Chapter 7 Personal Finance (for exam 3)

Cons of Renting

-no tax deductions -no real estate value -limited activities allowed as a tenant -living restrictions

common sources for down payment

-personal savings, sales of investments or other assets and assistance from relatives

the amount you offer is affected by

-recent selling prices in the area -current demand for housing -the time the home has been on the market -owner's need to sell -financing options -features and condition of the home

Private Mortgage Insurance (PMI)

-required if down payment is less than 20% -protects the lender from financial loss due to default -terminated after homeowner's equity reached 22%

When searching for rental property

-select an area and a budget -compare costs and facilities for comparable units -talk to current and past residents

traditional financial guidelines for buying a home

-should spend no more than 25 to 30 % of your take-home pay on housing -home should cost about 2 1/2 times your annual income

lessee

renter

zoning laws

restrictions on how the property in an area be used

rate cap

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

contingency clause

stating the agreement if binding only if a certain event occurs

points

prepaid interest charged by the lender

single-family dwelling units

previously owned houses, new houses, and custom built houses

reverse mortgage

provide homeowners who are 62 or older with tax free income in the form of a loan that is paid back (with interest) when the home is sold

Step 2: Find and Evaluate a Home

-Select a Location -Take advantage of services offered by real estate agents -Have a home inspection done on the home

second mortgage (home equity loan)

-allows a homeowner to borrow on the paid up value of the property -risk losing home if required payments on both first and second mortgage are not made -deductable interest on tax return of home equity laon

down payment

-amount of cash available for down payment affects size of mortgage required -20% or more likely to obtain mortgage more easily

condominiums

-an individually owned housing unit in a building with several such units -do not own the common areas (hallways, outside grounds, rec facilities) -pay monthly fee for maintenance, repairs, improvements, and insurance

At the end of a lease

-clean the rental -tell landlord where to send the security deposit -require any deductions from security deposit to be documented

Step 5: Close the Purchase Transaction

-conduct a walk through arrange a closing date -obtain funds and documents for closing -request clarification of unclear aspects of the transaction

Step 1: Determine Home Ownership Needs

-consider benefits and drawbacks of major financial commitment -assess types of housing units -calculate the amount you can afford

other things to consider when purchasing a house

-current mortgage rates -potential future value of the property -your ability to make monthly payments

Step 4: Obtain Finacning

-determine amount of down payment -investigate the rates and conditions of mortgages -apply for mortgage and evaluate types of mortgages

Step 3: Price the Property

-determine the home price -negotiate the purchase price

most desirable home improvements

-energy-efficient features -remodeled kitchen -remodeled bathroom -added rooms or storage space -converted basement -fireplace -outdoor space (deck, patio)

building a home

-for people with certain specifications -be sure you possess the necessary knowledge, money, and perservance

the amount you spend on housing is affected by

-funds available for a down payment -your income -your current living expenses

Living in a rental property

-keep rental in good condition -contact the landlord for repairs -respect noise rules -get rental insurance

Pros of Renting

-more mobility -fewer responsibilities -less expensive

when choosing a contractor to build your home, consider....

-the contractor's experience and reputation -the contractor's relationship with the architect, materials suppliers, electricians, plumbers, carpenters, etc -payment arrangements during construction

things to consider before refinancing

-the cost of refinancing in relation to the savings gained with a lower monthly payment -beware of organizations that promise to help you make additional payments on mortgage- you can do this on your own -involves making extra payments on your mortgage

purchase agreement

-the way to formalize your offer, the legal way to offer to purchase a home

security deposit

-typically one month's rent -held by landlord to cover the cost of any damages -if money is deducted you have the right to an itemized list of repair costs

Before signing a lease

-verify lease starting date, costs, and facilities -talk to a lawyer about unclear lease aspects -note in writing, signed by the owner, the condition of the rental unit -if two names are on the lease, one person can be held responsible for the full rent

three phases of applying for a mortgage

1. Complete mortgage application and meet with lender to present evidence of employment, income, ownership of assets, and amounts of existing debts 2. Lender obtains credit report, verifies application and financial status 3. Either approved or denied

Five Steps to Buying a Home

1. Determine Home Ownership Needs 2. Find and Evaluate a Property to Purchase 3. Price the Property 4. Obtain Financing 5. Close the Purchase Transaction

5 main services of a real estate agent

1. Showing you homes to meet your needs 2. Presenting your offer to the seller 3. Negotiating a settlement price 4. Assisting you in obtaining financing 5. Representing you at closing

with a credit score of _____ or higher a person can obtain home financing

620

sublet

letting someone else live in the rental and paying for the lease before the lease expires

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 unit -shareholders purchase stock o obtain the right to live in a unit -do not own the unit, it belongs to the co-op

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 variable-rate mortgage

handyman's special

a home that needs work and that you are able to get at a lower price, and then you will have to put in extra work and money to pay for the repairs and improvements

lease

a legal document that defines the conditions of a rental agreement

mortgage

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

earnest money

a portion of the selling price of a home that the buyer deposits as evidence of good faith to indicate a serious purchase offer

appraisal

an assessment of the market value of the home -an estimate of the current value of a property

how do you determine how much you can afford to spend on a home

an officer at a mortgage company will prequalify you -this is a free service

manufactured homes

assembled in a factory and then moved to the living site

duplex

building with separate homes

closing costs

fee and charges paid when a real estate transaction is completed -also referred to as settlement costs

prefabricated homes

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

The Real Estate Settlement Procedures Act (RESPA)

helps home buyers understand the closing process and closing costs -requires that loan applications be given an estimate of the closing costs before the actual closing

lifestyle

how you spend your money and your time

walk through

inspect the conditions of the home use a camera or video recorder to collect evidence of any last minute items you need to negotiate

title insurance

insurance that 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

buy down

interest rate subsidy from a home builder, real estate developer, or borrower that reduces the mortgage payments during the first few years -intended to stimulate sales among home buyers who cannot afford conventional financing

payment cap

keeps the payments on an adjustable-rate mortgage at a given level or limits the amount to which those payments can rise

lessor

landlord

townhouse

may contain two, four, or six living units

escrow account

money for the payment of property taxes and homeowner's insurance -usually deposited with the lending financial instituition

Pros of Buying a House

more permanent long-term financial advantages

multiunit dwellings

more than one living unit -duplex, townhouse

when mortgage payments do not rise but interest rates do, the amount owed can increase in months in which the mortgage payment does not cover the interest owed. this is known as

negative amortization -the amount of the home equity is decreasing instead of increasing

main sources for a listing of a rental property

newspaper ads real estate and rental offices people you know

refinancing

obtain a new mortgage on current home at a lower interest rate

amortization

the reduction of a loan balance through payments made over a period of time

what to include in a written contract with the contractor

time schedule, cost estimates, description of the work, and payment schedule

common examples of closing costs

title search fee title insurance attorney's fee property survey appraisal fee recording fees; transfer taxes settlement fee termite inspection etc.

interest only mortgage

to have lower payments for the first few years of the loan -higher payments will occur later in the loan