Chap. 7 Business
adjustable-rate mortgage (ARM)
(flexible rate mortgage or variable- rate mortgage) a home loan with an interest rate that can change during the mortgage term due to changes in market interest rates -usually have lower initial interest rates than fixed-rate mortgages but the borrower, not the lender has the risk of future interest rate increases
second mortgage
(home equity loan) a cash advance based on the paid-up value of a home -allows homeowner to borrow on the paid-up value of the property
closing costs
(settlement costs) fees and charges paid when a real estate transaction is complete -can range from 2% to 6% of loan amount
financial benefits
-deductibility of mortgage interest and real estate tax payments for federal income taxes -equity: the home value minus the amount owned on the mortgage (homeowners must be able to borrow against the equity of their homes)
disadvantages of renting
-few financial benefits -restricted lifestyle -legal details
drawbacks on home ownership
-financial uncertainty (obtaining money for downpayment) -limited mobility (high interest rates can result in weak demand for housing) -higher living costs
factors that affect the affordability of your mortgage
-income -debts -amount available for down payment -length of loan -current mortgage rates
advantages of renting
-mobility -fewer responsibilities -lower initial costs
single family dwelling
-most popular form of housing -include perviously owned houses, new homes, custom-built houses
benefits of home ownership
-pride of ownership -financial benefits -lifestyle flexibility
the legal details of renting
-tenants sign a lease: legal document that defines the conditions of a rental agreement some leases give tight to sublet: allows another person to take over rent payments and live in the rental unit
about ____% of US households live in rental units
35%
most lending institutions believe that a person can afford a monthly payment of about ___ percent of gross income less any long term debts
35%
deed
a document that transfers ownership of property from one party to another
conventional mortgages
a fixed rate, fixed payment home loan with equal payments over 15, 20, or 30 years -offers homeowners certainty about future loan payments
growing equity mortgage
a home loan agreement that provides for payment increases to allow the amount owed to be paid off more quickly
balloon mortgages
a home loan with fixes monthly payments and large final payments, usually after three, five, or seven years -designed for people who want to but a home during periods of high- interest rates but expect to be able to refinance the loan or sell the home before the balloon payment is due
reverse mortgages
a loan based on the equity in a home, that provides elderly homeowners with tac-free income and is paid back with interest when the home is sold or homeowner dies -must be 62 to qualify -has a set term at the end of which the loan would be due
person's employment and household situation influences the selecting of housing bc
a person who works at home would require home facilities different from a single person or a household with kids
earnest money
a portion of the purchase price deposited as evidence of good faith to show that the purchase offer is serious -at closing the earnest money is applied toward the down payment
closing costs can
add several thousand dollars to the expense of buying a home
main benefits and drawbacks of renting a place of residence
advantages of renting are mobility, fewer responsibilities, lower initial costs. disadvantages are few financial benefits, restricted lifestyle, and legal concerns
mortgage rates are set at a level that allows
amortization of the loan
appraisal
an estimate of the current value of the property
buy down
an interest rate subsidy from a home builder, real estate developer, or by the buyer that reduces a home buyer's mortgage payments during the first few years of the loan
major factor that affects a person's qualification for a mortgage is
applicant's credit rating
how do changing interest rates affect the amount of mortgage a person can afford
as interest rates decline, home buyers can afford to take a larger mortgage
duplex
building that contains two separate homes
home you buy serves as
collateral for the mortgage
apartment is the most
common type of rental housing
townhouse
contains two, four, six single family living units
contingency clause
contract condition states that the agreement is binding only if certain events occur (in home purchase agreements)
renting is less
costly in the shortrun
implied warranties
created by state laws may create some problem areas for repair costs
how do discount points affect the cost of a mortgage
discount points increase the initial cost of a mortgage; however, paying points results in obtaining a lower mortgage rate
greater than 20% (a large downpayment) will make it
easier to obtain a mortgage
buyer's market
exists when home sales are low and lower prices are likely
real estate taxes are a major
expense of homeownership -higher property values/ high taxes = higher real estate taxes
buying has more
financial advantages
common advantage with home ownership
financial benefits
disadvantages of owning a home
financial uncertainty, limited mobility, hight living costs
cooperative housing
form of housing in which the units in a building are owned by a nonprofit organization -shareholders purchase stock to obtain the right to live in the building -residents dont oen the units, but have legal rights to occupy unit for as long as the own stuck in the cooperative association
counter offer
from owner indicates a willingness to negotiating a price settlement
closing costs
funds that the homebuyer must have available to complete he real estate transaction
reverse mortgage annuity
guarantees the homeowner a monthly income for life
manufactured homes
housing units fully or partially assembled in a factory then moved in the living site
seller's market
in times of high demand for housing, negotiating may be minimized
price and down payment is affected by
income and current living expenses
factors that affect a person's ability to qualify for a mortgage
income, other debts, amounts available for a down payment, the length of the loan, current mortgage rates
condominiums
individually owned housing units in a building with several units
title insurance
insurance that during the mortgage term protects the owner or the lender against financial loss resulting from future defects in the title and from other unforeseen property claims not excluded by the policy
payment cap
keeps the payment on an adjustable0 rate mortgage at a given level or limits the amount to which those payments can rise (a limit on the payment increases for an adjustable-rate mortgage)
private mortgage insurance is usually required if down payment is
less than 20%
most real estate professionals believe that the most important factor in selecting a home
location
factors that affect the selling price of home
location, size, condition, features, current market demand
mortgage
long term loan on a specific piece of property
to price the property
look at -recent selling prices in the area -current demand for housing -purchase agreement: document constitues your legal offer to purchase the home
actions recommended when selling your home
make repairs, new paint, clear storage, remove unnecessary items
escrow account
money, usually, deposited with the lending institution, for the payment of property taxes and homeowner's insurance
appraisal
mortgage company will determine the fair market value of the property
refinancing
obtain a new mortgage at a lower rate (when you can get at least 1% lower rate than your current rate)
seller's market
occurs when demand for homes is high with few available for sale
what should you consider when deciding whether to sell your home on your own or use a real estate agent
on your own you will need to price, advertise, and show the house or a real estate agent can do so
multiunit dwellings
one or more living unit; includes duplexes/ townhouses
oral lease
one party must give a 30 day written notice to the other party before terminating the leaser or imposing a rent increase
common opportunity costs associated with the selection on housing
opportunity costs include lost interest on a down payment or security deposit and travel time to work when living in the country
sale by owner
over 10% of home sales are made by the home's owner
tenants
pay for the rights to live in a residence owned by someone else
what guidelines could be used to determine the amount that individuals should spend for a home purchase
person should make payments on the purchase of a home that involve about 25 to 30% of his or her income
main sources of money for down payment
personal savings, pension plan funds, investments, assistance from relatives
points
prepaid interest charged by the lender -each discount point is = to 1% of the loan amount and should be viewed as a premium you pay for obtaining a lower mortgage rate
advantages of owning a home
pride of ownership, financial benefits, lifestyle flexibility
which components of a lease are likely to be most negotiable
rent, amount of security deposit, starting date of lease, decorating
zoning laws
restrictions on how the property in an area can be used
rate cap
restricts the amount the interest rate can increase or decrease during the ARM term -prevents the borrower from having to pay an interest rate significantly higher then they owe in the original amount
a _____ mortgage allows a person to borrow on the paid-up value of a home
second
negative amortization
the amount of the home equity is decreasing instead of increasing
amortization
the balance owned is reduced with each payment
if you plan to live in you house a long time paying the points and taking the lower mortgage is
the best thing to do
warranty deed
the seller guarantees the title is good
cost of renting: security deposit
usually required to sign a lease; money held by the landlord to cover the costs of any damage done to the rental unit during the lease period (usually one month's rent) -if $ is deducted from security deposit you have right to itemized list of costs to repairs
under what conditions night an adjustable mortgage be appropriate
when interest rates are relatively high and they are expected to decline
when might refinancing a mortgage be advisable
when interest rates decline and a homeowner plans to stay in the same house for long enough for the savings from lower mortgage payments to recover the most of refinancing
buyer's market
when many homes are available for sale with relatively low demand