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Learn how to determine what home you can afford with lending standards, factors affecting affordability, steps in the home buying process, and guidelines for renting and negotiating prices. Understand mortgage options and make informed decisions to secure the best deal.
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Car & Home DecisionPart 2 Financial Planning - Yates
Determining What’s Affordable: Lending Standards 1. Financial history: • Income stability • Credit history 2. Ability to pay: • Housing cost ratio at a maximum of 28% of gross income • Housing and other long-term debt ratio at a maximum of 36% of gross income 3. Appraised home value Yates
Determining What’s Affordable: Other Factors • Calculation of your mortgage limit: • 28% rule (front-end ratio) • 36% rule (back-end ratio) • 80% rule (home-equity rule) • Prequalification, or knowing for sure what is affordable Yates
Determining What’s Affordable: Other Factors (cont’d) • Accumulation of a down payment: • Down payment sources and “gift letters” • FHA, VA, and FmHA federally-backed loans require a lower down payment • Private mortgage insurance (PMI) • IRA loan of up to $10,000 for first-time homebuyer Yates
Housing Step 2: Selection • The search process: • Use a traditional real estate agent • Use an independent or exclusive buyer-broker • Use the Internet to learn about buying a home • The inspection process: • Structural • Mechanical Yates
Housing Step 3: Making the Purchase • Guidelines for renting • Negotiating a sales price • Signing the sales contract • Financing the purchase – the mortgage Yates
Guidelines for Renting • Determine what you can afford. • Compare the location with shopping, employment, and schools. • Understand the lease. • Get every detail in writing. • Research the reliability of the landlord. • Acquire renter’s insurance. Yates
Negotiating a Sales Price • Always haggle on the actual purchase price and counteroffers. • Include all contingencies. • Consider closing costs. • Offer earnest money. • Note: You may never see the seller because often the real estate agents carry the offers between parties. Yates
Signing the Sales Contract • Always have a fixed price. • Do a title search. • Perform a pest or other inspection. • Make the contract contingent on receiving the proper financing. Yates
Signing the Contract (cont’d) • Divide the utilities, insurance, taxes, and interest equitably with the seller. • Stipulate the condition of the dwelling upon transfer. • Include all other contingencies that may interfere with a satisfactory purchase. Yates
Financing the Purchase • Shop for the lowest interest rate. • Determine where you want to finance. • Determine the length of the mortgage. • Choose the type of mortgage. • Note: Make sure you understand every aspect of the mortgage before you sign. This could be your largest purchase ever. Yates
Sources of Mortgages • Mortgage bankers • Mortgage brokers Yates
Conventional or Government-Backed? • Conventional • Veteran’s Administration (VA) mortgages • Federal Housing Administration (FHA) mortgages Yates
Government-Backed Mortgages • Advantages: • Lower interest • Smaller down payment requirement • Less strict lending standards • Disadvantages: • More paperwork to qualify • Higher closing costs • Maximum lending limits Yates
Types of Mortgages • Fixed-rate mortgage loans • Adjustable-rate mortgage (ARM) loans • Other mortgage loan options Yates
Fixed-Rate Mortgage Loans • Assumable loans – allow for transfer of the mortgage with the home • Prepayment privilege – allows the payee to increase the monthly payment without a fee Yates
Adjustable-Rate Mortgage (ARM) Loans • Initial rate – the first rate on the mortgage, usually short-term • Interest rate index – determines annual rate adjustment • Margin – the difference between the index rate and the quoted rate • Adjustment interval – the length of time between adjustments Yates
Adjustable-Rate Mortgage (ARM) Loans (cont’d) • Rate cap – the maximum rate increase allowed either per year or over the life of the loan • Payment cap – the maximum allowable payment amount. Normally not a desired feature due to the risk of negative amortization. Yates
Convertible Reduction-option Two-step Price level adjusted ARM Innovations Yates
Other Mortgage Loan Options • Balloon payment mortgage • Graduated payment mortgage • Growing equity mortgage • Shared appreciation mortgage Yates
Adjustable-Rate Versus Fixed-Rate Mortgages • Fixed-rate issues to consider: • Fixed payments • Lower interest rate risk • No risk of negative amortization • Adjustable-rate issues to consider: • Lower initial interest rate • May qualify for a larger loan due to lower monthly payments • With rising rates, rising payments Yates
Mortgage Decisions:Term of the Loan • 15-year advantages: • Less total interest paid • Faster equity accumulation and payoff • Lower interest rate • 30-year advantages: • Lower monthly payments increase affordability and financial flexibility • Higher time value of money • Greater tax advantages due to interest payment deductions Yates
Mortgage Decisions:Term of the Loan (cont’d) Two other considerations: • Time value of money • The effect of taxes Yates
Housing Step 4:Post-purchase Activities • Time and money for upkeep and maintenance • Refinancing your mortgage: • 2% rule • Closing costs Yates
Summary • Smart buying: Your automobile: • Step 1: Do your homework to narrow your car choice. • Step 2: Make your selection. • Step 3: Make your purchase. • Step 4: Maintain your purchase. • Step 5: Consider consumer protection and your car. Yates
Summary (cont’d) • Choosing a vehicle: • Consider your needs versus your wants. • Look at the alternatives. • Fit your car into your budget. • Do your comparison shopping via the internet or publications. • Determine what is available in your price range. • Test-drive the exact vehicle you are considering. Yates
Summary (cont’d) • Deal negotiation: • Take advantage of sales, but always negotiate the price. • Know the dealer’s cost of the vehicle. • Understand the various dealer markups. • Be aware of any rebate that may apply. • Evaluate financing. • Leasing alternatives: • Closed-end leases, or walk-away leases • Open-end leases • Alternatives Yates
Summary (cont’d) • Smart buying: Your housing: • Step 1: Homework • Step 2: Selection • Step 3: Making the purchase • Step 4: Post-purchase Yates
Summary (cont’d) • Choosing a housing type: • Decide on the fundamentals such as bathrooms, bedrooms, and closet space. • Decide on property size. • Compare other considerations like school systems, or proximity to shopping centers. • Buying versus renting: • Personal and lifestyle considerations • Financial considerations • Activities Yates
Summary (cont’d) • Types of mortgages: • Fixed-rate mortgage loans • Adjustable-rate mortgage (ARM) loans • Other mortgage loan options • Sources of mortgages: • Mortgage bankers • Mortgage brokers • Conventional mortgages • Government-backed mortgages Yates