the cost of owning
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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?
- 7. BEFORE BUYING, ASKYOURSELFHow willing are you to budget your expenses in order to meetyour monthly mortgage payments and other housingexpenses?
- 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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