Personal Finance - Ch.9

Title insurance

Insurance that, during the mortgage term, protects the owner and lender against financial loss resulting from future defects in the title and from other unforeseen property claims not excluded by the policy.

Discount Point Deductibility

- Principal residence: Both loan orig. fee & discount points deductible in the year paid for purchase of home. - Second home mortgage / Refinancing home mortgage: Both loan origination fee and discount points must be amortized over the life of the mortgage for tax purposes.

Break-even Calculation

# of months to Break-even = $ diff. in points / $ diff. in Monthly Premiums. EXAMPLE: $162,000 loan, 30 year, fixed-rate mortgage 5.6% or 6%

Discount Points

- 1% of the amount borrowed (LOAN). - Paid to the lender - "Up-front" money - Buys down the interest rate on mortgage - Considered "Interest"

Mortgage Refinancing

- A new mortgage is obtained to pay off and replace an existing mortgage. - Can be done to lower the interest rate on the loan. - Discount points/loan origination fee is amortized over the life of the loan.

Closing Ceremony

- Closing costs - Down payment - Discount points - Prepaid items - *Include cost to hire your own building inspector Closing: the buyer and seller and their representatives gather in the lender's office to complete the sale

Break-even Concept

- Comparing 2 mortgages costs - Used to determine the number of months to arrive at the breakeven point when the extra "up-front costs" equal the savings from lower monthly payments.

Home Ownership Costs

- Down payment (Balance Sheet) - Points & closing costs (Balance Sheet) - Mortgage payment (Cash Flow Sheet) - Insurance & taxes (Cash Flow Sheet) - Maintenance/operating costs (Cash Flow)

Advantages of Renting

- Easier to move - Fewer maintenance and repair responsibilities - Lower initial costs

Drawbacks of Homeownership

- Financial uncertainty: Obtaining money for the down payment, Obtaining mortgage financing, Home values could drop. - Limited mobility: Can take time to sell home. - Higher living costs: Home improvements, Rising real estate taxes.

Opportunity Costs of Housing Choices

- Interest earnings lost on money used for a down payment or the interest on a security deposit for an apartment. - Time and cost of commuting to live in an area that offers less costly housing or more space. - Renters lose tax advantages and equity growth. - Time and money you spend to repair and improve a lower-priced home. - Time and effort when you have a home built to your personal specifications.

Disadvantages of Renting

- No tax benefits - Limitations regarding remodeling - Restrictions regarding pets and other activities - Legal concerns of a lease - Costs including a security deposit, utilities and renter's insurance

Benefits of Home Ownership

- Pride of ownership ("American dream") - Financial benefits - Deduct property taxes and mortgage interest - Potential increase in value of your home - Building equity in your home - Lifestyle flexibility - express your individuality

Length of Maturity

- The longer the maturity on a mortgage the lower the monthly payment. - The longer the maturity on a mortgage the higher the total amount of interest that will be paid. - It is easy to take a longer maturity and make additional payments as desired to pay off sooner.

Credit Scoring

- Today, lenders base their decisions to grant a loan, and at what interest rate, on the applicant's credit score. - A score of 700 is typically required.

Home Equity Wealth

- Your ownership in the home (down payment + monthly principal payments + home appreciation). - Comprises a significant portion of wealth for most families.

Uniform Settlement Statement

- lists all of the fees to be paid at the closing - must be made available 24 hours prior to the closing for verification

Good-Faith Estimate

- received from the lender after formally applying for a mortgage - outlines all of the costs of purchasing the home

Mortgage Debt Service (Front-end) Ratio

- the total annual expenditures for housing with the loan applicant's gross annual income - 25-29% are seen as maximums

Debt Service (Back-end) Ratio

- the total of all monthly debt payments with gross monthly income - 33-41 percent are seen as maximums

Mortgage Types

1) Conventional Fixed Rate Mortgage. 2) Adjustable Rate Mortgage (ARM). 3) 2-Step Mortgage (3/27 or 7/23).

Steps of Home Buying

1) Get your own finances in order 2) Pre-qualify for a mortgage 3) Negotiate a purchase 4) Apply for a mortgage loan 5) Sign your name on the closing day

Lease

1. A legal document that defines the conditions of a rental agreement; specifies the rights of a landlord and tenant. 2. An arrangement in which you pay a monthly fee in exchange for exclusive use of a vehicle/property for a specific length of time, such as three years.

Estimating Monthly Housing Costs (getting finances in order)

1. Choose the type of home you would like in the neighborhood desired; (www.realtor.com). 2. Estimate the current interest rates on mortgage loans; (www.bankrate.com). 3. Estimate the monthly payment for a loan of the amount you need at the prevailing interest rates; (www.bankrate.com). 4. Add an additional 25 to 33 percent for such things as homeowner's insurance, property taxes, maintenance, and upkeep 5. The result is the amount to fit into your budge 6. Do a credit check up: order a copy of your credit report, correct any errors or omissions.

Equity

= the dollar value of the home in excess of the amount owed on it - equity grows as a loan is paid off - equity grows as a home increases in value

Second mortgage

A cash advance based on the paid-up value of a home; also called a "Home Equity Loan."

Deed

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

Conventional mortgage

A fixed-rate, fixed-payment home loan with equal payments over 10, 15, 20, 25, or 30 years.

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.

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; also called "Flexible-rate Mortgage" or a "Variable-rate Mortgage." Interest rate adjusted by: - Amount of payment - Outstanding principal balance - Loan term Interest rate tied to an index. Annual and/or lifetime interest cap (periodic cap).

Manufactured home

A housing unit that is fully or partially assembled in a factory before being moved to the living site, that is built according to United States Department of Housing and Urban Development (HUD) construction standards. Also known as a mobile home or house trailer.

Rate cap

A limit on the increases and decreases in the interest rate charged on an adjustable-rate mortgage.

Payment cap

A limit on the payment increases for an adjustable-rate mortgage.

Reverse mortgage

A loan based on the equity in a home, that provides elderly homeowners with tax-free income and is paid back with interest when the home is sold or the homeowner dies.

Mortgage

A long-term loan on a specific piece of property, such as a home or other real estate.

Condominium

A property developed for co-ownership with each co-owner having separate interest in an individual unit, combined with an undivided interest in the common areas.

Appraisal

An estimate of the current value of the property.

Buy-down

An interest rate subsidy from a home builder or a real estate developer purchased by the buyer, that reduces a home buyer's mortgage payments during the first few years of the loan.

Loan Qualifications Ex.

Example: Annual income $67,884 / 12 = $5,657 mo. income. Monthly Mortgage Debt Service: 32% of $5657 = $1,810 maximum payment. - PI = $850 - T = $217 - I = $ 54 $1,121 monthly payment OR: $1,121 / $5,657 = 19.8% Monthly Debt Service: 40% of $5,657 = $2,263 max. payment. $ 1,121 PITI 202 Education loan 274 Auto loan 116 Computer loan 216 Credit cards payments $ 1,929 total payments OR $1,929 / $5,657 = 34%

Closing costs

Fees and charges for which a seller and buyer are responsible when a real estate transaction is completed; also know as settlement costs. May Include: Loan origination fee, Owner's title insurance, Mortgagee's title insurance, Credit report, Private mortgage insurance (PMI), Appraisal fee, Survey fee, Legal fee (~$200), Recording fee, Escrow fee, Termite inspection.

Purchase Agreement

Includes: - Earnest money - Purchase price - Amount of down payment - Mutual escape clauses - Agreements on who pays what closing costs - List of appliances, drapes, etc. to "convey"

Zoning laws

Legal restrictions on land use that determine what types of building and economic activities are allowed to take place in certain areas. In the United States, areas are most commonly divided into separate zones of residential, commercial (retail), or industrial use.

Earnest money

Money deposited in the form of a down payment (a portion of the price) by a buyer under the terms of a contract, as evidence of good faith to indicate a serious purchase offer.

Escrow account

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

PITI

P = Principal I = Interest T = Taxes I = Insurance

Points

Prepaid interest charged by a lending institution for the mortgage; each discount point is equal to 1 percent of the loan amount.

Refinancing

The process of obtaining a new mortgage on a home to get a lower interest rate.

Amortization

The reduction of a loan balance through payments made over a period of time. = the process of gradually paying off a loan through a series of periodic payments - each payment contains: interest for the month, payment towards the principal owed.

Principal

debt remaining from the original amount borrowed.