the cost of owning

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THE COST OF OWNING UNIT 5, LESSON 1 ORCUTT ACADEMY HIGH SCHOOL FINANCE & ACCOUNTING

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Page 1: The cost of owning

THE COST OF OWNINGUNIT 5, LESSON 1

ORCUTT ACADEMY HIGH SCHOOL

FINANCE & ACCOUNTING

Page 2: The cost of owning

ASSESSING YOUR TIMELINEWait to buy a home until you plan on being there for at least 3 years (preferably five or more)

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PROPERTY MUST APPRECIATE 15% TO COVER EXPENSES

This will take at least 3 years

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EXPENSES• Mortgage costs• Inspection expenses• Moving costs• Commissions• Title insurance

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BEFORE BUYING, ASK YOURSELF…Are you saving enough money monthly to reach your retirement goals?

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BEFORE BUYING, ASK YOURSELF…How much do you spend (and want to continue spending) on fun things such as travel and entertainment?

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BEFORE BUYING, ASK YOURSELF…How willing are you to budget your expenses in order to meet your monthly mortgage payments and other housing expenses?

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BEFORE BUYING, ASK YOURSELF…How much of your children’s expected college educational expenses do you want to be able to pay for?

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CALCULATING HOW MUCH LENDERS WILL ALLOW YOU TO BORROWExisting debt will lower the amount you are eligible to borrow.

Monthly Debt Payments + Housing Expenses < 38% of monthly gross income

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CALCULATING HOW MUCH LENDERS WILL ALLOW YOU TO BORROWGeneral Rule: You can borrow up to three times (or two and a half times) your annual income when buying a home.

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BUT… HOW MUCH YOU CAN BORROW DEPENDS ON INTEREST RATESSet by the secondary market

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WHAT’S THE APPROXIMATE MAXIMUM YOU CAN BORROW?

When mortgage rates are Multiply your gross income by this figure

4% 4.6

5% 4.2

6% 3.8

7% 3.5

8% 3.2

9% 2.9

10% 2.7

11% 2.5

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MULTIPLIER

The number you multiply by your gross income to determine how much money you can borrow for a home mortgage; determined by interest rates.

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As rates fall, the monthly mortgage payment drops

Lower interest rates make buying real estate more affordable

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CALCULATE

What is the maximum amount you can borrow?

1. Annual income $45,870

a) Interest rate 5%

b) Interest rate 11%

2. Annual income $68,900

a) Interest rate 4%

b) Interest rate 8%

3. Annual income $159,650

a) Interest rate 9%

b) Interest rate 6%

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TOTAL HOUSING COSTS

MORTGAGE, TAXES, INSURANCE AND MAINTENANCE

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CALCULATE MORTGAGE USING MULTIPLIER

Interest Rate 15-year mortgageMultipliers

30-year mortgage

4% 7.4 4.77

4.5% 7.65 5.07

5% 7.91 5.37

5.5% 8.17 5.68

6% 8.44 6.00

6.5% 8.71 6.32

7% 8.99 6.65

8% 9.56 7.34

9% 10.14 8.05

10% 10.75 8.78

Multiply the multiplier by your mortgage expressed in thousands of dollars (divided by 1000)

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EXAMPLE

Skye is taking out a $100,000 30-year mortgage at 6.5%. What will be her monthly mortgage payment?

The multiplier is 6.32, so

Monthly mortgage payment = 6.32 x 100,000/1,000

= 6.32 x 100

= $632

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CALCULATE MORTGAGE USING FORMULA

M = P [ i(1 + i)n ] / [ (1 + i)n - 1] M = The monthly payment

P = The principal, or the amount of money being borrowed

i = The interest for each compounding period, or the interest per month for a standard mortgage

n = The number of compounding periods, or the number of months for a standard mortgage

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EXAMPLE

Go to Mortgage Math Workbook

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TAXES: THE COST• Homeowners pay property tax, which helps support local

governments.

• Property taxes vary according to the rate set by the county. Ex: Santa Barbara County

• Usually about 1-2%

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TAXES: THE BENEFIT

Interest paid on mortgages is tax deductible