Chapter 7: The Housing Decision

What is the point of a title search? (32)

A title search is done to ensure the seller can sell the house - no loans

Why should you be careful using your relator's recommended house inspector? (32)

Be careful using your relator's house inspector. He/she doesn't want to tick off the relator.

Drawbacks of homeownership (27)

Financial uncertainty - Obtaining money for the down payment - Qualifying for mortgage financing - Changing property values Limited mobility - May be difficult to sell your home quickly - May not like neighbors Higher living costs - Home improvements, maintenance, repairs - Rising real estate taxes · Surprise repairs!

What happens if mortgage rates rise? Can you buy a bigger home? (63)

- Monthly payment will go up: this will reduce the amount that you can spend there fore you cannot buy a bigger home - Salary $100,000 * .28 = $25,000 per year for Principal and Interest. Monthly payment = 25,000/12 = $2,083

What are some of the disadvantages of renting? (9)

1. Few Financial Benefits - No tax deduction for mortgage interest and property taxes that buyers get - No capital gains on property, nor building equity 2. Restricted Lifestyle - Limits regarding remodeling, pets, sound 3. Legal Details - Lease is legal document that defines the conditions of the rental 4. Costs include a security deposit, utilities, and renter's insurance Under what conditions can a landlord enter your property: "To show it, or if they think it is being damaged (overflowing bathtub)." This was mentioned in class

What are some of the advantages of renting? (8)

1. Mobility: Moving is easier 2. Fewer Responsibilities: o Renters usually do not have to be concerned with maintenance and repairs o Renters have fewer financial concerns and no expenses for property taxes, property insurance, and upkeep 3. Lower initial costs: o Renters pay a security deposit which is much less than the down payment and closing costs required when buying

Benefits of owning a home (13)

1. Pride of ownership - Stability of location 2. Financial benefits - Having a mortgage to leverage your gains - Deduct property taxes and mortgage interest - Potential increase in value of your home - Building equity in your home by paying off mortgage 3. Lifestyle flexibility - Express your individuality (decorating)

What are typical contract contingencies? (20)

1. Sign contract on price, general closing issues, and contingencies - Building inspection - Mortgage contingency - seller might not like this 2. Inspect the home - Renegotiate if necessary 3. Close on transaction - After that, all problems are yours.

· What is a typical PITI rate that banks use? (35)

33% or 28% (we used 28% in the homework)

List a few closing costs (34)

Closing costs (settlement costs) include: · Title insurance and title search fee · Attorney's and appraisal fee · Property survey; Termite inspection · Recording fees; transfer taxes · Lender's origination fee · Escrow account for tax and insurance reserve · Pre-paid interest; Real estate commission · Prepaid utilities: oil in oil tank · Prepaid taxes · Possibly homeowners' insurance · All of the above will be explained in detail before closing

What is the difference between a Condominium and a Cooperative? (14)

Condominium: You own your individual unit in a building with several units - It is not a type of building structure but rather a legal form of home ownership Cooperative housing: Non-profit organization — members own shares and rent a unit in a building with multiple units

Why do you have to keep records on home improvements? (60)

Cost basis of your home is the purchase price plus any capital improvements: o Additions like building a second story or garage o Home system upgrades such as installing a new septic system, replacing the ductwork, or making improvements to the wiring o Landscaping projects like adding a paved walkway, fence, or deck o Exterior improvements such as replacing siding or installing a new roof o Interior renovations like replacing the floors, updating the kitchen, installing a fireplace, or adding more insulation

When would you be willing to pay points? (40)

If you pay more points, the bank will reduce its lending rate. o Makes for a simple breakeven calculation. If 1.25 points reduces your rate by 0.25%, it's a five-year payoff. § If you are thinking you will stay in your home for a long time, look at paying points.

If rates are higher, what do you do?

Nothing, keep the lower rate mortgage

Explain how a bank compares your salary to your PITI payment (35)

PITI payments should be 28% of your annual or monthly salary

What are a few things to keep in mind when selling a house? (58)

PREPARING YOUR HOME FOR SELLING: o Repair, repaint, and clean o Clear out the garage o Keep the lawn cut o Keep kitchen and bathroom clean o When showing home, turn on lights and open drapes o Clean out the clutter make rooms and closets look bigger o Consider "staging" where they remove your furniture and bring in new temporary furniture and artwork. o Professional photographer

Location - what is important to you? (3)

Personal: o Flexibility o Can I move easily o Can I make changes Location - o Commutation - Long commute, near trains, near shopping o Schools, Neighborhood, Yard, Safety Financial: o What can you afford now? o What can you afford in the future? o Repairs/improvements o Bigger is not always best

What does PITI mean? (39)

Principal, Interest, Taxes, and Insurance

When might you have to get mortgage insurance? (35)

Private Mortgage Insurance (PMI) is required if down payment is less than 20%

Pros/cons of real estate as an investment? (65)

Pros · Real estate in not an efficient market · A cyclical market, but rentals remain fairly stable · Can use leverage and get tax benefit · Relatively low maintenance · Can use vacation property if not rented · Tax implications · Can hire a real estate manager · You can depreciate the value for tax purposes Cons Finding good renters Managing a property can be difficult Added personal Liabilities Need to know tenant rights

Does the seller's relator always push for the highest price? (23)

Remember, the realtor wants to sell your house quickly. o $1,000,000 gets them $12,500 if rate is 5% o $950,000 gets them $11,875 ($625 less) § You get $50,000 less, § They get $625 less · They may be more flexible on price, than you might be.

Capital gains on selling a home - is there some kind of tax relief? (61)

Taxpayers who sell their main home and have a gain from the sale may be able to exclude up to $250,000 of that gain from their income. Taxpayers who file a joint return with their spouse may be able to exclude up to $500,000. Homeowners excluding all the gain do not need to report the sale on their tax return. o This was to help people when they sold a house with a gain, they didn't have to buy a smaller house because they owed taxes

If you like a home what two things are important? (Excel homework)

The down payment and your ability to support the mortgage.

If the relator is representing both the buyer and seller, who are they obligated too? (22)

The seller, they are the ones paying the commission

What do you have to be careful of with an adjustable-rate mortgage? (47, 48)

· A payment cap may limit the payment, resulting in negative amortization and extension of loan period o A payment cap is a consumer safeguard that limits the amount that your monthly payment on an adjustable-rate mortgage can change. It ensures that you don't face drastically increased payments on your mortgage. However, since payment caps don't limit the amount of interest you can accrue, it's possible that your interest due could be larger than your payment amount. In this case, your principal balance would increase instead of decrease. · Banks have pushed these to get people to buy a house o This is a teaser or reduced rate and will increase over time § You can afford this if the rate is 1%! § It is discounted for the first year and will go up from there, even if rates in general don't rise. · Look for caps and maximum annual increases. o Assume the worst - especially now with historically low rates.

What is an interest-only mortgage? (49)

· Allows a homebuyer to have lower payments for the first few years of a loan · None of the mortgage payment goes toward the loan amount · Higher payments will occur later in the loan or at maturity · Can be especially dangerous if the value of the property declines

What are some considerations when looking at a Condo as an investment? (73)

· Be careful if it's a new development with unsold units. You may have to compete with the developer to sell your slightly used condo, when he/she is selling new ones. · Be careful of over supply in your area. If new condos are going up, your old one will have to compete again. · Look for a well-run condo: One that budgets for new roofs, driveways, painting and has the money put aside. · Look for a condo with mostly owners than renters. Owners take better care of the building. · Try to find out how many owners are behind on condo charges. · How much are the condo charges? What are they for? Where is it kept? Who manages the condo? Are they accruing for large expenses? · See if you can get any information on the condo board. Some are very dysfunctional. · Get a copy of the rules and regulations. Some are ridiculous. o Cover parking rules, when you can move in, parties, food smells, etc. Anything the board wants to add.

How is the relator commission split? (22)

· Commissions can be around 5 to 6% (for a small piece of property) of the selling price · I believe commissions are split in four ways: 5% commission? o Selling firm gets 2.5% o Selling broker gets 50% to 90% of that 2.5% o Buying broker gets 2.5% o Selling broker gets 50% to 90% of that 2.5% · Selling a $1 million home? o $50,000 total commission split four ways

How do you value an investment property? (68)

· Comparable - what have similar homes sold for? · Base on rentals · Based on Net Operating Income o Current capitalization rate is 2.5% over 10-year Treasury § However, Treasury rates are so low, investors are demanding more, which drives the price down § NOI = Revenue minus reasonable operating expenses. · Adjust for condition, location, and mortgage rates · Simple cash flows after mortgage o "I want this to be cash flow neutral and I'll think of it as a land bank."

Who pays the realtor and how much? (21)

· Either the seller or buyer · A seller can use a realtor or try to sell the house on their own. - Realtor: You will sign a contract stating that if you sell your house regardless of how, you will pay the realtor 5 or 6% of the selling price. · A buyer can use a realtor to help them find a home. - Careful if they ask you to sign a contract prior to looking at a home.

What is the advantage of a mortgage broker? (45)

· Mortgage broker represents many brokerage firms and can find you the lowest rates · Where as if you go to Wells Fargo or Peoples, they can only give you their current rates - many times they are posted on their websites

When would you refinance your mortgage? (54)

· Obtain a new mortgage if interest rate drops at least 1% o If rates are declining, the bank expects you to do this. · But if your rate is low, or rates are rising, keep your old the mortgage · If your current mortgage rate is low, keep this in mind if you want to buy a new home - it will be at a higher rate and cost you more o If mortgage rates rise, home values should decline somewhat like a bond.

What are points? (40)

· Points are prepaid interest charged by lender · Each discount point is equal to 1% of the loan amount and represents the premium you pay to obtain a lower mortgage rate · Points are paid at closing

What does a realtor do? (24 & 25)

· Suggest selling price - very important! - Not just an opinion, but backed up with recent sales · Help set strategy and expectations - Let's start at this price.. · Make suggestions to make you home more sellable · Advise on all costs and process · Host open houses for realtors and for public · Deal with buyers and their brokers · Advise on offers and closing

What does pre-approval mean? (19)

· a formal process in which a buyer fills out a lender's loan application before beginning the search for a house.