Rent vs. Buy

The Finances of Housing and Real Estate

Housing Alternatives

Rent an Apartment / Condo / Townhouse

Rent a HouseOwn a HouseOwn a Condo / TownhouseOwn a Manufactured Home

Advantages of Renting

Mobility

Fewer Responsibilities

Low Initial Costs

Disadvantages of Renting

Financial Restrictions

Lifestyle and Property Restrictions

Higher Long Term Costs – no equity buildup or tax breaks

Factors Affecting the Cost of Renting

Location, location, location Living Space (square footage)

Utilities (included?)Security DepositsRenters Insurance

Steps to Buying a Home

1. Get your finances in orderCredit score, down payment

2. Determine your home ownership needsHousing type, affordability,

quality

Steps to Buying a Home

3. Get pre-qualified for a mortgage Find out how much your bank will lend you

4. Find and evaluate a property to purchase

Real Estate agent?

Steps to Buying a Home

5. Negotiate a purchase price

• Research prices• Make an offer• Earnest money

Steps to Buying a Home

6. Obtain Financing

7. Closing Day – sign all required documents and get the keys to your new home!

Housing Vocabulary

assessed value mortgage insurance

closing costs prepayment fee

escrow account real estate property taxes

(interest) points subleasing / subletting

lease title insurance

III. Financing a home

A. Mortgage Loans1. Mortgage - loan to purchase real estate

the property is collateral

2. Principal (amount of loan) plus interestExample: If cost is $200K & $20K is

down payment, principal is $180K3. Generally have to pay “points” – a fee

which is a percentage of the amount borrowed – each point is 1%

B. Factors Affecting Monthly Mortgage Payments

1. Amount borroweda. Cost of home

1)compare similar homes b. The larger the down payment,

the better1) less interest2)mortgage paid off more

quickly3)may get lower interest rate

2. Interest ratesa. Higher the interest rate higher monthly payment

b. Fixed or variable interest rate?

c. Re-finance your mortgage if interest rates decrease

3. Length of maturity (length of loan)a. shorter less interest b. equity builds up faster with shorter loansc. pre-payment - option of paying more than monthly requirement

4. Equity is the amount that has been paid off plus an appreciation on the value of the home

Example: - House cost $200K - Value has increased to $220K - You have paid $50K towards your mortgage

You have $70K in equity ($20K + $50K)

C. Unforeseen Expenses1. “House poor” = too much income

goes to mortgage little leftover for other expenses

2. Closing costs can equal 2 – 10% of loan amount

3. Property taxes usually 1-4% of value of the home

a. Escrow account – a reserve account where money is set aside each month to pay for property taxes

4. Lenders also require insurance on home (in case of fire, etc.)