PF C7

Home Buying: A Summary

For most people, buying a home is the most expensive decision they will undertake.

Comparing Renting and Buying Housing

ADVANTAGES - RENTING - Easy to move - Fewer responsibilities for maintenance - Minimal financial commitment DISADVANTAGES - RENTING - No tax benefits - Limitations regarding remodeling - Restrictions regarding pets, other activities

Your Lifestyle and Your Choice of Housing

Although the concept of lifestyle—how you spend your time and money—may seem intangible, it materializes in the consumer purchases you make. Every buying decision is a statement about your lifestyle. Personal preferences are the foundation of a housing decision, but financial factors will modify your final choice.

Types of Housing Available

Condominiums are individually owned housing units in a building. Ownership does not include common areas, such as hallways, outside grounds, and recreational facilities. These areas are owned by the condominium association, run by the owners of housing units. The condominium association oversees the management and operation of the housing complex. Condominium owners are charged a monthly fee to cover the maintenance, repairs, improvements, and insurance for the building and common areas. A condominium is a legal form of home ownership.

Conducting a Home Inspection

EXTERIOR FACILITIES - Appearance of neighborhood - Condition of streets and sidewalks - Location of streetlights, fire hydrants - Quality of landscaping, trees, shrubs - Condition of driveway and garage - Outdoor lighting - Condition of patio or porch - Appropriate drainage system EXTERIOR CONSTRUCTION - Material quality and condition of building - Construction and condition of foundation - Condition of bricks, wood, or other siding - Condition and quality of windows - Condition and quality of rood and gutters - Type and condition of chimney INTERIOR CONSTRUCTION - Condition of electrical features and wiring - Condition of plumbing features - Adequate water pressure; water heater condition - Type and condition of heating unit - Quality/condition of walls, floors, and doors - Cracks or potential ceiling problems - Ease of operation of windows - Type and condition of floor covering - Condition, potential use of basement - Condition of stairways INTERIOR DESIGN - Size and arrangement of rooms - Amount of closet and storage space - Door sizes for moving furniture - Counter space and layout of kitchen - Condition of kitchen appliances - Ventilation for cooking - Adequate laundry area - Location of bedrooms relative to other areas - Accessibility to attic and basement - Adequate electrical outlets

The Mortgage

Payments on a mortgage are usually made over a time period ranging from 10 to 30 years. Applying for a mortgage involves these steps: 1. Complete the mortgage application and meet with the lender to present evidence of employment, income, ownership of assets, and existing debt amounts. Self-employed applicants should provide detailed evidence of income amounts, along with proof of savings to show financial stability. 2. The lender obtains a credit report, and verifies your application and financial status. 3. The mortgage is either approved or denied, with the decision based on your financial history and an evaluation of the home you want to buy. - the major factors that affect mortgage affordability are your income, other debts, the down payment amount, loan length, and current mortgage rates. The results of this calculation are (a) the monthly mortgage payment you can afford, (b) the mortgage amount you can afford, and (c) the home purchase price you can afford. - When comparing mortgage companies, consider other factors than just the interest rate. The down payment and the points charged will affect the interest rate. Points are prepaid interest charged by the lender. Each discount point is equal to 1 percent of the loan amount and is a premium paid for obtaining a lower mortgage rate.

Sale by Owner

Selling your own home can save several thousand dollars, but an investment of time and effort is required. Avoid selling at too low of a price by knowing the value and features of comparable homes.

Costs of Renting

Some state and local laws require landlords to pay interest on a security deposit if a building has a certain number of rental units. After you vacate the rental unit, your security deposit must be refunded within a reasonable time. If money is deducted, you have the right to an itemized list of repair costs. In some situations, a pet or move-in fee may be charged.

Determine the Home Price

The amount you offer will be affected by recent selling prices in the area, current housing demand, the length of time the home has been on the market, the owner's need to sell, features and condition of the home, and the mortgage amount for which you qualify. Each of these factors can affect your offer price. For example, you will probably offer a higher price in times of low interest rates and high demand for homes.

Preparing Your Home for Selling

The effective presentation of your home can result in a fast and financially favorable sale.

Find and Evaluate a Home

- Location is considered the most important factor when buying a home. - If you have a family, assess the school system. Educators recommend that schools be evaluated based on program quality, student achievement level, percentage of students who go to college, dedication of the teachers, facilities, school funding, and parent involvement. Homeowners without children also benefit from strong schools, since the educational quality in a community helps maintain property values.

Common Closing Costs

At the transaction settlement of a real estate purchase and sale, the buyer and seller will encounter a variety of expenses that are commonly referred to as closing costs. COST RANGE ENCOUNTERED/ BY THE BUYER/ BY THE SELLER - Title search fee; $150-$375; --- - Title insurance (lender/owner policies); $800-$1,800; $2000+ - Attorney's fee; $400-$700; $50-$700 - Property survey; -- ; $400-$500 - Appraisal fee (or nonrefundable application fee); $250-$300; -- - Recording fees, transfer taxes; $95-$130; $15-$30 - Settlement fee; $500-$1000+; -- - Wire transfer fee; $25-$100 - Lender's organization fee; 1-3% of loan amount; -- - Reserves for home insurance and property taxes; Varies; -- - Interest paid in advance (from the closing date to the end of the month) and "points"; Varies; -- - Real estate broker's commission; --; 4-7% of purchase price NOTE: The amounts paid by the buyer are in addition to the down payment

Money Minute Focus

By taking a 15-year mortgage instead of 30 years, most home buyers can save over $100,000 in interest over the life of the loan. Faster equity growth and interest savings also results from paying an additional principal amount each month. Be warned, however, these actions have risks. If you encounter financial difficulties and don't have an emergency (reserve) fund, you could face foreclosure. Some suggest that if your reserve fund earns a rate greater than your mortgage rate (also taking into account tax benefits), you may decide to invest rather than pay down your mortgage. This approach could give more flexibility when encountering an economic downturn, and allow for possibly refinancing your mortgage at a lower interest rate. Also, beware of organizations promising to help you make additional mortgage payments. You can do this on your own, without the fee they will likely charge.

Determining the Selling Price

Putting a price on your home can be difficult. Too high of a price, and you risk not selling it quickly; or, you may not get a fair amount if the price is too low. An appraisal, an estimate of the current value of the property, can provide a good indication of the price you should set. An appraisal is likely to cost between $300 and $500. Also obtain a market analysis from a real estate agent to get a realistic property value. An asking price is influenced by recent selling prices of comparable homes in your area, demand in the housing market, and current mortgage rates.

Types of Mortgages

- Conventional 30-year mortgage; Fixed monthly payments for 30 years provide certainty of principal and interest payments; Higher initial rates than adjustables. - Conventional 15 or 20-year mortgage; Lower rate than 30-year fixed, faster equity buildup and quicker payoff loan; Higher monthly payments - FHA/VA fixed-rate mortgage (30-year and 15-year); Low down payment requirement and may be assumable with no prepayment penalties; May require additional processing time. - Adjustable-rate mortgage (ARM) payment changes on 1-, 3-, 5-, 7-, or 10- year schedules; Lower initial rates than fixed-rate loans, particularly on the 1-year adjustable. Offers possibility of future rate and payment decreases. Loans with rate "caps" may protect borrowers against increases in rates.; Shifts far greater interest rate risk onto borrowers than fixed-rate loans. May push up monthly payments in future years.

Obtain Financing

- Personal savings, sales of investments or other assets, and assistance from relatives are common down payment sources. - Private mortgage insurance (PMI) is usually required if the down payment is less than 20 percent. - The Homeowners Protection Act requires that a PMI policy be terminated automatically when the equity reaches 22 percent of the property value at the time the mortgage was executed. Homeowners can request termination earlier if they can prove the equity in the home is at least 22 percent of the current market value.

Close the Purchase Transaction

The closing is a meeting of the buyer, seller, and lender of funds, or representatives of each party, to complete the transaction. Documents are signed, last-minute details are settled, and appropriate amounts are paid. Several expenses are incurred at the closing. The closing costs, also referred to as settlement costs, are the fees and charges paid when a real estate transaction is completed. Exhibit 7-9 presents the costs commonly associated with a closing. These expenses will vary based on the price of the house and your location, as other fees may be imposed by local regulations. - Title insurance has two phases. First, the title company conducts a survey to define the boundaries of the property and conducts a search to determine whether the property is free of claims, such as unpaid real estate taxes. Second, during the mortgage term, the title company protects the owner and lender against financial loss resulting from future defects in the title and from unforeseen property claims not excluded by the policy. - Also due at closing time is the deed recording fee. The deed is the document that transfers ownership of property from one party to another. With a warranty deed, the seller guarantees the title is good. This document certifies that the seller is the true owner of the property, there are no claims against the title, and the seller has the right to sell the property. - The Real Estate Settlement Procedures Act (RESPA) helps home buyers understand the closing process and settlement costs. This legislation requires that loan applicants be given an estimate of the closing costs three days before the closing. For information on RESPA and the "know before you owe" rule (with the technical label TRID) go to www.consumerfinance.gov. - At the closing and when you make your monthly payments, you will probably deposit money for home expenses. For example, the lender will require that you have property insurance. An escrow account is money, usually deposited with the lending institution, for the payment of property taxes and home insurance.

Listing with a Real Estate Agent

- A real estate agent will provide you with services that include a suggested listing price based on a market analysis, providing advice on features to highlight, hosting open houses, and coordinating showings to potential buyers. The agent will also help negotiate a selling price and guide you through the closing. - An agent's marketing materials include promotional materials such as brochures, flyers, and for-sale signs along with digital activities such as e-mail blasts and social media content. They also have contacts with real estate attorneys, repair companies, and other services that might be needed. - A real estate agent will screen potential buyers to determine whether they qualify for a mortgage. Discount real estate brokers are available to assist sellers who are willing to take on certain duties and want to reduce selling costs.

Evaluate Home Ownership

- Stability of residence and a personalized living location are important motives of many home buyers. A major financial benefit of home buying is that mortgage interest and real estate may be deducted on your federal income taxes. - A disadvantage of home ownership is financial uncertainty. Obtaining money for a down payment and securing mortgage financing may be a concern. Changing property values can affect your financial investment. Home ownership does not provide the ease of changing living location that renting does. If changes in your situation necessitate selling your home, doing so may take time.

Adjustable-Rate, Variable-Payment Mortgages

- The adjustable-rate mortgage (ARM), also referred to as a flexible-rate mortgage or a variable-rate mortgage, has an interest rate that increases or decreases during the life of the loan. ARMs usually have a lower initial interest rate than fixed-rate mortgages; however, the borrower, not the lender, bears the risk of future interest rate increases. - A rate cap restricts the amount by which the interest rate can increase or decrease during the ARM term. This limit prevents the borrower from having to pay an interest rate significantly higher than the original one. A payment cap keeps the payments on an adjustable-rate mortgage at a set level or limits the amount payments can rise. When mortgage payments do not rise but interest rates do, the amount owed can increase in months when the mortgage payment is less than the interest for that month. This increased loan balance, called negative amortization, means the amount of the home equity is decreasing instead of increasing.

Other Financing Methods

- The interest on a home equity loan may be tax deductible on your federal income tax return. A home equity loan creates the risk of losing the home if required payments on both the first and second mortgages are not made. To help prevent financial difficulties, home equity loans for more than 70 percent of your equity are not allowed in many states. - During the term of your mortgage, you may want to refinance your home, that is, obtain a new mortgage on your current home at a lower interest rate. Before taking this action, consider the refinancing costs in relation to the savings gained with a lower monthly payment.