Personal Finance- Chapter 10
Denise and Kenny are ready to make an offer on a(n) 2,200-square-foot home that is priced at $150,300. They investigate other homes on lots of similar size and find the following information: • A(n) 2,933-square-foot home sold for $187,040. • A(n) 1,833-square-foot home sold for $118,570. • A(n) 1,344-square-foot home sold for $87,953. What offer should they make on the home?
187040/2933= 63.77 118570/1833= 64.69 87953/1344= 65.44 193.89/3= 64.63 x 2200= 142192.17
How do economic conditions and the stability of your job affect the home buying decision?
Mortgage payments cover a long period of time so you need to consider the stability of your job when determining how much to borrow. Also consider whether your job will be affected if the economy weakens. Borrowing less than you qualify for will make it easier to make payments if you are laid off when economic conditions deteriorate.
Paul will be able to save $381 per month (which can be used for mortgage payments) for the indefinite future. If Paul finances the remaining cost of a $120,000 home, after making a $24,000 down payment, (amount to finance $96,000) at a rate of 4% over 30 years, what are his resulting monthly mortgage payments? Can he afford the mortgage?
Paul's resulting monthly mortgage payment is -use Loan calculator- use for loan amount- 'amount to finance' = $458.32
When is this type of mortgage useful?
Sellers may offer this personal financing option to buyers that do not qualify for a conventional mortgage. Individuals anticipating higher incomes in the future or that anticipate selling the home prior to the balloon might choose this option if the interest rate is lower than rates on a traditional mortgage.
Teresa rents her apartment for $871 per month, utilities not included. When she moved in, she paid a $700 security deposit using money from her savings account that was paying 4% interest. Her renter's insurance costs her $84 per year. What are Teresa's total annual costs of renting?
Teresa's total annual costs of renting are Total Annual Cost of Renting = Annual rent Payment + Annual Insurance cost + Annual Opportunity cost of security deposit - Annual rent Payment = $871*12 = $10452 - Annual Insurance cost= $84 - Annual Opportunity cost of security deposit = Amount of Security Deposit*Interest rate earned = $700*4% = $28 Total Annual Cost of Renting = $10452 + $84 + $28 $10564
Lloyd and Jean are considering purchasing a home requiring a $75,000 mortgage. The payment on a 30-year mortgage for this amount is $498.97. The payment for a 15-year maturity is $674.12. What is the difference in the total interest paid between the two different maturities?
Total interest paid on 30 year mortgage = (498.97×360) - $75000 = 104629.2 Total interest paid on 15 year mortgage = (674.12×180) - $75000 = $46341.6 104629.2 -46341.6= 58287.6
Lloyd and Jean are considering purchasing a home requiring a $117,000 mortgage. The payment on a 30-year mortgage for this amount is $916.26. The payment for a 15-year maturity is $1,165.90. What is the difference in the total interest paid between the two different maturities? The difference in the total interest paid between the two different maturities is
Total interest paid on 30 year mortgage = (916.26×360) - 117000 =$211413.6 Total interest paid on 15 year mortgage = (1165.9×180) - $117000= $92862 Difference in total interest paid = $211413.6 - $92862 = $118551.6
A home inspection is:
a formal written assessment of the home's physical condition conducted by a qualified professional. Home inspectors evaluate the condition of the home's electrical systems, plumbing, heating and cooling, foundation, roof, and other physical aspects of the home.
Each mortgage payment represents:
a portion of payment towards the principal and a portion of payment towards the interest.
an adjustable-rate mortgage contract
must specify the frequency with which the mortgage rate may adjust
a real estate broker can help you by
offering suggestions on homes that satisfy your preferences
Escrow accounts are:
set up to collect the property taxes and insurance and remit those payments in a timely manner. Many mortgages require escrow payments to ensure the borrower does not allow the insurance to lapse or taxes to become delinquent.
Some of the risks associated with buying a home include:
some issues, such as faulty wiring, are difficult to spot unless you are trained or have some experience as an electrician. the fact that real estate may decline in value. In many cases a homeowner may find themselves "upside down" or "underwater". These terms are commonly used to describe a situation where the mortgage is greater than the market value of the property.
Closing costs are those costs
that are incurred in the loan application process.
The reputation of the school system in the area of the home you are buying is important because:
the quality of a school system influences the home values.
insurance costs vary among homes because
home values vary
An amortization table discloses the monthly mortgage payment based on the:
mortgage amount, a specified fixed interest rate, and a maturity.
an adjustable-rate mortgage contract
must specify how much the interest rate may adjust at one time
The costs of renting a home are:
rent payments, security deposits, and renter's insurance
Lenders protect their interest in a home by:
requiring the home to act as collateral for the loan.
the decision to refinance depends on a comparison of the
savings from the new interest rates and the closing cost that would be incurred.
Fixed-rate mortgages offer a fixed rate of interest for:
15 or 30 years, and are preferred by many homeowners because their payment is not tied to market interest rates.
What does it mean to default on a mortgage? How do changing home values affect mortgage defaults?
Default occurs when the homeowner fails to make the mortgage payments and the lender eventually repossesses the home. During the financial crisis of 2008-2009, home prices fell significantly in many areas. In some areas, the homeowners owed more on the mortgage then the home was worth after falling in value, which led to an increase in defaults.
Two government backed home loan programs are:
Federal Housing Administration and Veterans Administration
A market analysis of the home is:
based on the prices of similar homes in the area.
You should offer the price:
based on your market analysis.
What services do real estate agents and brokers provide?
Real estate agents and brokers have knowledge of the property market and home values. They know what types of homes are available and know about price ranges, features, and whether homes are appreciating or depreciating in a specific area. However, you need to keep in mind that they also have a vested interest in selling you a home so you should not rely solely on their advice.
Which of the following should not be a criteria you use when selecting a home?
Real estate taxes. B. School system. C. Maintenance. D. All of the above should be considered.
The two financial components you must consider before purchasing a home are the:
down payment and the monthly mortgage payments.
a fixed rate mortgage is preferred when interest rates are expected to
fall
refinancing a mortgage
is generally done when interest rates fall substantially lower than your current mortgage rate
The maintenance affects your home-buying decisions because:
it will affect your ability to keep the house in good condition.
Once you have reduced your list of three or four homes down to one home, your next step is to:
make the seller an offer.
If the cost of refinancing their house is $6,320, how long would Doug and Lynn have to remain in their home in order to recover the cost, based on annual savings of $1,315? Ignore any interest on the savings in this question.
they would need to remain in the house for = 6320/1315 years 4.8 years
The amount of the monthly mortgage payment depends on the:
time to maturity, such that the longer the time to maturity, the lower the mortgage payment.
How does it impact the cost of your mortgage?
PMI is typically an annual fee of 0.5% to 1% of the amount borrowed and is paid on a monthly basis. In some cases an upfront fee is also charged for PMI.
Private mortgage insurance (PMI):
protects the lender in the event the borrower defaults on the loan. Most lenders require PMI if your down payment is less than 20% of the mortgage value.
Matt paid mortgage interest of $3,290 during his first year in the condo. His property taxes were $487, and his homeowner's insurance was $351. If Matt is in a 12% marginal tax rate bracket, what were his tax savings for his first year assuming he will itemize deductions?
His tax savings for his first year = ($4430 + $629) * 12%=5059*12%= $607.08
Why is it important for you to have a home inspected before purchase?
Home inspectors can inform you of costly repairs needed prior to buying the home. In some cases the buyer may opt to withdraw the offer, or reduce the offer in order to have funds to fix the problems.
Appraisal fee
fee for determining the fair market value of the home; commonly between $200 and $500
Title search and insurance
fee to search county records to verify that the seller owns the home
You consider these so you can:
focus on homes you can afford.
Escrow accounts help protect the lender:
from loss due to an insurance peril reducing the value of the home and pushing the borrower to default and also keeps the property from being seized for delinquent property taxes.
balloon mortgage payments
have low payments then a large single payment
graduated payment mortgages
have payments that increase and then are constant
Sarah and Joe own a small home that they would like to sell in order to build their dream home. Their current home has a mortgage and needs extensive repairs to make it marketable. A local loan company is offering home equity loans equal to 125% of the home's value. Since Sarah and Joe have good jobs and can make the additional home equity loan payments, they easily qualify for the 125% equity home loan. It takes the entire home equity loan to complete the repairs and upgrades to the home. They are shocked to find that even after the upgrades they are unable to sell their home for enough to repay the mortgage and the home equity loan. In other words, they have negative equity in the home.
a. Considering the finance company's ethics in making loans in excess of a home's appraised value, which of the following is true? This could be considered ethical if the bank knew that Sarah and Joe planned to stay in their home for the long term. b. What are Sarah and Joe's options in their current situation? They can defer their move or rent their house.
A balloon payment mortgage:
amortizes a loan over a typical 30-year period but then requires the entire loan balance to be paid after a specified period that is less than the amortization period.
Loan application fee
charged by the bank when obtaining a loan; typically between $100 and $500
Loan origination fee
charged by the lender; will be lower if you accept a higher interest rate
points
charged by lender; can be 1% to 2% of the mortgage amount
the first step in buying a home is to
compare existing homes for sale in your area so you can compare the cost of buying to the cost of renting
an adjustable-rate mortgage is preferred when interest rates are expected to
fall