Finance homework

Meeting Housing Needs: Buy or Rent

The Biggest Financial Decision (Most likely) You’ll Ever Make! Remember, you’re buying a house and your credit terms

Figure 1: U.S. House Prices (1970-2013)

1. What type of housing meets your needs?

a. Single family home (property control)

b. Condominium

i. Title to unit and jointly own common areas.

ii. There usually exists a monthly homeowners’ association fee.

c. When to rent…appropriate for those…

i. With No down payment

ii. Who are unsettled in job or family status

iii. Who do not want home ownership responsibilities

iv. Who feel current conditions are unattractive for home ownership.

2. How much housing can you afford? Try a calculator at www.bankrate.com

a. Benefits of owning a home

i. Tax shelter: mortgage interest and property taxes can be deducted from your income taxes.

1. For example, if Mr. Jones paid $8,000 in mortgage interest and $4,000 in property taxes last year, this will reduce his taxable income by $12,000. If he is in a 25% tax bracket, that will save him $12,000 x 0.25 = $3,000 in federal taxes.

ii. It’s a good investment. Over the long run, housing prices outpace the inflation rate. Tax free returns! Leveraged Investment!

iii. Pride of ownership.

b. The costs of Homeownership

i. Your mortgage payment typically consists of four parts: PITI

1. Principal, Interest, (real estate or property) Taxes, and homeowners’ Insurance. See Exhibit 5.5

a. Affordability ratios: most lenders do not want to see more than 30% of a home buyer’s monthly gross income going toward the mortgage payment.

b. Property taxes are typically about 1% of the home’s value on an annual basis.

c. ¼ to ½ of a percent for homeowner’s insurance.

d. Principal and interest are paid directly to the lender, and the property taxes & homeowner’s insurance may be paid to the lender or directly to the county and the homeowner’s insurance firm.

ii. Down payment (a medium or long-term goal)

1. To determine the required down payment, lenders use the loan-to-value ratio, which is the maximum percentage of the value of a property that the lender is willing to loan.

iii. Closing costs (See exhibit 5.4)

iv. Points: prepaid interest. Usually, one point is equal to 1% of the amount borrowed.

v. Maintenance and operating expenses: When something breaks, you have to fix it.

3. The Home-buying Process (See exhibit 5.7)

a. Shop the market first! Don’t be too fussy or in a hurry.

b. Get preapproved.

c. Use an agent. They’re the experts. But make sure you know for whom they work! 6%

d. Consider a short sale.

e. The real estate sales contract.

i. Earnest money deposit.

ii. Contingency clause.

1. Home inspection

f. Mortgage loan

i. 30-year fixed-rate loan.

1. Interest rate is fixed over the life of the loan.

2. If interest rates fall and you have equity and a nice credit score, you may be able to refinance.