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.