Chapter 7: Selecting and Financing Housing
JS earns $72,000 per year. His bank uses a rule that PITI must be equal to or less than 33% of gross monthly income. If his home owner's insurance is $100 per month, roughly how much of a monthly payment can Joe afford including taxes over and above the $100 for insurance?
72,000/12 months= 6,000 - $100= 1,900
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.
Real estate taxes r a major expense of homeowners.
Higher property values and increased tax rates mean higher real estate taxes.
A payment cap
Keeps the payments on an adjustable-rate mortgage at a given level or limits the amount to which those payments can rise.
Every buying decision is an STATEMENT
about your lifestyle.
An interest-only mortgage
allows a home buyer to have lower payments for the first few years of the loan. During that time, none of the mortgage payment goes toward the loan amount. Once the initial period ends, the mortgage adjusts to be interest-only at the new payment rate. Or a borrower may obtain a different type of mortgage to start building equity.
A home equity loan
allows u to deduct the % on consumer purchases on u federal income tax return. However, it creates the risk of losing the home if required payments on both the first and 2nd. mortgages r not made.
subletting
allows you to have another person take over rent payments and live in the rental unit when you must vacate the premises before the lease expires
walk-through
allows you to inspect the condition of the home
The drawback of an ARM mortgage (adjustable rate mortgage) is that the mortgage balance could actually rise to a value greater than the value of the home.
True. This type of loan may result in negative amortization because payments can be so low that they do not cover all the interest and principal due.
reverse mortgages
also called home equity conversion mortgages; provide homeowners who are 62 or older with tax-free income in the form of a loan that is paid back when the home is sold or the homeowner dies
condominium
an individually owned housing unit in a building with several units.
manufactured homes
assembles in a factory and then moved to the living site
duplex
building with separate homes
purchase agreement
contract which is your legal offer to purchase the home
Implied warranties
created by state laws may cover some problem areas; or other repair costs can occur.
multiunit dwellings
dwellings with more than one living unit
deed
a document that transfers ownership of property from one party to another
mortgage
a long-term loan on a specific piece of property such as a home or other real estate
conventional mortgage
has equal payments over 15, 20, or 30 years based on a fixed interest rate
prefabricated homes
have components built 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. This legislation requires that loan applicants be given an estimate of the closing before the actual closing.
lifestyle
how you spend your time and money
single-family dwellings
include previously owned houses, new houses, and custom-built houses
closing costs
fees and charges paid when a real estate transaction is completed; also called settlement costs
Closing costs
fees and charges paid when a real estate transaction is completed; also called settlement costs.
Many states have buyer agents
who represent the buyer's interests and may be paid by either the seller or the buyer.
rate cap
restricts the amount by which the interest rate can increase or decrease during the ARM term. (adjustable rate mortgage)
A real estate agent can provide with various services:
* Suggesting a selling price. * Making potential buyers and other agents aware of u home. * Handling the financial aspects of the sale. * Screen potential buyers to determine whether they will qualify for a mortgage.
Determine the home price
* current demand for housing * the time the home has been on the market * the owner's need to sell, financing options, and features and conditions of the home.
1. Determine homeownership needs
*Evaluate owning u place of residence. * Assess types of housing units. * Calculate the amount u can afford.
Types of housing available:
1. Single-family dwellings 2. Multiunit dwellings
5. Close the purchase transaction
* Arrange a closing date * Obtain funds and documents for closing. * Request clarification of unclear aspects of the transaction.
4. Obtain financing
* Determine amount of down payment. * Investigate the rates and conditions of mortgages. * Apply for mortgage and evaluate types of mortgages.
3.Price the property
* Determine an appropriate market price. * Negotiate an agreement price.
Conducting a home inspection:
* Interior construction * Interior design * Exterior facilities * Exterior construction
2. Find and evaluate a property to purchase
* Select a location * Consider using a real estate agent * Conduct a home inspection.
Common sources of down payment funds to purchase a home include:
- Assistance from relatives - Personal savings - The sales of investments
The benefits of a FHA/VA fixed-rate mortgage include:
- Low down payment - No prepayment penalties - May be fully assumable
Steps of the mortgage process:
1. Complete the mortgage application and present evidence of income, etc. 2. Lender gets credit report, confirms financial aspects. 3. Mortgage is approved or denied.
Home buying process
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.
Consider several factors when evaluating adjustable-rate mortgages:
1. Determine the frequency of and restrictions on allowed changes in interest rates. 2. Consider the frequency of and restrictions on changes in the monthly payment. 3. Investigate the possibility that the loan will be extended due to negative amortization. 4. Find out what index is used to set the mortgage interest rate.
Renting
Advantages: * Easy to move * Fewer responsibilities for maintenance * Minimal financial commitment Disadvantages: * No tax benefits * Limitations regarding remodeling * Restrictions regarding pets & other activities
Buying
Advantages: * Pride of ownership * Financial benefits * Lifestyle flexibility Disadvantages: * Financial commitment * Higher living expenses than renting * Limited mobility
Equity is calculated:
Subtract the mortgage amount owed from the current market value of the home. EX, a home worth $200,000 with $80,000 owed on the mortgage would have equity of $120,000, which is the 60% percent of the home's value.
which is the main factor to consider when refinancing a loan at a lower rate?
The cost of refinancing versus the benefits (savings) of lower monthly payments.
Mobile home
They are only a few that are moved from their original sites. They r smaller than 1,000 square feet, they can offer features such as a fully equipped kitchen, fireplace, cathedral ceiling and whirlpool bath.
Abuy-down
is an interest rate subsidy from a home builder, a real estate developer, or the borrower that reduces the mortgage payments during the first few years of the loan. This assistance is intended to stimulate sales among home buyers who cannot afford conventional financing. After the buy-down period, the mortgage payments increase to the level that would have existed without the financial assistance.
Private mortgage insurance (PMI)
it is usually required if the down payment is less than 20% This protect the lender from financial loss due to default. After building up 20% equity in a home, a home buyer should contact the lender to cancel PMI.
townhouse
may contain two, four, or six living units
security deposit
money held by the landlord to cover the cost of any damages; usually one month's rent
escrow account
money, usually deposited with the lending financial institution, for the payment of property taxes and homeowner's insurance
exterior facilities r:
neighborhood, landscaping, and outdoor lighting
refinance
obtain a new mortgage on your current home at a lower interest rate
points
prepaid interest charged by the lender
Points
r prepaid interest charge by the lender. Each discount point is equal to 1% of the loan amount and should be viewed as a premium u pay for obtaining a lower mortgage rate.
An adjustable rate mortgage usually has a ....
rate cap and a payment cap
The homeowners protection act
requires that a private mortgage insurance (PMI) policy be terminated automatically when a homeowner's reaches 22 % of the property value at the time the mortgage was executed.
zoning laws
restrictions on how the property in an area can be used
counteroffer
slightly lower than the asking price
contingency clause
states that the agreement is binding only if a certain event occurs. For example, the contract may be valid only if the buyer obtains financing for the home purchase within certain time period, or it may make the purchase of a home contingent on the sale of the buyer's current home.
negative amortization
the amount of the home equity is decreasing instead of increasing
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 increased loan balance, called negative amortization, means the amount of the home equity is decreasing instead of increasing.
The major factors that affect the affordability of u mortgage r: u income, other debts, the amount available for a down payment,
the length of the loan, and current mortgage rates. The results of this calculations r: a. The monthly mortgage payment u can afford. b. the mortgage amount u can afford. c. the home purchase price u can afford.
lessor
the owner/landlord
amortization
the reduction of a loan balance through payments made over a period of time
warranty deed
the seller guarantees the title is good
lessee
the tenant
The conventional mortgage
usually has equal payments over 15,20, or 30 years based on a fixed interest rate.
Applying for a mortgage involves three main phases:
1. U complete the mortgage application and meet with the lender to present evidence of employment, income, ownership of assets, and amount of existing debts. 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 u financial history and an evaluation of the home u want to buy.
The title insurance has two phases:
1st. the title company defines the boundaries of the property being purchased and conducts a search to determine whether the property is free of claims such as unpaid real estate taxes. 2nd. During the mortgage term, the title company protects the owner and the lender against financial loss resulting from future defects.
traditional guidelines suggest that u should spend no more than
25 or 30% of u take-home pay on housing.
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
handy-man's special
a home that needs work and that you are able to get at a lower price
second mortgage
commonly called a home equity loan; allows a homeowner to borrow the paid-up value of the property. (fee or bill fully paid)
dual agent
works for both the buyer and the seller
Building a home
*The contractor's experience and reputation. * the contractor's relationship with the architect, materials suppliers, electricians, plumbers, carpenters, and other personnel. * payment arrangement during construction. U written contract should include a time schedule, cost estimates, a description of the work, and a payment schedule.
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 a flexible-rate mortgage or a variable-rate mortgage
appraisal
an estimate of the current value of a property
lease
a legal document that defines the conditions of a rental agreement
earnest money
a portion of the price of a home that the buyer deposits as evidence of good faith to indicate a serious purchase offer
title insurance
insurance that during the mortgage term, 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 subsidy from a home builder, a real estate developer, or the borrower that reduces the mortgage payments during the first few years of the loan
Government-guaranteed financing programs
these include loans insured by the federal housing Authority (FHA) and loans guaranteed by the Veterans Administration (VA). These government agencies do not provide the mortgage money; rather, they help home buyers obtain low-interest, low-down-payment loans.
When selling a home, the asking price is influenced by:
1. Recent selling prices of comparable homes in u area. 2. Demand in the housing market. 3. Current mortgage rates.
Services of real estate agents
1. Showing u home to meet u needs. 2. Presenting u offer to the seller based on a market analysis. 3. Negotiating a settlement price. 4. Assisting u in obtaining financing. 5. representing u at the closing.
payment cap
keeps the payments on an adjustable-rate mortgage at a given level or limits the amount to which payments can rise
A rate cap
restricts the amount by which the interest rate can increase or decrease during the ARM term (adjustable rate mortgage). This limit prevents the borrower from having to pay an interest rate significantly higher than the one in the original agreement.
