C HAPTER 9

1. CHAPTER9 The Housing Decision: Factors and Finances Personal Finance 6e Kapoor Dlabay Hughes 9-1

2. Evaluating Housing Alternatives • 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. 9-2

3. Evaluating Housing Alternatives (continued) • Opportunity cost of housing choices, includes 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 offer less costly housing or more space. • Renters lose tax advantages and equity growth. • Time and money to repair and improve a lower-priced home. • Time and effort when you have a home built to your personal specifications. 9-3

4. Rent or Own: Evaluating Housing Alternatives • Advantages of renting. • Mobility. • Fewer maintenance responsibilities. • Lower initial costs. • Disadvantages of renting. • Few financial benefits. • Restricted lifestyle. • Legal concerns of a lease. • Costs including a security deposit, utilities and renter’s insurance. 9-4

5. Housing Rental Activities • The search. • Select an area and rental cost for your needs. • Compare costs of 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. • Either person who signs lease can be held responsible for the full rent. 9-5

6. Legal Details of a Lease • Description and address of property. • Name and address of the owner/landlord. • Name of tenant. • 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. 9-6

7. 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 deposit be documented. 9-7

8. Advantages of Owning • Pride of ownership. • American dream/norm. • Reduced income taxes. • Deduct property taxes. • Deduct mortgage interest. • Build an equity by paying down the loan or by price appreciation. • Builds your credit rating. • Hedge against inflation. • Lifestyle flexibility - express your individuality. 9-8

9. Disadvantages of Owning • Financial uncertainty. • Get down payment and financing. • Home values could drop. • Limited mobility. • Can take time to sell. • Higher living costs. • Maintenance. • Repairs & improvements. • Real estate taxes. 9-9

10. Assess Types of Housing Than Can be Purchased • Single-family dwelling. • Multi-unit dwelling. • Duplex. • Townhouse. • Condominium. • You own your unit in a building of units. • It is not a type of structure but a form of ownership. • Cooperative housing. • Members own shares in and rent a unit in a building with multiple units. 9-10

11. Assess Types of Housing Than Can be Purchased (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. • Lower cost than site built homes. • Mobile homes. • A type of manufactured home often less than 1,000 square feet. • Offer same features as a conventional house. • Safety is debated and they tend to depreciate. 9-11

12. Assess Types of Housing Than Can be Purchased (continued) • If building a home, consider… • Does the contractor have needed experience? • Does contractor have a good working relationship with architect, suppliers, electricians, plumbers, carpenters and others? • What assurance do you have about quality? • What are payment arrangements? • What delays will be considered legitimate? • Is the contractor licensed and insured? 9-12

13. Home Buying Process Step 1: Determine Homeownership Needs • Determine how much you can afford. • Consider both price and quality. • Price and down payment. • Available funds for a down payment. • Your income and living expenses. • Your ability to make the payments. • Get prequalified. • Size and quality. • As you move to a second and third home you can include more of the features you want. • Look at the condition of the home. 9-13

14. Home Buying Process Step 2: Finding and Evaluating a Property to Purchase • Select a location. • Be aware of zoning laws. • Assess the school system if you have children. • Using a real estate agent. • They present your offer, negotiate the price, assist you in obtaining financing, and represent you at the closing. • Conducting a home inspection. • Obtain an appraisal. 9-14

15. Home Buying Process Step 3: Pricing the Property • Determining the home price. • Negotiating the purchase price. • Buyer-agents. • Seller’s or buyer’s market. • Earnest money. • Contingency clauses • Buyer can obtain financing. • Sale contingent on the sale of the buyer’s current home. 9-15

16. Home Buying Process Step 4: Obtaining Financing • Determine the amount of the down payment. • Mortgage insurance if less than 20%. • Qualifying for a mortgage. • Can be pre-qualified based on income, assets, debts, credit history, mortgage rate, and length of loan. • Evaluating points (prepaid interest). • The home loan application process. • Fixed or adjustable rate mortgage. 9-16

17. Type of Mortgages • Conventional. • 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. • Adjustable rate mortgages. • Interest rate varies with the prime rate but has a rate cap. 9-17

18. 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. • Payment increases to allow loan to be paid off more quickly. 9-18

19. Type of Mortgages (continued) • Shared appreciation. • Borrower 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 is an example. • Reverse mortgages. • Provides elderly with tax-free income based on the home equity. • Refinancing. 9-19

20. Home Buying Process Step 5: Closing the Purchase Transaction • Title insurance and search fee. • Attorney’s and appraisers fees. • Property survey. • Recording fees; transfer taxes. • Credit report. • Termite inspection. • Lender’s origination fee. • Tax and insurance reserve. • Pre-paid interest. • Real estate commission. Closing Costs 9-20

21. The Main Elements of Buying a Home • Location. • Down payment. • Mortgage application. • Points. • Closing costs. • PITI (principal, interest, taxes, insurance). • Maintenance costs. 9-21

22. Selling Your Home • Preparing your home. • Determining the selling price. • Appraiser. • Realtor. • For sale by owner. • Listing with a real estate agent. 9-22