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					      Advantages of Renting
• - Select a lifestyle

• - Low/no maintenance

• - Flexibility
     Disadvantages of Renting
•   Economic reasons
•   No tax breaks
•   No hedge against inflation
•   Less living space for same money spent in
    buying
       Advantages of Owning
• Tax advantages
  - Interest deductible (ID)
  - Property taxes (ID)
  - Capital gains (exemption limits)
  - Loan origination fee deductible (ID)
  - Discount points deductible (ID)
• Inflation hedge
• Psychological aspects
   Disadvantages of Owning
• Repairs & maintenance
  - "Homeowner Hell"
    Every House is a Money Pit




-
"Every House is a Money Pit“
  - 2000 Average Home Improvement Costs




• Flexibility
         Housing Prices
• Who Owns??
   66.2% USA (2000) (TX = 63.8)
        Median Sales Price

Metro Areas    2004       2003       2002
U.S. average   $183,300   $170,000   $158,100
 Northeast     $214,800   $190,500   $164,300
 Midwest       $150,300   $141,300   $136,000
 South         $170,300   $157,100   $147,300
 West          $259,700   $234,200   $215,400
      Home Price Outlook

• Austin / San Marcos, TX
  U.S.
    • $152,000 median price for 2001
          $147,800
    • $156,500 median price for 2002
          $158,100
    • $156,700 median price for 2003
          $170,000
    • $158,900 predicted price for 2004
          $183,800
                Housing Prices
• Housing Affordability across USA               2nd
 Quarter 03
  – Affordability Problem
          City            Median Price
      •   62%   New York        $351.000
      •   63%   Los Angeles           $337,000
      •   63%   San Diego       $407,000
      •   63%   San Francisco   $560,000
      •   64%   Orange County   $472,000
      •   74%   Honolulu        $375,000
      •   79%   Boston          $409,000

      SOURCE: USA TODAY 10/22/03
• Affordable
                 City           Median Price
     •   218%   Indianapolis    $122,000
     •   218%   St. Louis       $123,000
     •   180%   Kansas City     $145,000
     •   179%   Atlanta         $151,000
     •   178%   Houston         $137,000
     •   174%   Philadelphia    $168,000
     •   174%   Dallas          $140,000
     •   161%   Orlando         $138,000
     •   154%   Phoenix         $153,000
     •   148%   New Orleans     $133,000
     •   137%   Portland, OR    $192,000
     •   126%   Washington DC   $286,000
     •   119%   Las Vegas       $177,000
     •   117%   Denver          $238,000
     •   113%   Chicago         $242,000
   Who Pays More-Renters or
           Owners

• Based on cash flow, renters appear to
  win.



• After taxes and appreciation, owners
  usually win.
        Home Equity Wealth
• What you own in your home

• Comprises a significant portion of wealth
  for most families
 Basic Steps of Home Buying
• Get your own finances in order

• Pre-qualify for a mortgage

• Negotiate a purchase

• Apply for a mortgage loan

• Sign your name on the closing day
    Get Your Finances in Order
Accurately estimate monthly housing
    costs
1. Choose the type of home you would like in
    the neighborhood desired;
    (www.realtor.com)
2. Estimate the current interest rates on
    mortgage loans; (www.bankrate.com)
3. Estimate the monthly payment for a loan of
    the amount you need at the prevailing
    interest rates; (www.bankrate.com)
  4. Add an additional 25 to 33 percent
    for such things as homeowner’s
    insurance, property taxes,
    maintenance, and upkeep

  5. The result is the amount to fit into
    your budget

• Do a credit check up
  – order a copy of your credit report
  – correct any errors or omissions
LOAN QUALIFICATION
  Pre-qualify for a Mortgage

• Mortgage Loan
  – a loan to purchase real estate
  – the real estate itself serves as collateral

• Mortgage Brokers
  – help link home buyers with mortgage
    lenders
  – arrange about one-half of all mortgage
    loans today
  – earn a commission from the lender
• The front-end ratio compares
  – the total annual expenditures for housing
  – with the loan applicant’s gross annual
    income
  – 25-29% are seen as maximums


• The back-end ratio compares
  – the total of all monthly debt payments with
    gross monthly income
  – 33-41 percent are seen as maximums
  Loan Qualification Example
• Annual income $67,884 / 12 = $5,657 mo.
  income
• Monthly Mortgage Payment
      32% of $5657 = $1,810 maximum payment
• PI = $850
• T = $217
• I = $ 54
  $1,121 monthly payment

 OR: $1,121 / $5,657 = 19.8%
  Mortgage debt -- 25 to 28% typical
Q? - Do you have enough reliable income to
  make your monthly house payment(s)?
• All debt -- 33 to 38% typical

Q? - Do you have enough reliable income to
 make monthly house payment(s) plus all
 other debt payments?
 Monthly Installment Payment

• 40% of $5,657 = $2,263 max. payment
$ 1,121 PITI
    202 Education loan
    274 Auto loan
    116 Computer loan
    216 Credit cards payments
   $ 1,929 total payments
          OR $1,929 / $5,657 = 34%
   Purchase Rules to Follow
• Home price 2.5 times your annual gross
  income

• Loan amount 2 times your annual gross
  income

• Total monthly housing costs equal to one
  week's net take-home pay

• Monthly payment not over 25% gross income

• Total monthly debt obligations not over 36%
       Factors to Consider


•   Location
•   Zoning
•   Value of surrounding property
•   Convenience
•   New vs. Old
               The “HUNT”
• List your needs
  - essential
  - desirable
  - "wish"
• The list allows you to
  - screen homes
  - recognize trade-offs
  - focus on needs you are willing and able to
  afford
         Housing Decision
            10 Things to Know
• Don’t buy if you can’t stay put

• Start by shoring up your credit

• Aim for a home you can really afford

• Don’t worry if you can’t put down 20%

• Buy in a district with good schools
• Get professional help

• Choose carefully between points & rate

• Bring your camera when house-hunting

• Do your homework before bidding

• Hire a home inspector
    The Purchase Agreement



• Earnest money
• Purchase price
• Amount of down payment
• Mutual escape clauses
• Agreements on who pays what closing
  costs
• List of appliances, drapes, etc. to
  Applying for a Mortgage Loan

• Formal application follows signing a
  purchase contract.

• Good-Faith Estimate
  – received from the lender after formally
    applying for a mortgage
  – outlines all of the costs of purchasing the
    home
    Home Ownership Costs

• Down payment --- (Balance Sheet)

• Points & closing costs --- (Balance Sheet)

• Mortgage payment ---- (Cash Flow Sheet)

• Insurance & taxes --- (Cash Flow Sheet)

• Maintenance/operating costs --- (Cash Flow)
                  P I T I
• P = Principal

• I = Interest

• T = Taxes

• I = Insurance
       Front – End Costs

• Down payment

• Closing costs

• Discount points
      DISCOUNT POINTS
• 1% of the amount borrowed (LOAN)

• Paid to the lender

• "Up-front" money

• Buys down the interest rate on
  mortgage

• Considered "Interest"
       Break-even Concept
• Comparing 2 mortgages costs

• Used to determine the number of months
  to arrive at the breakeven point when the
  extra "up-front costs" equal the savings
  from lower monthly payments
$$ difference in points = # of months
$$ difference in Mo.Pmt to Breakeven

• EXAMPLE:
$75,000 loan, 30 year, fixed-rate mortgage
        $75 K loan, 30-year
• 8%     7.5%        "Differences"
• no DPt 1½ DPt    $1,125 difference
• $550 $520        $ 30 difference

• $1,125 / $30 = 37.5 months

•   37.5 months / 12 = 3.125 years
        The Closing Ceremony
•   Closing costs
•   Down payment
•   Discount points
•   Prepaid items

* Include cost to hire your own building
  inspector
• Closing
  – the buyer and seller and their
    representatives gather in the lender’s office
    to complete the sale


• Uniform Settlement Statement
  – lists all of the fees to be paid at the closing
  – must be made available 24 hours prior to
    the closing for verification


• After closing, the home is yours
            Closing Costs
•   Loan origination fee
•   Owner's title insurance
•   Mortgagee's title insurance
•   Credit report
•   Private mortgage insurance (PMI)
•   Appraisal fee
•   Survey fee
•   Legal fee
•   Recording fee
•   Escrow fee
•   Termite inspection
          PREPAID ITEMS
• 1 year homeowner's insurance + 2 months
• 1 year real estate taxes + 2 months
• 1 year private mortgage insurance (PMI) +
     2 months
• Prepay interest if purchase is in last half of
     month
• Escrow account
          Credit Rescoring
• Today, lenders base their decisions to
  grant a loan, and at what interest rate, on
  the applicant’s credit score.

• A score of 700 is typically required.

• Otherwise, the borrower may be required
  to borrow on the sub-prime market.
  – this is where people with poor credit histories
    may borrow
  – interest rates are higher and loan terms more
    restrictive
        DOWN PAYMENTS

• Advantages of Low down Payment
  - Easier to sell house
  - More money available for other Pur/Invests
  - Larger mortgage during inflationary times
  - More interest paid -- tax advantage
  - Greater leverage
• Advantages of Higher down Payment
  - Easier to obtain a mortgage
  - Greater equity (ownership)
   -Smaller monthly payment
  - Pay less total interest
  - Homestead law protection
   Discount Points Deductibility

Principal residence
  Both loan orig. fee & discount points deductible in
  the year paid for purchase of home

Second home mortgage / Refinancing home
  mortgage
  Both loan origination fee and discount points must
  be amortized over the life of the mortgage for tax
  purposes
        How to Purchase ???
• Pay cash
• Assume an existing mortgage
     - Adv: lower interest, easier to qualify,
           minimize closing costs
     - Disadv: larger down payment
• Get a new mortgage
     - From lender
     - From seller
• Amortization
  – the process of gradually paying off a loan
    through a series of periodic payments
  – each payment contains
     • interest for the month
     • payment towards the principal owed
• Amortization Schedule
  – a table outlining
     • each monthly payment
     • the portion of each that will go toward interest
       and principal
     • the debt remaining after each payment is made
• Principal
  – debt remaining from the original amount
    borrowed


• Equity
  – the dollar value of the home in excess of
    the amount owed on it
  – equity grows as a loan is paid off
  – equity grows as a home increases in value
     Mortgage Refinancing
• A new mortgage is obtained to pay off
  and replace an existing mortgage

• Can be done to lower the interest rate
  on the loan

• Discount points/loan origination fee is
  amortized over the life of the loan
         Length of Maturity
• The longer the maturity on a mortgage the
  lower the monthly payment

• The longer the maturity on a mortgage the
  higher the total amount of interest that will
  be paid

• It is easy to take a longer maturity and make
  additional payments as desired to pay off
  sooner
     MORTGAGE TYPES

Conventional Fixed Rate Mortgage

Adjustable Rate Mortgage (ARM)

2-Step Mortgage (3/27 or 7/23)
       ARM       (Adjusted Rate Mortgage)


• Interest rate adjusted by
      - Amount of payment
      - Outstanding principal balance
      - Loan term

• Interest rate tied to an index

• Annual and/or lifetime interest cap (periodic cap)
      Negative Amortization
Cap on monthly payment (negative
 amortization) (payment cap)

Payment will not cover all the interest
    owed and the debt level increases
 rather than normally decreasing when
 payments are made
        Example of an ARM
• 4% APR
• 1.5% Annual cap
• 6% Total cap (sometimes labeled 10%
                     lifetime cap)
• Index is Treasury index + 2.15
• Calculate “adjustment” for next year
• Calculate when interest rate hits ceiling
  15-Year vs. 30-Year Loans
• Monthly payment and total interest paid
• Which to choose
• Ways to reduce interest costs and build
  equity more quickly
     - Larger down payment
     - Shorter repayment period
     - Bi-weekly rather than monthly payment
     - Pay off loan early
    Texas Homestead Law




• Effective January 1998
• Allow homeowners to borrow on their
  home equity
• Calculate maximum loan amount

				
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