Ch 8 - Buying a Home

What are the 2 main ratios in housing costs?

Front-end and Back-end ratios

What is the most important thing to remember in buying a home?

Take your time, do your homework, and avoid rushing into a decision

Define equity

The hypothetical amount of money you would have left over if you sold your home and paid off your mortgage today.

What is armortization?

The process of determining the amount and frequency of equal payments that will gradually repay a loan over the length of the loan

What are other up-front costs of buying a home?

Title insurance, attorney fees, property survey fees, credit reports, termite/mold inspections, excrow payments, and home inspection report

Define refinancing

To refinance a home is to finance a home again with a new loan and new interest rate but from the same bank. Requires paying off the old loan as well as closing-costs.

When is mortgage insurance required?

When the home buyer borrows more than 80% of the purchase price of the home.

What 4 concepts should you consider when decided how to finance your home?

Your time horizon, Your preference for low payments, your tolerance for interest-rate risk, your income and work status

What is the advised golden down payment

20% of total cost of the home to avoid private mortgage insurance and to save on your monthly payment

What are the 9 steps of buying a home?

1. Examine your budget to determine max amt you could spend 2. Pre-qualify for a loan to determine mortgages you can afford 3. Determine what you are looking for in a home to meet your goals/needs 4. Get help from realtors, lawyers, appraisers, inspectors 5. Determine down payment and up-front costs 6. Look at many different homes 7. Contact the seller and make a written offer 8. Negotiate 9. Both parties sing the agreed upon written contract

What is the mortgage debt per capita in the united states?

$42,860 per capita

What is also known as a second mortgage?

A home equity loan

Define mortgage

A loan from a lending institution in which the home or property serves as the loan collateral. Your credit score will affect the interest rate of your mortgage.

Define fixed-rate mortgages

A loan that have a constant interest rate throughout the entire life of the loan. Examples are 30-yr and 15-yr mortgages

What is a home equity loan?

A loan which uses equity in your house to secure your loan. These types of loans should be avoided.

Define balloon mortgages.

A mortgage where all remaining principle is due a certain number of years into the contract.

Pros of renting a house.

Easy and inexpensive, no repair or maintenance costs, lower financial commitments, one rent bill

What are the risks of a home equity loan?

Limits your future financial flexibility, puts your home at risk, could lose your home, could lose your high credit score, you could end up owing more on your house than you could sell it for if there's a downward trend in the housing market.

Define Adjustable Rate Mortgages (ARMs)

Loans that allow the interest rate to rise and fall with changes in mortgage interest rates. These loans make more sense in times of low interest rates

What are some techniques that will lower your mortgage payment?

Make a larger down payment, have a good credit score, pay points, shorten the length of the mortgage (from 30 yrs to 15 yrs), pay more than the monthly amount

Cons of renting a house.

May have to move at end of contract period, lack of pride in ownership, no renovations, m/o payment may increase, no tax benefits, less privacy, no potential for your property appreciating

According to the textbook, which region of the United States has the lowest cost of housing since 1990?

Midwest

Define Graduated Payment Mortgages.

Mortgages designed to allow younger people to qualify for a home mortgage by initially reducing mortgage payments and then gradually increasing the mortgage payments over time. One con is that negative amortization could occur if your monthly payment is less than the interest-only amount would be.

Being house-rich and cash-poor occurs when what?

Occurs when a couple's debt ratio goes above the recommended limits and the couple is stretched super tight in making their mortgage payment

In home buying there is something called points. What are they?

On point is equal to one percent of the loan value. It is generally wise to pay for points for a lower interest rate when you plan to have the morgage long enough to recover the expenses.

What is your back-end ratio?

PITI plus any other long-term debt (tithing, car payments, student loans, etc) / m/o gross income. Loan likelihood increases if this ratio is 36% or less

What is your front-end ratio?

PITI/ monthly gross income. Getting a loan increases in likelihood if front-end ratio is below 28%

During the vast majority of the early years of a mortgage loan, most of the monthly payment goes towards what?

Paying interest not the principle

What does PITI stand for?

Principle, Interest, Property Taxes, Insurance

What is the biggest financial mistake young couples right out of BYU make according to the textbook?

Purchasing a home that is too big, costs, too much, and has too large of a down payment. When couples do this, other financial goals cannot be met. The couple becomes cash-starved and unable to save.