fee. • Attorney’s and appraisers fees. • Property survey; Pest inspection. • Recording fees; Transfer taxes. • Credit report; Lender’s origination fee. • Escrow account for tax and insurance reserve. • Pre-paid interest; Real estate commission.

24. Overview of the Main Elements of Buying a Home • Location. • Down payment. • Mortgage application. • Points. • Closing costs. • PITI (principal, interest, taxes, insurance). • Maintenance costs.

25. Selling Your Home • Preparing your home. • Repair, repaint, clean, reduce clutter. • When showing home turn on lights and open drapes. Bake bread or make coffee for a welcoming smell. • Determining the selling price. • Appraiser estimates the current value. • Real estate agent markets your home. • If “for sale by owner,” use a lawyer or title co. • Listing with a real estate agent for services.