Ch 8: Independent Living 8.4 Purchase a Home
Answer the following in your groups… • What will the American dream cost you? • What are some recurring and nonrecurring costs that you are responsible for now? • Why is it important for a prospective buyer to have a title search? • What are some financial responsibilities that are paid in arrears?
Investigative questions to think about • What would be most important to you on this list??? • In other words, what are your “must haves” • Talk with your groups
Cost is most important • Two categories: recurring costs and nonrecurring costs • Recurring costs = costs that occur o a regular basis (Every month, every year etc.) • Ex: mortgage payment, insurance payments, property taxes • Nonrecurring costs = one-time only costs • Ex: closing costs, moving costs • Closing is a meeting attended by the buyer, seller , their attorneys and a representative of the lending institution • this is where the official sale takes place • Closing costs are costs that have to be paid to close the sale
Closing Costs can include the following… • Earnest Money Deposit – money paid to the seller by an interested home buyer to show that they buyer is serious about buying the home • Attorney Fees – fees paid to the attorney in return for representation at the closing • Origination Fees – money paid to the lending institution for the paperwork involved in the loan application process • Title – the legal claim of property ownership • Before property changes hands, a title search is conducted to be sure that the seller actually holds the title to the property being sold
More on closing costs • Points – extra fees charged by the lending institution for the use of their money. Each point is equivalent to 1% of the loan amount. There are two types of points: • Origination points are points collected from the buyer as a means of paying for the loan application process • Discount points are points that reduce the interest rate of the loan • Prepaid Interest - • Transfer Tax – fee that is charged for the transfer of the title from the buyer to the seller
Example 1 • Leah and Josh are buying a $600,000 home. They have been approved for a 7.25% APR mortgage. They made a 15% down payment and will be closing on September 6th. How much should they expect to pay in prepaid interest at the closing?
Check your understanding • How much will be charged in prepaid interest on a $400,000 loan with an APR of 6% that was closed on December 17?
Example 2 • Leah and Josh know that they will have to bring their checkbook to the closing. What might they expect to pay in total at the closing?
Check your understanding • Shannon had to make a down payment of 15% of the selling price of her house. She was approved for a $340,000 mortgage. What range of costs might she expect to pay at the closing?
Example 3 • Trudy and Tom have been approved for a $300,000, 15-year mortgage with an APR of 5.75%. How much of their first monthly payment will go to interest and principal?
Check your understanding • What percent of the monthly payment went to principal and what percent went to interest?
Example 4 • How can Trudy and Tom get an accounting of where their monthly payments will go for the first year of their mortgage? • We will use an amortization table (a listing of the unpaid principal, monthly payment, amount allocated to paying down the pricipal and the amount allocated to interest)
Example 5 • Trudy and Tom decide to make an extra payment of $100 each month to reduce their principal. They adjust their spreadsheet as shown. What formula change(s) did they make in row 6 so that the extra payment could be accounted for?
Adjustable Rate Mortgages (ARMs) • Previous examples were all fixed rate mortgages • In an adjustable rate mortgage(ARM) the interest rate can change periodically which means the monthly payments will change as well • Lenders quote you an initial rate that stays in effect for a specific amount of time (can be 1 month to several yrs) • Monthly payment is based on initial rate • The period between rate changes in known as the adjustment period • Hybrid ARMS are a combination of a fixed rate period of time with an adjustable rate period of time
Example 6 • Chris and Gene have a 6-month adjustable 15-year mortgage. They borrowed $300,000 and were quoted an initial rate of 5%. After 6 months, their rate increased by 1%. Examine the following spreadsheet for the first year of payments. How were the amounts for payment 7 calculated?
Check your understanding • How much of a difference did the 1% adjustment in interest rate make in the monthly payment and the amounts towards interest and principal?
Ch 8 Asnmt 4 • Pg 420 #2, 4-7, 9, 11, 13