# the cost of owning

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## Economy & Finance

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• 1. THE COSTOF OWNINGUNIT 5, LESSON 1ORCUTT ACADEMY HIGH SCHOOLFINANCE & ACCOUNTING
• 2. ASSESSING YOURTIMELINEWait to buy a home until you plan on being therefor at least 3 years (preferably five or more)
• 3. PROPERTY MUSTAPPRECIATE 15%TO COVER EXPENSES
• 4. EXPENSES Mortgage costs Inspection expenses Moving costs Commissions Title insurance
• 5. BEFORE BUYING, ASKYOURSELFAre you saving enough money monthly to reach yourretirement goals?
• 6. BEFORE BUYING, ASKYOURSELFHow much do you spend (and want to continue spending) onfun things such as travel and entertainment?
• 8. BEFORE BUYING, ASKYOURSELFHow much of your childrens expected college educationalexpenses do you want to be able to pay for?
• 9. CALCULATING HOWMUCH LENDERS WILLALLOW YOU TO BORROWExisting debt will lower the amount you are eligible to borrow.Monthly Debt Payments + Housing Expenses < 38%of monthly gross income
• 10. CALCULATING HOWMUCH LENDERS WILLALLOW YOU TO BORROWGeneral Rule: You can borrow up to three times(or two and a half times) your annual income when buying a home.
• 11. BUT HOW MUCH YOUCAN BORROW DEPENDSON INTEREST RATESSet by the secondary market
• 12. WHATS THE APPROXIMATEMAXIMUM YOU CAN BORROW?When mortgage rates are Multiply your gross income by this figure4% 4.65% 4.26% 3.87% 3.58% 3.29% 2.910% 2.711% 2.5
• 13. MULTIPLIERThe number you multiply by your gross income to determinehow much money you can borrow for a home mortgage;determined by interest rates.ORThe number you multiply by your mortgage expressed inthousands of dollars (divided by 1000) to determine yourmonthly mortgage payment
• 14. As rates fall, the monthly mortgage payment dropsLower interest rates make buying real estate more affordable
• 15. CALCULATEWhat 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%
• 16. MORTGAGE, TAXES, INSURANCE AND MAINTENANCETOTALHOUSINGCOSTS
• 17. CALCULATE MORTGAGEUSING MULTIPLIERMultiply the multiplier by your mortgage expressedin thousands of dollars (divided by 1000)Interest Rate 15-year mortgage 30-year mortgage Multipliers4% 7.4 4.774.5% 7.65 5.075% 7.91 5.375.5% 8.17 5.686% 8.44 6.006.5% 8.71 6.327% 8.99 6.658% 9.56 7.349% 10.14 8.0510% 10.75 8.78
• 18. EXAMPLESkye is taking out a \$100,000 30-year mortgage at 6.5%. Whatwill be her monthly mortgage payment?The multiplier is 6.32, soMonthly mortgage payment = 6.32 x 100,000/1,000 = 6.32 x 100 = \$632
• 19. CALCULATE MORTGAGEUSING FORMULAM = P [ i(1 + i)n ] / [ (1 + i)n - 1]M = The monthly paymentP = The principal, or the amount of money being borrowedi = The interest for each compounding period, or the interestper month for a standard mortgagen = The number of compounding periods, or the number ofmonths for a standard mortgage
• 20. EXAMPLEGo to Mortgage Math Workbook
• 21. TOTAL HOUSING COSTS1. Mortgage Payment2. Taxes The Cost and the Benefit3. Insurance4. Maintenance
• 22. 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% Based on the value of your home
• 23. CALCULATINGTAX COSTSThe value of a home in Greenwood County is \$285,000.Property taxes in Greenwood are 1.25%. What is the monthlyproperty tax bill for the home?Annual property tax bill: (285,000)(.0125) = \$3562.50Monthly property tax bill: (3562.50)/12 = \$296.88
• 24. TAXES: THE BENEFIT Interest paid on mortgages is tax deductible You can deduct Interest paid to buy, build, or improve your home Interest paid on a home equity loan Property taxes You can deduct a second home Learn more about Tax Deductions on Mortgage Interest
• 25. CALCULATING THE TAXBENEFIT OF OWNINGTAX BENEFIT =(Mortgage Payment + Property Taxes) (Tax Bracket)Tax Brackets 2012 (Estimated) Single (Est) Married Filing Jointly (Est) Head of Household10% Bracket \$0 \$8,700 \$0 \$17,400 \$0 \$12,40015% Bracket \$8,700 \$35,350 \$17,400 \$70,700 \$12,400 \$47,35025% Bracket \$35,350 \$85,650 \$70,700 \$142,700 \$47,350 \$122,30028% Bracket \$85,650 \$178,650 \$142,700 \$217,450 \$122,300 \$198,05033% Bracket \$178,650 \$388,350 \$217,450 \$388,350 \$198,050 \$388,35035% Bracket \$388,350+ \$388,350+ \$388,350+EXAMPLETylers gross annual income is \$83,000. His mortgagepayment is \$1,200/month and he pays \$260/month in propertytaxes. What is his tax benefit from owning.(1200+260)(.25) = \$365
• 26. MAINTENANCEAbout %1 of the homes value on averageExample:A home with a value of \$475,000Annual maintenance = (475,000)(.01) = \$4,750Monthly maintenance = 4,750/12 = \$395.83
• 27. HOMEOWNERSINSURANCE On average, between \$45 and \$75/month Varies depending on homes value and location type and amount of insurance
• 28. TOTALHOUSING COSTPUTTING THE PIECES TOGETHER!Total Housing Cost =(Mortgage Payment + Property Taxes + Insurance + Maintenance) (Tax Benefit)
• 29. EXAMPLE 1Taylor is an actor living in Los Angeles, California where the propertytax is 1.25%. Her gross annual income is \$71,500 and the value of herproperty is \$367,000. Her monthly mortgage payment is \$1,200 and shepays \$40/month for insurance. Estimate her total housing costs.Total Housing Cost =(Mortgage Payment + Property Taxes + Insurance + Maintenance) (Tax Benefit)Mortgage Payment = \$1,200Property Taxes = (367,000)(.0125)/12 = \$382.29Insurance = \$40Maintenance = (367,000)(.01)/12 = \$305.83Tax Benefit = (Mortgage Payment + Property Taxes)(Tax Bracket) (1200 + 382.29)(.25) = 395. 57Total Cost = 1200 + 382.29 + 40 + 305.83 - 395.57 = \$1532.55

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