Finance 8 Personal Finance - Ch 7 Selecting and Financing Housing - Focus on Personal Finance - McGraw Hill 5 edition

Appraisal

An estimate of the current value of a property

Condominium

An individually owned housing unit in a building with several such units with common areas.

Buy-down

An interest rate subsidy from a home builder, real estate developer, or the borrow that reduces the mortgage payments during the first few years of the loan To stimulate sales After the buy-down period, the mortgage payments increase to the level that would have existed w/o the financial assistance.

Types of mortgages

1- Conventional 30-year mortgage 2- Conventional 15-or 20-year mortgage 3- FHA/VA Fixed-rate mortgage (30 & 15 yr) 4- Adjustable-rate mortgage (ARM) - payment changes on 1-,3-,5-,7- or 10-year schedules 5- Interest-only mortgage

Advantages of renting a home

1- Easy to move 2- Fewer responsibilities 3- minimal financial commitment

How do you minimize future problems when buying a home

Contracting a trained home inspector to find the future problems.

Rate cap

Restricts the amount by which the interest rate can increase or decrease during the ARM term

Who pays for commission

Seller

Townhouse

Shares a wall with another unit Has 2nd floor and backyard

Motives of home buyers

Stability of residence and a personalized living location

If planning to live in home for a short time

Take the higher mortgage rate with less points

Closing

A meeting of the buyer, seller, and lender of funds, or representatives of each party, to complete the transaction.

Earnest money

A portion of the price of a home that the buyer deposits as evidence of good faith to indicate a serious purchase offer. Money is applied toward the down payment Money is returned if sale cannot be completed

Private mortgage insurance (PMI)

A requirement if the down payment is less than 20 percent. Protects the lender from financial loss due to default Can cancel PMI after building up 20% equity in a home

Points

Prepaid interest charged by the lender

Single-family dwellings

Previously owned houses, new houses, and custom-build houses

Buyer agent

Represents the buyer's interests and may be paid by either seller or buyer

Homeowners Protection Act

Requires that PMI be terminated automatically when a homeowner's equity reaches 22% of the property value at the time the mortgage was executed.

Zoning laws

Restrictions on how the property in an area can be used.

If planning to live in home for a long time (over 5 yrs)

Take the lower mortgage rate with more points

Lessee

Tenant

The renting process

1- The Search Select an area and rental amount Compare costs and facilities Talk to current and past tenants 2- Before signing a lease Verify lease start date, costs, and facilities Talk to an atty re: unclear aspects of lease Note in writing, signed by the owner, the condition of rental If 2 names on lease 1 can be held responsible for full rent 3- Living in rental property Keep all facilities in good condition Contact owners re: needed repairs Respect the rights of others re: noise Obtain renter's insurance for personal belongings and liabilities situations 4-At the end of the lease Clean the rental - leave in the same condition when moved in Tell lessor (landlord) where to send security deposit Require that any deductions from deposit be documented

Multi-unit dwellings

Dwellings with more than one living unit i.e. Duplex, Townhouse

Conventional 30-year mortgage

Equals payments 15, 20, 30 years based on a fixed interest rate Disadvantages: Higher initial rates than adjustables

Closing costs

Fees and charges paid when a real estate transaction is completed; Includes: Title search fee Title insurance (lender/owner policies) Attorney's fee Property survey Appraisal fee (or nonrefundable application fee) Recording fees; transfer taxes Settlement fee Termite inspection Lender's origination fee Reserves for home insurance and property taxes Interest paid in advance (from the closing date to the end of the month) and "points" Real estate broker's commission Also called: SETTLEMENT COSTS

Discount point

Fees paid directly to the lender at closing in exchange for a reduced interest rate. Can lower your monthly mortgage payments. One point costs 1% of your mortgage amount (or $1,000 for every $100,000). Also called MORTGAGE POINTS BUYING DOWN THE RATE

Sublet

Have another person take over rent payments and live in the rental unit.

Prefabricated homes

Have components build in a factory and then assembled at the housing site

Real Estate Settlement Procedures Act (RESPA)

Helps home buyers understand the closing process and closing costs Requires that loan applicants be given an estimate of the closing costs before the actual closing

Condominiums

Individually owned units Has common areas and association fees covering maintenance, repairs, improvements, and insurance

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.

Lessor

Owner/landlord

Amortization

The reduction of a loan balance through payments made over a period of time.

Warranty deed

The seller guarantees the title is good Certifies that the seller is the true owner No claims against the title Seller has the right to sell the property

Lease

A legal document that defines the conditions of a rental agreement Provides protectoin to both landlord and tenant

Mortgage

A long-term loan on a specific piece of property i.e. Home or other real estate

The home-buying process

1- Determine home ownership needs Evaluate owning place of residence Assess types of housing units Calculate the afford amount 2- Find and evaluate a property to purchase Select a location Consider using a real estate agent Conduct a home inspection 3- Price the property Determine an appropriate market price Negotiate an agreement price 4- Obtain financing Determine amount of down payment Investigate the rates and conditions of mortgages Apply for mortgage and evaluate types of mortgages 5- Close the purchase transaction Arrange a closing date Obtain funds and documents for closing Request clarification of unclear aspects of the transaction

Disadvantages of renting a home

1- No tax benefits 2- limitations regarding remodeling 3-Restrictions regarding pests, other activities

Advantages of buying a home

1- Pride of ownership 2-financial benefits 3- lifestyle flexibility

Real estate agent services

1- Shows home that meets the needs of a buyer 2- Presents the offer to the seller based on a market analysis 3- Negotiates a settlement price 4- Assists in obtaining financing 5- Represents buyer at closing 6- Recommends: atty, insurance agents, home inspectors, and mortgages companies

Types of housing

1- Single-family dwelling 2- Mult-unit dwelling 3- Condominiums 4- Cooperative housing 5- Manufactured homes Prefabricated home Mobile home 6- Building a home

What affects offer price

1- The recent selling prices in the area 2- current demand for housing 3- The time the home has been on the market 4- The owner's need to sell 5- Financing options 6- features and condition of the home

Disadvantages of buying a home

1- financial commitment 2- Higher living expenses than renting 3- limited mobility

Adjustable-rate mortgage (ARM)

A home loan with an interest rate that can change during the mortgage term due to changes in market interest rates; Advantages: Lower initial rates than fixed-rate loans particularly on the 1-year adjustable Offers possibility of future rate and payment decrease Loans with rate "caps" may protect borrowers against increase in rates Disadvantages: Shifts far greater interest rate risk onto borrowers than fixed-rate loans May push up monthly payments in future years Also called: FLEXIBLE-RATE MORTGAGE or VARIABLE-RATE MORTGAGE

Variable-rate mortgage

A home loan with an interest rate that can change during the mortgage term due to changes in market interest rates; Also called: FLEXIBLE-RATE MORTGAGE or ADJUSTABLE-RATE MORTGAGE

Flexible-rate mortgage

A home loan with an interest rate that can change during the mortgage term due to changes in market interest rates; Also called: VARIABLE-RATE MORTGAGE or ADJUSTABLE-RATE MORTGAGE

Handy-man's special

A home that needs work and able to get at a lower price

Duplex

A building with separate homes

Purchase agreement

A contract A legal offer to purchase the home

Deed

A document that transfers ownership of property from one party to another.

Cooperative Housing

A form of housing in which a building containing a number of housing units is owned by a nonprofit organization whose members rent the units.

Cooperative housing

A form of housing in which the units in a building are owned by a NONPROFIT organization.

Implied warranties

A guarantee that the item sold is merchantable and fit for the purpose intended.

Dual agent

Agent working for both the buyer and seller

Interest-only mortgage

Allows a home buyer to have lower payments for the first few years of the loan. During that time, NONE of the mortgage payment goes toward the loan amount Advantages: Lower payments More easily affordable Disadvantages: No decrease in amount owed No building equity unless home value increases Must convert to a higher fixed-rate mortgage after 10 years

Second-mortgage

Allows homeowner to borrow on the paid-up value of the property. Also called: HOME EQUITY LOAN

Home equity loan

Allows homeowner to borrow on the paid-up value of the property. Also called: SECOND-MORTGAGE

Walk-through

Allows the buyer to inspect the condition of the home.

Negative amortization

Amount of the home equity is decreasing instead on increasing An increase in the principal balance of a loan caused by making payments that fail to cover the interest due. The remaining amount of interest owed is added to the loan's principal, which ultimately causes the borrower to owe more money. Pays lower interest rate while rate on loan is higher

Counteroffer

An offer made in response to another

FHA/VA fixed-rate mortgage (30- and 15-year)

Insured by the Federal Housing Authority Guaranteed by Veterans Administration They help home buyers obtain low-interest low-down payment loans. Advantages: Low down payment requirements May be assumable with no prepayment penalties Disadvantages: May require additional processing time

Settlement costs

Fees and charges paid when a real estate transaction is completed; Includes: Title search fee Title insurance (lender/owner policies) Attorney's fee Property survey Appraisal fee (or nonrefundable application fee) Recording fees; transfer taxes Settlement fee Termite inspection Lender's origination fee Reserves for home insurance and property taxes Interest paid in advance (from the closing date to the end of the month) and "points" Real estate broker's commission; Also called: CLOSING COSTS

Manufactured homes

Homes that are assembled in a factory and moved to the living site

Mobile home

Housing smaller than 1,000 sq feet on an owned or rented site

Lifestyle

How you spend your time and money

Payment cap

Keeps the payment on an adjustable-rate mortgage at a given level or limits the amount to which those payments can rise. Mortgage payments do not change BUT interest rates do The amount owed can increase in months in which the mortgage payment does not cover the interest owed.

Conventional 15- or 20-year mortgage

Lower rate than 30-year fixed; Fater equity buildup Quicker payoff Disadvantages: Higher monthly payments

Loan payment formula

M = P[i(1+i)n]/[(1+i)n-1] M = Mortgage payment monthly P = Principal; loan amount i = interest rate divided by 12 n= number of months of the loan

Escrow account

Money, usually deposited with the lending financial institution, for the payment of property taxes and homeowner's insurance.

Refinance

Obtain a new mortgage on current home at lower interest rate

Security deposit

One month's rent to cover the cost of any damages After vacating the rental unit security deposit is refunded If money is deducted otain an itemized list of repair costs

Reverse mortgage

Provides homeowners who are 62+ with tax-free income in the form of a loan that is paid back (with interest) when the home is sold or the homeowner dies. Also called: HOME EQUITY CONVERSION MORTGAGE

Home equity conversion mortgage

Provides homeowners who are 62+ with tax-free income in the form of a loan that is paid back (with interest) when the home is sold or the homeowner dies. Also called: REVERSE MORTGAGE

Contingency clause

The agreement is binding only if a certain event occurs.

Locks in interest rates

The approve mortgage application for 30 - 90 days

Assumable mortgages

WERE attractive if the mortgage rate was lower than the market interest rates at the time of sale Not offered