chapter 9: buying your home garman/forgue personal finance ninth edition ppt slide program prepared...

Chapter 9:Buying Your Home

Garman/Forgue

Personal FinanceNinth Edition

PPT slide program prepared by Amy Forgue and Ray Forgue.

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Learning Objectives

1. Decide whether rented or owned housing 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.

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Learning Objectives

4. Distinguish among the conventional and alternative ways of financing a home and list the advantages and disadvantages of each.

5. Identify the important aspects of 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 you do not move without paying your rent.

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Rented Housing

• 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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Rented Housing

• Lease agreement and restrictions– Tenancy for a Specific Time

– Subleasing

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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?

• What does it cost to buy a home?

• Consider the tax consequences of buying 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.

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Up-Front Costs

• 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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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

• Mortgage Insurance– Private mortgage insurance (or PMI)– Federal Housing Administration (FHA)

• Department of Veterans Affairs (VA)

• Home warranty insurance

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Misc. Fees

• Some fees are paid both up-front and then monthly– Taxes (T) and Insurance (I)– Escrow account

• Real estate property taxes

• Homeowner’s insurance

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The Steps of Home Buying

• Get your finances in order.

• Prequalify for a mortgage.– Front-end ratio– Back-end ratio– 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.

• Agree to terms with the seller.

• 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 counteroffer.

• Negotiate and sign a purchase contract (or sales contract).

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The Steps of Home Buying

• Apply for a mortgage loan.– Good-faith estimate

– Mortgage lock-in

– Loan commitment (or loan preapproval)

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The Steps of Home Buying

• Prepare for the closing.

• Hire your own inspector.

• Hire an attorney.

• 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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Financing a Home

• Items to consider:– The mathematics of mortgage loans

• Lien• Foreclosure• Principal

– Amortization schedule

• The amount borrowed• The interest rate• Length and maturity of the loan

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Financing a Home

• The conventional mortgage loan

• The adjustable-rate mortgage loan– Teaser Rate– Payment Caps– Negative Amortization

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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)– Reverse mortgage (or home-equity

conversion loan)

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Selling a Home

• Should you list with a broker or sell a home yourself?– Fizbo: For sale by owner (FSBO)

• Selling carries its own costs– Brokers Commission– Prepayment Fee

• Be wary of seller financing!

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The Top 3 Financial Missteps When Buying Housing

People slip up in 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.

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The Top 3 Financial Missteps When Buying Housing

People slip up in when they do the following:

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 Habits in Buying Your Home

• Read your leases and all other real estate contracts before signing.

• Save the funds for a down payment in a tax-sheltered Roth IRA account.

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Good Money Habits in Buying Your Home

• 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.

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Good Money Habits in Buying Your Home

• 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 Habits in Buying Your Home

• Thoroughly explore mortgage loan sources and options to determine which one best fits your needs.

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Good Money Habits in Buying Your Home

• 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.