Chapter 9 Obtaining Affordable Housing
Dec 14, 2015
Chapter 9
Obtaining Affordable Housing
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Learning Objectives
1. Decide whether renting or owning your home is better both financially and personally.
2. Explain the up-front and monthly costs of buying a home.
3. Describe the steps in the home-buying process.
4. Distinguish among the conventional and alternative ways of financing a home and list the advantages and disadvantages of each.
5. Identify the key considerations when selling a home.
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Introduction
• Mortgage Loan: Loan to purchase real estate in which the property itself serves as collateral.
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Rented Housing• Rent, deposit, and related expenses
– Rent: Cost charged for using an apartment or other housing space.
– Security Deposit: Ensures that a tenant does not move without paying the rent.
• Lease agreement and restrictions
– Lease: Contract specifying both tenant and landlord legal responsibilities.
– Periodic Tenancy: Lease agreement can be terminated by either party if they give proper notice in advance.
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How to Get Your Security Deposit Back
• Make a list of all damages and defects when you first move into the unit. Have the landlord sign this list.
• Maintain the unit and keep it clean.
• Notify the landlord promptly (in writing, if necessary) of any maintenance problems and malfunctions.
• Give proper written notice of your intention to move out at least 30 days in advance of the lease expiration.
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How to Get Your Security Deposit Back
• Make a written list of all damages and defects after moving out but prior to turning over the keys. Have the landlord sign this second list.
• Use certified mail (with a return receipt) to request the return of your security deposit and to inform the landlord of your new address.
• Use small-claims court (see Chapter 8), if necessary, to obtain a court-ordered refund.
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Owned Housing
• Single-Family Dwelling: Housing unit that is detached from other units.
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Owned Housing
• Condominiums and cooperatives
– Condominium (or Condo)
– Homeowner’s Association
– Homeowner’s fee
• Manufactured housing and mobile homes
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Renting vs. Buying• Who pays more: Renters or Owners?
– Based on cash flow, owners pay more
– Based on total costs, renters pay more
• Taxes and interest expense are deductible
• Appreciation in value reduces ownership cost
• What does it cost to buy a home?– Down payment is a % of purchase price
– Points are upfront payments as % of loan amount
– Attorney fees – can be 0.5% of purchase price
– Title and insurance fees
– Miscellaneous appraisal, inspection and notary fees
• Consider the tax consequences of buyingyour home.
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Class Discussion Question #1
Many of you rentor own a house,apartment, orcondominium.What motivated you to either rent or own your home?
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Up-Front Costs• Most up-front costs are due at the closing.
– Closing costs
• Down Payment: Portion of the purchase price that is not borrowed.
• Point (or Interest Point): Fee equal to 1 percent of the total mortgage loan amount.
• Attorney fees
• Title search and insurance
• Miscellaneous fees: Home inspection, appraisal fee, etc.
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Illustrated Up-Front and Monthly Costs When Buyinga Home
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Monthly Costs
• Monthly costs include both principal and interest.
• Mortgage principal and interest.
– PITI
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Monthly Costs• Loan-to-Value (or LTV) Ratio:
– Target is 80% of Loan amount to Home Value
– Results in 20% down payment
• Mortgage Insurance:
– Private mortgage insurance (or PMI) required if LTV is more than 80% and varies between 0.25% and 2%. Protects lender against buyer default on loan.
– Federal Housing Administration (FHA) offers mortgage insurance to creditworthy homeowners as alternative to a private company
– Department of Veterans Affairs (VA) provides mortgage insurance to lender for military veterans
• Home warranty insurance – service contract covers home features such as mechanical and electrical equipment at time of sale
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Misc. Fees• Some fees are paid both up-front and then
monthly:– Taxes (T) and Insurance (I) usually paid 6 months
upfront and then monthly “impounded” by escrow account
– Escrow account – A special reserve account at a financial institution in which funds are held until they are paid to a third party.
• Real estate property taxes – paid to local government and range between 1 – 4 % of the home value.
• Homeowner’s insurance – Required by lender as prepayment in case of fire or other disaster
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The Steps of Home Buying• Get your finances in order.
– Check Credit Report and correct any errors
– Estimate monthly housing costs
– Adjust budget to fit the expected costs
• Prequalify for a mortgage.
– Front-end ratio of 25-29% annual PITI to gross annual income
– Back-end ratio of 33-41% total debt to gross annual income
– Mortgage broker: Individual or company that acts as an intermediary between borrowers and lenders.
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The Steps of Home Buying
• Search for a home online and in person.– Make a list of desired home features
– Drive around neighborhood to identify noise
– Bring a notepad to write down items discussed
• Agree to terms with the seller on Sale
• Make an offer to buy.
– Purchase offer (or offer to purchase): Written offer to purchase real estate.
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The Steps of Home Buying
• Respond to a counter offer.
• Negotiate and sign a purchasecontract (or sales contract).
• Apply for a mortgage loan.
– Good-faith estimate – Lender provides estimate of all costs associated with the loan such as APR, closing costs, application fees, etc.
– Mortgage lock-in – Lender’s promise to hold a certain interest rate for a specified period of time such as 60 days.
– Loan commitment (or loan preapproval) – Lender’s promise to grant a loan to the buyer
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The Steps of Home Buying• Prepare for the closing.
– Change of Address Notice
– Hire a moving company
– Close utilities accounts
• Hire your own home inspector.– Inspects for termites, wood rot and heating/cooling functions
• Hire an attorney – may help negotiate closing costs
• Sign your name on closing day.
– Uniform Settlement Statement: Lists all of the costs and fees to be paid at the closing.
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Steps in theProcess of Buying a Home
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Financing a Home• Items to consider:
– The characteristics of mortgage loans
• Lien – legal right of lender to take property or sell it if borrower defaults on the loan
• Foreclosure – Process of lender suing the borrower and asking court to order property sale to pay the debt.
• Principal – amount borrowed as a loan balance
– Amortization schedule – shows monthly payment breakdown of interest, principal and debt balance owed throughout loan period
• The amount borrowed – represents the loan issued by lender subject to interest expense on unpaid balance
• The interest rate – Percent of loan paid as compensation to lender for funds supplied to buyer for home purchase
• Length and maturity of the loan – Longer time period results in lower monthly payment but higher overall interest expense
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Partial Amortization Schedule for a $160,000, 30 year Mortgage Loan at 6%
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Financing a Home• The conventional mortgage loan – Fixed rate, fixed term, fixed
payment mortgage loan
– Optimal when interest rates rise over time
– Provides steady cash flow payment
• The adjustable-rate mortgage loan – Variable rate, variable term, variable payment mortgage loan
– Rate based upon change in prime lending rate
– Optimal when interest rates fall or borrower needs shorter term financing alternatives to achieve lower payment
– Teaser Rate – Low introductory rate for limited time period, then gradually increases over time
– Payment Caps – Limit the amount payment can vary as % of ARM
– Negative Amortization – Occurs when monthly payments are smaller than needed to pay interest on the loan resulting in rising principal balance.
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Income Needed toQualify for a Mortgage
• Monthly payment includes principal, interest, taxes and insurance• Assumes 28% front end ratio (PITI % gross income)• Payment assumes 20% down payment for 30 year fixed rate
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Financing a Home• Alternative mortgage loans:
– Interest-only mortgage
– Graduated-payment mortgage
– Lender buy-down mortgage
– Rollover (renegotiable-rate) mortgage
– Growing-equity mortgage
– Assumable mortgage– Land contract (contract for deed) – title of ownership remains
with seller until all payments occur or buyer forfeits money paid and any appreciation in value
– Reverse mortgage (or home-equity conversion loan) – homeowner age 62+ borrows against equity and receives income payment for 5 to 15 years or for life.
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Changes in Principal and Interest Components of a Monthly Payment
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Your Credit Score Affects Your Mortgage Interest Rate
Credit Score APR
760–850 4.0%
700–759 4.2%
680–699 4.4%
660–679 4.6%
640–659 5.0%
620–639 5.6%
Below 620 subprime market only
Mortgage lenders charge interest rates based on your credit score.
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Selling a Home• Should you list with a broker or sell a home yourself?
– Fizbo: For sale by owner (FSBO)
– Advertising and Marketing Costs
– Challenge is to create awareness for Listing
– Maybe time consuming
• Selling carries its own costs
– Brokers Commission – 6% of sales price
– Prepayment Fee – 1-3% of loan for early pay off
• Be wary of seller financing! – Referred to as “Carry” the buyer or seller provides financing to buyer.
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The Top 3 Financial MisstepsWhen Buying Housing
People experience challenges when they do the following:
1. Fail to search for and negotiate for the lowest mortgage interest rate possible.
2. Fail to request that private mortgage insurance be canceled when their loan-to-value ratio drops to 80 percent.
3. Pay off a mortgage early when carrying credit card debt or not saving regularly through a qualified tax-sheltered retirement plan.
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Good Money Habitsin Buying Your Home
• Read your leases and all other real estate contracts before signing.
• Talk to family members or friends who have bought a home to obtain their insights into the process.
• Get your finances in order before shopping for a new home by reducing debt, budgeting better, and clearing up anything that keeps you from having a high credit score.
• Buy a home as soon as it fits your budget and lifestyle so you can take advantage of special income tax deductions and the likelihood of substantial price appreciation over time.
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Good Money Habitsin Buying Your Home
• Thoroughly explore mortgage loan sources and options to determine which one best fits your needs.
• If you make a down payment of less than 20 percent on a home, cancel private mortgage insurance as soon as the equity in your home pushes the loan-to-value ratio to 80 percent.
• Set a reasonable goal for a down payment amount and calculate how much you would have to save per month to reach it at http://partners.leadfusion.com/tools/motleyfool/savings03/tool.fcs