Chapter 10: Purchasing and Financing a Home Part 1

Effects of business activity and zoning laws

-Business activity nearby increases demand for housing in an area ---Home prices may rise as well ---If business leave, those workers sell their homes and may have to lower prices -Zoning laws may affect desirability ---Homes near areas that have just been zoned for industrial use become less desirable ---Value of a subdivision can change substantially in response to a change in the public school that the resident children would attend

Title search and insurance

-Conducted by the mortgage company to ensure that the home or property is owned by the seller -Title insurance provides you with protection in the event that persons other than the seller show evidence that they hold the actual deed of ownership to the property -Closing costs and down payment both due at the time of the closing

Decision to Own a Home versus Rent

-Consider financial assessment before considering personal preferences -Estimating the total cost of renting and owning -Renting-rent payment, security deposit -Owning-down payment, mortgage payment, closing costs, maintenance, taxes and insurance ---Owning also has tax advantages

Transaction Costs of Purchasing a Home

-Down payment -Closing costs

Economic impact on market prices

-Economic conditions affect the valuation of homes -As demand for homes increase, prices rise -When economic conditions weaken, demand declines resulting in lower home prices -READ EXHIBITS 10.1 and 10.2 PAGE 271

How Much Can You Afford?

-Financial planners suggest 2 rules: -A home price should be no more than 2 times the total gross annual household income -All of the monthly household debt payments should be no more than about 40% of the total monthly gross income

Resale Value

-Highly dependent on its location -Although home prices in a given subdivision tend to move in the same direction, the price movement can vary substantially among homes -When using real estate agents though, the agent will usually charge about a 6% commission price of what the house sells for

School System

-If you have children, the reputation of the school system is very important -Even if you have no kids, the resale value of your house benefits from a good school system

Taxes

-Imposed on homes to pay for local services, such as the local school system and local park system -Annual property taxes are often between 1% and 2% of the market value of the home (tax on a $100,000 home is around $1,000 or $2,000 per year) -Property taxes are tax deductible if you itemize deductions on your income tax return (can deduct them from your income when determining your federal income tax)

Closing Costs

-Loan application fee—from $100-$500 -Points -Loan origination fee—about 1% of the mortgage amount -Appraisal fee—from $200-$500 -Title search and insurance

Down Payment Pt. 2

-Maintenance of an escrow account usually required for taxes and insurance ---Your monthly mortgage payment will include an additional payment for your home insurance and your property taxes -Contingent clause ---Makes an offer of $340K, must make a good faith effort to sell your existing home ---Financing in good faith, inspecting the home, buyer and seller pick a sell date

Valuation of a Home

-Market analysis -Economic impact on market prices -Effects of business activity and zoning laws -Obtaining a second opinion on your valuation -Negotiating a price

Negotiating a price

-Most sellers will accept less than their asking price -Seller may accept your offer, reject it, or suggest a revision -A contract will stipulate the agreed upon price and any other conditions

Criteria Used to Select a Home

-Price -Convenient Location -Maintenance -School System -Insurance -Taxes -Homeowner's Association -Resale Value

Selecting a Home

-Purchasing a home may be the single biggest investment you will ever make and requires serious consideration -Relying on a realtor can be helpful, but make decisions that meet your needs ---A good realtor will ask you about your preferences and suggest appropriate homes -Using online realtor services usually saves money in commission charges

Affordable monthly mortgage payments

-Refer to your cash flow statement -Your mortgage payment may replace a rent payment but there are other expenses to consider -Allow for continued saving

Homeowner's Association

-Set guidelines for the homes and may even assess fees that are used to hire security guards or to maintain grounds within the area -Monthly fees by some are very high and should be considered when buying a home

Some buy a home that's more expensive then they intended and can justify doing this with some of the following reasons:

-The more expensive house may not require any additional down payment if they just obtain a larger mortgage (more debt?) -They can possibly obtain a second job to afford the higher mortgage payment (could reduce the fun of your new home) -They will benefit from buying a more expensive home because if prices rise over time, the more expensive homes will likely rise in value by a greater degree (values could decline over time, too)

Appraisal fee—from $200-$500

-Used to estimate the market value of the home and thus protects the financial institution's interests -If you can't make the payments, the financial institution can sell the home to recoup the mortgage loan that it provided

Down Payment Pt. 1

-Usually 10 to 20 percent ---The lender expects you to cover a portion of the purchase price with your own money because the home serves as collateral to back the loan ---If the homes value declines over time, however, a creditor may not obtain all the funds that it initially lent -Lower down payment may be required for government backed loans ---Federal Housing Administration (FHA) ---Veterans' Administration (VA)

Affordable down payment

-Usually 20%, but can get down to [15%, 10%, 5%- FHA], or even 0% (Va Guarantee) $200,000 Price with $40,000 (20%) down payment $160,000 loan/mortgage -What is the market value of the assets you will use to make your down payment? -You also need to allow for closing costs and some unanticipated expenses

Characteristics of Market Analysis

-Usually based on price per square foot -Information can be obtained from a real estate broker or appraiser

Insurance

-When you own a home, you need to purchase homeowner's insurance, which covers the home in case of burglary or damage -Cost of insurance is higher for more expensive homes and for homes in high-risk areas (such as flood zones)

Convenient Location

Focus on homes in a convenient area so that you can minimize commuting time to work or travel time to other activities

Loan origination fee—about 1% of the mortgage amount

Many lenders allow homeowners to select among different fee structures, so you may be able to pay a lower loan origination fee if you accept a slightly higher interest rate

An estimate of the price of a home based on the prices of similar homes in the area

Market Analysis

-A fee charged by the lender when a mortgage loan is provided; stated as a percentage of the mortgage loan amount ---1 point - 1% of amount borrowed ---Tax-deductible, so the expense can be deducted from your income when determining your taxable income

Points

PITI

Principal, Interest (amount skewed, mo. payment), Taxes, Insurance

Obtaining a second opinion on your valuation

Remember that while you may have an excellent agent...he's paid by seller unless contracted differently

Maintenance

Some homes built by well-known construction companies have lower repair bills than others (i.e. newer homes tend to need fewer repairs than older homes)

Price

Stay within your budget/avoid purchasing a home you cannot afford