What Are Real Estate Investments

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					                      Personal Real Estate

 Creating Wealth through Real Estate

                              Student’s Copy


                 Copyright Washington State Department of Financial Institutions.




                                            Disclaimer
This course is developed for educational purposes and non-commercial use. It should not be
construed as endorsement for any financial products or services. It in no way intends to convey
legal, real estate, employee benefits, tax, insurance, or financial planning advice. It is a simple
overview to educate those who are new to these subjects. Consultation with a professional is
recommended for individual advice. These topics are complicated, dynamic, and constantly
changing. Please check for current regulations, rules and laws.




                                                                                       2009 Page 1
                                               Table of Contents
Table of Contents ........................................................................................................................ 2
About this Course for Instructors.................................................................................................. 4
About this Course for Students .................................................................................................... 5
Personal Real Estate Lesson Plan............................................................................................... 6
Personal Real Estate 90-minute Session ..................................................................................... 7
Introduction ................................................................................................................................. 9
   Setting Financial Goals .......................................................................................................... 13
      Education ........................................................................................................................... 14
      First House......................................................................................................................... 14
      Retirement ......................................................................................................................... 15
      Other goals ........................................................................................................................ 17
   Create a spending plan .......................................................................................................... 17
   Protect Your Wealth............................................................................................................... 21
      Future Financial Behavior Evaluation.................................................................................. 23
Unit 1: Buying Your Home Overview .......................................................................................... 24
Renting vs. Buying .................................................................................................................... 28
Unit 2: Six Steps to Buying a Home ........................................................................................... 31
   Step 1 – Prepare and determine affordability .......................................................................... 31
      Credit Report ...................................................................................................................... 31
      Activity – Review a Credit Report........................................................................................ 33
      Debt to Income Ratio .......................................................................................................... 33
      Down Payment ................................................................................................................... 33
      How to Hold Title ................................................................................................................ 33
   Step 2: Choose the right team ................................................................................................ 34
      Real estate broker .............................................................................................................. 34
      Home inspector .................................................................................................................. 35
      Others ................................................................................................................................ 36
   Step 3 – Selecting a home ..................................................................................................... 36
   Step 4 – Making an offer and getting mutual acceptance ........................................................ 40
   Step 5 – Obtain a loan ........................................................................................................... 42
   Step 6 – Close the deal .......................................................................................................... 42
   Buying a Condominium .......................................................................................................... 43
   New Home Warranties ........................................................................................................... 44
   Home Remodeling ................................................................................................................. 44
Unit 3. Mortgages ...................................................................................................................... 48
   Mortgage Summary ............................................................................................................... 48
   How mortgages work ............................................................................................................. 50
   How Much Can You Afford? ................................................................................................... 53
   Information to Get When You Take Out a Mortgage ............................................................... 53
      Rates ................................................................................................................................. 54
      Points................................................................................................................................. 57
      Fees................................................................................................................................... 57
      Down Payments and Private Mortgage Insurance ............................................................... 57
      Subprime Mortgages .......................................................................................................... 58
      Mortgage Shopping Worksheet........................................................................................... 59
      Laws That Protect You ....................................................................................................... 62
      Canceling a Mortgage ........................................................................................................ 63
Unit 4. Home Equity Line of Credit ............................................................................................. 68




                                                                                                                           2009 Page 2
  Home Equity Summary .......................................................................................................... 68
  Rates ..................................................................................................................................... 70
  Costs ..................................................................................................................................... 71
  Repayment ............................................................................................................................ 71
  Disclosures From Lenders ..................................................................................................... 71
Reverse Mortgages ................................................................................................................... 73
     Kinds of Reverse Mortgages............................................................................................... 74
     Loan Features .................................................................................................................... 74
     Getting a Good Deal ........................................................................................................... 75
Unit 5: Protecting Yourself ......................................................................................................... 76
  Predatory Lending ................................................................................................................. 76
  Your Rights............................................................................................................................ 77
Unit 6: Investing in Real Estate .................................................................................................. 78
  Why Invest in Real Estate? .................................................................................................... 80
  How Has Real Estate Done?.................................................................................................. 80
  Residential Real Estate.......................................................................................................... 81
  Evaluating the Economy ........................................................................................................ 82
Valuing Real Estate ................................................................................................................... 83
Glossary.................................................................................................................................... 85
Sources................................................................................................................................... 922




                                                                                                                           2009 Page 3
                 About this Course for Instructors
Personal Real Estate will cover the single-family house and mortgage market. Learners will
review the home buying and mortgage application process.

Course Outline
US real estate as an investment
Single-family real estate in the US
Historical returns on single-family real estate
Evaluating the single-family homes as an investment
Interest rates and how they work
Mortgage maturity and risks
Mortgage payment calculation
The home buying process

Outcomes
Evaluate case studies of buying and renting including investment and tax benefits.
Articulate rights in the home buying process.
Review home buying programs.
Articulate steps in the home buying process and risks in each step.
Financial evaluation of various mortgages (fixed rates, APR, variable rates, interest only, terms,
points, etc.).
Evaluate the effect of brokers’ fees, title insurance, inspections and lawyers fees on a home
purchase.
Evaluate the effect of interest rates on mortgages.




                                                                                      2009 Page 4
                   About this Course for Students
Close to 70% of adults in the US own their homes. A family’s home remains the largest piece of
any household’s wealth throughout their financial life. For these reasons, it’s important that you
know and understand how to buy and finance a home.

The home remains the biggest part of most families’ net worth. It is one of the most important
financial goals that most people have. However, there are financial pitfalls you should avoid when
making this important decision. This course will teach you how to evaluate whether you should
rent or buy. It teaches you all the steps you should go through to purchase a house. You will also
learn how to evaluate mortgages.

It’s important to do your homework before you buy your home




                                                                                      2009 Page 5
                                         Personal Real Estate Lesson Plan
Topics/Learning               Class Activities               Assignments                 Must Cover                     If Time Permits
Objectives
Unit 1: Introduction          Discussion of national and     Be ready to engage in       Introduction to home buying    Review a
What is real estate           local home ownership           class discussion on debt    Advantages and                 lease agreement
Buying your home              percentages                    to income ratio and rent    disadvantages of renting vs.
overview                      Discuss the                    versus buy.                 buying
Renting versus buying         advantages/disadvantages
                              of renting vs. buying
Unit 2: Six Steps to Buying   Review a credit report and     Complete an affordability   Understanding credit reports   Discuss how much each
a Home:                       calculate debt ratios          analysis.                   and debt ratios                student can afford based
Step 1 - Prepare and          Earnest money and down         Briefly review credit       Earnest money & Down           on provided information
Determine affordability       payment                        report.                     Payment
Step 2 – Choosing your        Different ways to hold title                               Different ways to hold title
real estate team              Selecting your team                                        Selecting a realtor
                                                                                         professional
Unit 2: Six Steps to Buying   Overview of the purchase       Assignment on selecting     Purchase and sale              The rights of
a Home:                       and sale agreement.            a home.                     agreement.                     homeowners
Step 3 – Selecting a home     Briefly touch on other forms                               Factors in making an offer.    and the laws protecting
Step 4 – Making an offer      needed for purchase of                                                                    those rights.
                              home
Unit 2: Six Steps to Buying   Discussion of the cost of      Case Study Assignment       Escrow                         Detailed review of
a Home:                       closing a real estate                                      Buyer Beware                   HUD Settlement
Step 6 – closing the deal     transaction                                                Settlement Statement           Statement
Buying a Condominium          Escrow
                              HUD Settlement Statement
Unit 3: Mortgages             Evaluating the impact of       Buying a house              Fixed versus variable.         Home equity loans
Rates, points,                fixed and variable, points,    assignment                  Term, rates, points, fees,     Real estate investing
Different types               down payment and term on                                   down payment, rights
rates                         monthly payments of the
                              mortgage.




                                                                                                                                  2009 Page 6
                                      Personal Real Estate 90-minute Session
Topics/Learning Objectives            Class Activities/ Outline          Must Cover                              If Time Permits
Introduction                          Discuss the                        Home buying overview                    Review the
Buying your home overview             advantages/disadvantages of        Advantages/disadvantages of renting     leasing agreement
Renting versus buying                 renting vs. buying                 vs. buying

Unit 2: Six Steps to Buying a Home:   Determine affordability activity   Credit reports and debt income ratios   Analyze a Purchase and Sale
Step 1 - Prepare and Determine        Select a home activity             Criteria for selecting a home           Agreement
affordability                         Purchase and sale agreement        Different ways to hold title
Step 2 – Choosing your real estate    overview                           Purchase and sale agreement
team
Step 3 – Selecting a home
Step 4 – Making an offer
Step 5: Mortgages,                    HUD Settlement Statement           Down payment, rates, points, APR,       Buying a condominium
Step 6 – Closing the deal             Evaluate a mortgage assignment     ARMs, term and the impact on            Complete a settlement
                                                                         monthly payments                        statement




                                                                                                                                     2009 Page 7
                                                                Financial Strategies for a Lifetime
                 Starting Out               Twenties                  Twenties - Thirties              Thirties                Forties - Fifties           Sixties - Plus
                Set exciting goals      Create an                    Reach financial goal       Establish tax-            Upgrade and                Paid all debts in full
Protect
financial
                Make a spending          emergency fund                of purchasing a             advantaged                 maintain house             Adequate health
dreams
                 plan                    Learn about savings           home                        education funds for       Reach financial goal        and long term care
                Establish a              instruments                  Establish a 401k            children                   of adequate funds for       insurance coverage
                 record-keeping          Learn about bonds             account                    Create a will to           kids’ college              Estate plan
                 system                  Get adequate auto,           Start IRAs                  protect your assets        education
                                                                                                                                                          Updated will
                Establish good           health, and rental           Learn about major          Expand investment         Asset allocation and
                                                                                                                                                          Ladder ed
                 credit habits and        insurance                     asset classes and           portfolio by asset         rebalanced
                                                                                                                                                           investments or
                                                                                                    allocation                 investment portfolios
                 history                 Form a financial              their risk and return
                                                                                                                               to accommodate
                                                                                                                                                           annuities to cover
                                          team with your               Create a plan to
                                                                                                                               retirement
                                                                                                                                                           for retirement
                                          partner                       financially survive a                                                              income
                                                                        job change                                            Able to care for
                                                                                                                                                          Income to last
                                                                        situation.                                             parents if desired
                                                                                                                                                           lifetime

                Having excessive        Lacking financial            Not taking                 Lack of                   Using home equity to       Not able to care for
Avoid            credit card debt         skills                        advantage of the            diversification in         spend or pay off old        self
financial
nightmares
                Taking too much         Focusing on short-            time value of money         investment portfolio       debts                      Inadequate health
                 in student loans         term satisfaction             by saving early            Taking on too much        Unable to pay for           coverage
                Victimized by            and not long-term            Unable to invest            debt - Bankruptcy          major replacements         Not enough income
                 identity theft           needs                         because lacking            Untimely death with        on house                    for retirement
                                         Destroying                    understanding of            no will                   Taking loans on            Victimized by fraud
                                          relationships over            investments and                                        401Ks                       because of lack of
                                                                        their characteristics
                                          financial problems                                                                  Not enough money            education.
                                         Financial ruin from          Taking on too much                                     for kids’ college
                                          inadequate                    debt - Bankruptcy                                      educations
                                          insurance                                                                           Not able to care for
                                                                                                                               parents
                                                                                                                              Bankruptcy




                                                                                                                                                              2009 Page 8
                                                       Introduction

                                                     Your Financial Life
                                            High                                             Growing your career
                                         School and                                              and managing
                                          College                                            life’s ups and downs
                                                                                                                                                 Retirement
                                          You’re starting to                                                                                        If you’ve been good
                                                                                            You move towards
                                           earn money (not                                                                                        about saving, you will
           Income                             much) and          Starting a                 your peak earning
                                                                                            years and use this                                    enter retirement debt-
                                               getting the         family                   time to grow your                                   free and comfortable for
                                                education                                                                                          the rest of your life. If
                                                                                            wealth with proper
                                            ($80,000 for a                                                                                         you haven’t, the only
                       Childhood           public university)   Your earnings start       asset allocation and
          $60,000                                               to take off and you             rebalancing.                                        option is to continue
                                             to earn more.                                                                                      working if you can. You
                                                                settle down to start        You upgrade your
                                           This is when you                                                                                             asset allocate,
                       You begin by                              a family. With that       house and save for
                                            start with credit                                                                                     rebalance, and ladder
                     being a financial                            comes your first          your kids’ college
                                           cards (33% have                                                              Your income could       your investments to give
                        drain to your                                house (down          education ($100,000
                                              over $2000                                                                fall well before you    you a steady distribution
                        middle-class                             payment of about             each) and your
                                              outstanding                                                            reach retirement age.        of income. Healthcare
                     parents costing                                  $30,000),          retirement ($1 million).
                                             balance) and                                                                 You continue to
          $40,000    $10,000 a year          student loans      mortgage, and the         You will change jobs
                                                                                                                          accumulate for
                                                                                                                                                becomes a big expense.
                        or $184,000                             kids who now drain         (every 2 to 4 years)                                     You protect yourself
                                          ($20,000 average                                                             retirement and plan       from fraud. You update
                      until you leave                               you $10,000 a                and may be
                                           for a bachelors).                                                        how your nest egg will            your estate plan.
                      the roost—and                             year. You need an            unemployed (by
                                           You start a 401K                                                         last for the rest of your
                        that doesn’t      or IRA to save for    emergency fund of            choice or not) at
                                                                                                                      life. You protect your
                      include college                             six months. You             times. You may
                                               retirement.                                                          health and assets with
                           tuition.                             protect your assets        divorce (77% fall in
          $20,000                                                                           wealth). You may
                                                                                                                           long term care
                                                                 with life, property,                                  insurance. You may
                                                                 liability, disability    have to care for your
                                                                                                                     work longer because
                                                                      and health           parents ($5500 per
                                                                                                                          you need to or
                                                                   insurance. You         year). All these could
                                                                                                                     because you want to.
                                                                     create a will.             set you back.


                                         10           20                30                40               50                60                 70                80
          -$10,000

                                                                                   Age (years)


How does a typical person look---financially? Not as prosperous as most of us believe. The
typical family income in Washington State is $63,000 in 2006 dollars. Household income tends to
go down during recessions and recover afterwards. Although it’s increased throughout most of
the last century, it’s been flattening in recent years and still hasn’t recovered from the last
recession to its 2000 peak. This means that income might not grow as quickly in the future. Some
evidence suggests that people coming out in the workforce now may be the first generation to
make less than their parents, mainly because the US economy is not growing as quickly as it
used to. According to the Economic Mobility study, the economy grew 17% in the last generation
as compared to 52% in previous generations.

                        Washington                                                                               2006
                                                                                                       Median Income
                        Total:                                                                                 63,705
                        2-person families                                                                      58,584
                        3-person families                                                                      66,252
                        4-person families                                                                      75,140
                        5-person families                                                                      68,562
                        6-person families                                                                      62,484
                        7-or-more-person                                                                       61,212
                        families

                                                           Source: US Census




                                                                                                                                                                 2009 Page 9
Your income changes depending on the economy, tending to go up during good times and down
during bad. It also changes depending on where you are in your life. You start your life as a
financial drain on your parents, costing most middle-income families about $10,000 a year. Your
income rises as you get more established in life, peaks about the time you are 50 years old and
then declines as you move towards retirement and retire. But this chart doesn’t tell the whole
story.




What can you do to improve your financial status? Education has an impact. Here is a chart that
describes the impact of education on your salary. There is a big jump in earnings when you get
your college degree and even a bigger jump if you get a professional degree such as engineer,
accountant, lawyer or doctor. Keep in mind that even with the same education, women make 60%
to 70% of what men make. Some speculate that this is because women are still the main
caregivers for both parents and children and may take time off to give this care.




                                                                                 2009 Page 10
Of course, your financial life doesn’t proceed as smoothly as even these charts show. Right now
the average time that someone stays in a job is about 5 years. So that there’s a pretty good
chance that you’ll be unemployed, underemployed, or self-employed for periods in your working
life. On average folks have 4.5 spells of unemployment during their working life and they last on
average about 3 months. This suggests that having an emergency fund or 3 to 6 months of
income to tide you over such periods is a very good idea.

Other life events such as marriage (70% of people get married) can have an effect on your
financial life. Marriage increases a person’s wealth by about 77% because two can live as
cheaply as one and half. Divorce (40% to 50% of first marriages end in divorce) can have a
significant impact on your financial life. Divorce can decrease your wealth by 77%. Marriage
becomes the most significant financial decision you will make in your lifetime.

You already know that children can have an impact as well. Just as you cost your parents so your
kids will cost you $10,000 a year for a total of $184,000. When they go to college, the average
cost of a college education at a Washington state public university is $20,000 per year or about
$80,000 for a bachelor’s degree. Other colleges can be priced at
http://apps.collegeboard.com/search/index.jsp. At the same time as you pay for your kid’s
education, you may have to bear some financial responsibility for your parents ($5500 per year).

It follows that net worth or the amount of wealth you have also increases as you age. Your net
worth---what you own (home, retirement accounts, investments, etc.) less what you owe




                                                                                   2009 Page 11
(mortgage, car loans, etc.)--grows over your lifetime and declines as you retire and no longer
earn money.

Debt is a big part of your net worth formula. The goal is to keep your financing payments (credit
card payments, car loans, student loans and mortgage payments) well below 40% of your income
while you are working and to pay down all debt by the time you retire.




For most folks, as can be seen by the graph above, their home is the largest part of their net
worth. People tend to buy their first house when they are 32 (typically 1812 square feet for
$236,500 in Washington state) and upgrade when they are older ($300,000). That house can also
be a financial drain with replacing the roof, appliances, the furnace, or even a major renovation.
However, as a financial asset, don’t depend on your home. Most folks view their homes very
emotionally and will not sell it even when they retire. About 70% of people who retire don’t sell or
even take money out of their homes to fund their retirement.

Location                                                        2006 Median Price
Kennewick-Richland-Pasco                                                $156,100
Portland-Vancouver-Beaverton                                             280,800
Seattle-Tacoma-Bellevue                                                  361,200
Spokane                                                                  184,100
Yakima                                                                   136,500

Source: National Association of Realtors




                                                                                    2009 Page 12
As you head into retirement, you have to deal with making sure that your financial resources last
you for the rest of your life and that you have taken precautions to protect your assets. Senior
citizens are targets of all the scam artists because they have assets and they are trusting or often
lonely. As you navigate your way through your financial life, it’s important to learn crucial skills to
help you deal with all the twists and turns that can be thrown at you. It’s important that you get
smart about your money no matter where you are in this journey.

Now that you have a good idea of what your financial life looks like, you need to acquire the
investing skills and habits that will serve you through your life. In this first section, you will learn
about setting goals and creating a spending plan. These two items are of vital importance in
keeping your investing program on track.

Setting Financial Goals
The first important step in your strategy to a secure financial future is to have goals. When we
don’t have goals we drift and at the end of our work lives, we wonder why we didn’t do what we
wanted (whatever that was). When we have goals, we achieve them, especially if they are written
down.

Now you will have short-term and long term goals. The short-term ones can include a car or a
vacation. Long term goals are the house, your children’s education and your retirement. Lay out
your lifetime financial goals. That’s right—for your whole life. It is tough because we tend to have
short-term horizons. But, you need to think about all your goals now because some of them will
take a long time to achieve.

According to The Facts about Saving and Investing (1999) put out by the SEC, two out of three of
all US families fail to reach one major financial goal. Identify financial or saving goals that excite
you, such as saving to buy a car; staying home with the kids; leaving an awful job; paying off your
mortgage; starting your own business; traveling with your family or friends, helping others, and
more.

Set realistic goals using the SMART approach:

        Specific. Smart goals are specific enough to suggest action.
        ―Save money for a used car.‖

        Measurable. Goals need to be measurable when you’ve reached your goal.
        ―This used car will cost $8000 so I need to save $1,000 for a down payment.

        Attainable. Goals need to be reasonable.
        ―$8000 for a used car (versus $20,000 for a new car) is reasonable for my
        circumstances.‖

        Realistic. The goals need to make sense.
        ―I make $30,000 a year so a used car so saving $84 a month for $1000 makes sense.‖

        Time-related. Set a definite target date.
        ―I can save $84 per month and reach $1000 within 12 months.‖




                                                                                          2009 Page 13
Education

Education seems to be a necessity in this new global age where higher skill sets are necessary.
But, education is also a big ticket item with students paying on average $10,000 a year in tuition
plus $10,000 in living expenses to go to Washington state’s public four-year universities. For four
years, this can add up to $80,000. If you go on to pursue a professional degree such as a law or
medical degree, the cost goes over $100,000. Even community college costs $4000 a year. With
this large cost, often grandparents must chip in along with parents to ensure that the kids in the
family have a chance to get the college education.

Activity

What is the difference in cost between a public and private university? Check out colleges in
Washington State such as Seattle University and Whitman and compare them to the University of
Washington and Washington State. http://cgi.money.cnn.com/tools/collegecost/collegecost.html

First House

The first major financial goal for most folks starting out is the house. If you’re living in a typical
Washington state city a house might cost you $200,000, or $40,000 down payment (keep in mind
that these prices vary greatly depending on where you live).

Activity

Although these sites are not totally accurate, check out www.zillow.com as to the price of a house in a
neighborhood that you want to live in. How much will you have to pay for the house?




                                                                                            2009 Page 14
Retirement

Most of you are going to live longer than the current life expectancy (about 78 years) because of
developments that are prolonging life. This means that you will have to ensure that you have
enough money for a longer period of time. If you think Social Security will take care of your
lengthening requirements, you might want to reconsider. Social Security currently gives you a
minimum wage (the average payment as of 2006 is $955 a month and the maximum is $1500). It
covers about 42% of retired people’s needs if they made $15,000 before they retired. If they
made $60,000, Social Security covers 25% of their needs. Right now workers are putting more
into the social security than retirees are taking out. But that is expected to change in about 25
years. At that time, according to the Social Security Administration, people who retire will receive
only 75% of the current entitlement. Reviewing you Social Security report gives you an amount
that you can consider as a ―floor‖ of your retirement income. If you don’t want to live at that
income level (about 25%) you will need to start saving. We will address Social Security again in
Unit 6.

Although folks think that they will reduce spending when they retire, most keep their level of
spending up. Many people keep their homes (and all the expenses that come with them) when
they retire. When you get older, some expenses get bigger. Your medical costs increase.
Medicare takes care of 54% of your needs, but you must pay extra for doctor’s visits. If you need
long-term care such as a nursing home, you have to pay the bill yourself.

Nowadays, most people are resigned to the fact that employers will no longer take care of you
when you retire. Most people don’t work long enough at any company to even qualify for the
traditional pension plans. It’s true that employers are slowly phasing out traditional pension plans
and phasing in retirement savings plans (401k) that require you to save and invest for yourself.
Employers believe that these types of plans match what workers do. Most workers don’t stay the
5 years necessary to get any benefits, let alone the 30 years it takes to get adequate benefits
from the traditional plans. With the 401k plans, when these workers leave they can take their
retirement accounts with them.

Although many people know that these retirement savings plans will be their main source of
retirement income, about 18% don’t contribute at all. When people leave their companies, many
cash out and spend their retirement money instead of ―rolling it over‖ into other retirement plans.
This means at their next job, they start out with nothing in retirement. Younger folks tend to do
this most and they are the most hurt by cashing out. Even small amounts set aside early in your
working life can work hard for you over time. If you’re cashing out, most of the benefits of
compounding are lost.

The experts don’t always agree on the amount you need for retirement because there’s so much
uncertainty involved in the amount of social security and your longevity not to mention inflation
rates and rates of return. It’s estimated that baby boomers (who are starting to retire now) have
about one third of what they need to retire.

As a rule of thumb, you can estimate the amount of money that you expect to live on a year and
divide by 4% to come up with what you might need in your retirement fund if you have no other
sources of retirement income.




                                                                                     2009 Page 15
Question

When you retire, Medicare takes care of what portion of your medical expenses when you retire?
  a) One quarter
  b) One half
  c) Three quarters


Answer

When you retire, Medicare takes care of what portion of your medical expenses when you retire?

    a) One quarter
    b) One half
    c) Three quarters

Correct answer b. Medicare only covers hospital and prescription drugs. Doctor visits and long-
term care is not covered.

Question

When you retire, Social Security benefits can cover what portion of your living expenses?

    a) One quarter
    b) One half
    c) Three quarters

Answer

When you retire, Social Security benefits can cover what portion of your living expenses?

     a) One quarter
     b) One half
     c) Three quarters
It depends on how much you made before. If you made $15,000, social security may cover three
quarters or more of your income. If you made more income, social security will cover less. In the
future, social security is expected to cover only 25% to 33% of your income.

Question

Your life expectancy when you reach age 65 is:

    a) 13 years
    b) 18 years
    c) 23 years

Answer

Your life expectancy when you reach age 65 is:

    a) 13 years
    b) 18 years
    c) 23 years




                                                                                            2009 Page 16
If you are 65 now, your life expectancy is 18 years. That is older than the average life expectancy
because if you reach 65, you increase the odds of living longer.

Other goals

Maybe you’ve got other goals, like starting your own business (Jeff Bezos used $60,000 of his
own money to start Amazon.com). Lay them all out and put a price on them. You won't get there
from here unless you do. According to the 2004 Consumer Finance Survey, here are the top
reasons people save:

Retirement                                             34.7%
Liquidity                                              30
Purchases                                              7.7
Buying own home                                        5
For the family                                         4.7
Investment                                             1.5
Education                                              11.60

Once you've got your list of goals, post them where you will see them every day, re-evaluate
every year. Your needs may change. Tax time is a good time since you’re looking at your
finances any way. Your tax return will tell you how much you earned and you should figure out
how much you spent. Did you save enough for the year? Check out your goals. Do you have
additional goals now? (A life event—marriage, having kids, etc. — tends to change your financial
goals.)

Activity

Estimate how much you will need when you retire. Use a simple rule of thumb. Most people will take out 4%
of their retirement fund for annual living expenses. Decide what level of lifestyle you want when you retire
(e.g. $40,000, $60,000, etc.) and divide by 4%.




Create a spending plan
A spending plan is a planning tool to help you manage your money. It is the core of your financial
strategy and if implemented and made a habit all your life, you will achieve financial security. A
spending plan helps you identify your personal financial goals, analyze what income you have
available, know what you are spending money on, and develop steps to achieve your personal
financial goals. A spending plan will help you:

      Achieve financial goals and dreams.
      Keep a positive attitude about personal finances.
      Save for those important things such as a new car, college education, wedding, new
       house, comfortable retirement, or travel.
      Lower stress level and reduce conflicts in your family.
      Control spending so that you conserve your wealth.
      Eliminate unnecessary debt.




                                                                                            2009 Page 17
This is how Americans spend their money according to the Bureau of Labor Table of 2004
Expenses by Family Size.


                                       One person      Two person        Three      Four      Five or
                                                                        person    person        more
Expenditures Total (In                     $23,507          $40,359    $45,508   $54,395     $53,805
dollars)
Food at home                                  1,533           2,954      3,696     4,404       5,151
Food away from home                           1,302           2,336      2,512     3,043       3,042
Alcoholic beverages                             314             400        315       368         309
Housing                                       8,371          12,944     14,744    17,914      17,317
Apparel                                         862           1,650      2,013     2,643       2,893
Transportation                                4,012           7,692      9,348    10,775      11,123
Healthcare                                    1,441           2,827      2,265     2,253       2,150
Entertainment                                 1,097           2,051      2,137     2,787       2,718
Personal                                        297             512        555       614         658
Reading                                         111             168        139       155         131
Education                                       423             476        830     1,059         984
Tobacco                                         203             312        397       349         416
Miscellaneous                                   518             744        843     1,156         743
Cash contributions                            1,063           1,429      1,167     1,287       1,399
Personal insurance and pensions               1,960           3,864      4,547     5,589       4,770
Personal Taxes                                1,829           3,599      3,066     3,900       2,652
Source: 2004 Consumer Expenditure Survey, Bureau of Labor Statistics

Start by collecting your pay stubs, household and other bills, expense receipts, checkbook or
online checking data, checking and credit card statements. Sort the receipts by categories and
sections listed on the Spending Plan Worksheet (see appendix). The sections are: Income,
Fixed Expenses, Variable Expenses Discretionary Expenses and Adjustments to Spending Plan.
Total the dollar amounts in each of these categories for one month. Don't forget to record your
cash expenditures and online transactions. Look to see where your cash goes, especially if you
make frequent ATM withdrawals from your bank accounts.

To make it easier to create a spending plan that will work for you, a 4-step process will be used to
develop each section of the Spending Plan Worksheet.

1.   Calculate your monthly income
2.   Calculate fixed, variable and discretionary expenses
3.   Calculate Net Income (Monthly Income minus Total Expenses)
4.   Analyze expenses starting with your discretionary expenses and make spending plan
     adjustments such that you can achieve your saving goals. If necessary, identify your debts to
     pay down and create a debt reduction plan

For more details on how to create a spending plan, you can refer to the first module of this series
on Money Management. It is important that you have a spending plan each year and that you
track all expenses to your spending plan. This could include a good manual record-keeping
system. Here are some suggestions on the financial records you should keep.




                                                                                     2009 Page 18
                 What financial records to keep and for how long?
Type of record                         Length of                  Reason to Keep
                                         Time
Bills                                 One-year to    Review your bill statements once a year.
                                      permanently    For most cases, when the canceled
                                                          check from a paid bill was shown on
                                                          your checking statement (or the
                                                          canceled check has been returned
                                                          with your statement), you can shred or
                                                          burn the bill.
                                                     However, bills for large purchases, such
                                                          as appliances, furniture, cars, jewelry,
                                                          computers, rugs, collectibles, antiques,
                                                          etc., should be kept in an insurance file
                                                          for proof of their value in the event of
                                                          loss, damage, flood, or fire.
Credit card receipts and              45 days to     Keep your original receipts until you get
statements                            seven years         your monthly statement.
                                                     Shred or burn the receipts if the receipts
                                                          match the monthly statement
                                                     If a large purchase listed above, keep the
                                                          receipt.
Bank records                          One-year to    Go through your checks each year and
                                      permanently         keep those related to your taxes,
                                                          business expenses, mortgage
                                                          payments and home improvements.
                                                     Shred or burn those that have no long-
                                                          term importance.
Paycheck stubs                        One year       Keep all your paycheck stubs until you
                                                          receive your annual W-2 form from
                                                          your employer; make sure the
                                                          information matches the stubs and W-
                                                          2.
                                                     If it does match, shred or burn the stubs.
                                                     If it does not match, request a corrected
                                                          form, known as a W-2c.
Taxes                                 Seven years
                                                    The IRS has three years from your tax filing
Tax returns (forms) filed with IRS                  date to audit your tax returns, if it finds
                                                    questionable good faith errors.
                                                     The three-year deadline also applies if
Receipts/canceled checks
                                                        you discover a mistake in your return
(charitable contributions, mortgage
interest, alimony and retirement                        and decide to file an amended tax
                                                        return to claim a refund.
plan contributions)
                                                     The IRS has six years to challenge your
                                                        return if it thinks you under-reported
                                                        your gross income by 25% or more.




                                                                                  2009 Page 19
Records for tax deductions you
                                                 There is no time limit if you failed to file
took on your tax forms
                                                 your return or filed a fraudulent tax return.
IRA contributions                Permanently     If you made a non-deductible contribution
                                                 to your IRA, keep your records indefinitely
                                                 to prove that you paid tax on this money
                                                 when it comes time for you to withdraw
                                                 from your IRA account(s).
Retirement/Savings plan          One year to      Keep the quarterly statements from your
statements                       permanently          401(k) or other plans until you receive
                                                      the annual summary statement. If it
                                                      matches up, then shred or burn the
                                                      quarterly statements.
                                                  Keep the annual summary statements
                                                      until you retire or close the account.
Brokerage statements             Until you       Keep the purchase confirmations or sales
                                 sell the        slips from your brokerage or mutual fund to
                                 securities      prove whether you have capital gains or
                                                 losses at tax time.
House/condominium records        Six years to     Maintain deeds, mortgage documents,
                                 permanently         title, cost of improvements, and closing
                                                     statements in a safe place
                                                     permanently.
                                                  Keep tax, rental agreements, rental
                                                     receipts and repairs for 7 years.
                                                  Keep records of the expenses incurred in
                                                     selling and buying the house/property,
                                                     such as legal fees and your real estate
                                                     agent’s commission, for six years after
                                                     you sell your house.
                                                  Keeping these records is important
                                                     because any improvements you make
                                                     on your house, as well as expenses in
                                                     selling it, are added to the original
                                                     purchase price or cost basis. This
                                                     adds up to a greater profit (also called
                                                     capital gains) when you sell your
                                                     house. Therefore, you lower your
                                                     capital gains tax from the sale of your
                                                     house.
Loan agreements                  When             Keep copies of all outstanding loan
                                 outstanding         agreements and most recent
                                                     statements indicating how much you
                                                     have repaid
Insurance policies               Long term        Keep your insurance cards in your cars
                                 care and life       as required by law.
                                 insurance –
                                                  Keep copies of your most recent
                                 permanently
                                                     homeowners, auto, and umbrella
                                                     insurance policies so that claims can




                                                                               2009 Page 20
                                      Others one          be made easily and efficiently.
                                      year after       Keep both long-term care and life
                                      expiration          insurance in a safe place and let a
                                                          responsible person know how to find
                                                          them.
                                                       Create and update an annual inventory
                                                          of all personal property. Include
                                                          appraisals or receipts. Keep a copy of
                                                          this in a safe place outside of your
                                                          home.
Health care expenses                  One year to      Keep your original receipts to file health
                                      seven years         insurance and flexible spending
                                                          account claims
                                                       Keep medical receipts for deductions that
                                                          you claimed on your tax return




Protect Your Wealth

The Federal Trade Commission received over 674,354 Consumer Sentinel complaints in 2006,
64% represented fraud and 36% were identity theft complaints. Identity theft occurs when a thief
uses another person’s personal identification to open new credit card accounts, take over existing
accounts, and obtains loans in the victim’s name, of otherwise steal funds from the victim.
Victims go through a difficult and time-consuming ordeal to clear their names. They must first try
to convince the lenders and the credit-reporting agencies that they are victims of identity theft.
They also must deal with calls from collection agencies and endless paperwork in trying to
remove erroneous information and fraudulent accounts from a credit record.

Credit card fraud (28%) was the most common form of reported identity theft followed by phone
or utilities fraud (19%), bank fraud (18%), and employment fraud (13%). Other significant
categories of identity theft reported by victims were government documents/benefits fraud and
loan fraud. The percentage of complaints about ―Electronic Fund Transfer‖ related identity theft
doubled between 2002 and 2004.

Thieves get information from
 Garbage – pre-approved credit cards, bank and credit card statements, and utility bills
 Mailboxes – both incoming and outgoing mail
 Loan applications – banks, car dealerships, mortgage companies
 Rental applications – cars or apartments
 Schools – classroom attendance sheets that list the student’s Social Security number
 Desk drawers in the workplace
 Certifications/licenses placed on walls (in the workplace)
 Job applications
 Health club applications
 Internet – information resulting from the sale of personal banking and investment details, chat
    rooms, and false merchants
 Telephone companies




                                                                                   2009 Page 21
   Information freely given by the public – from warranty cards, for contests, to department
    stores, and ―Win a Free Membership…‖ forms

Advice to avoid identity theft
 Don’t disclose any personal information that isn’t integral to a transaction.
 Be careful of any personal information that you give on yourself in social networking sites and
   safeguard financial information on your computer or other file storage centers.
 Carry only one or two credit cards that you use regularly.
 Keep your Social Security number as private as possible. If a salesperson requests it, don’t
   give it. If your health plan prints it on your membership card, ask for one without it. Don’t write
   it on your class attendance sheet (your school already has your number on official records).
   Divulge this number only for legitimate purposes, such as paying taxes, requesting credit, or
   obtaining a driver’s license. Check to see if your social security number is on the internet at
   StolenIDSearch.com.
 Shred or burn mail containing personal information – from account numbers to travel
   itineraries.
 Prevent mail theft. Have a locked mailbox. Don’t leave mail in your mailbox for the mail
   carrier. Don’t have new checkbooks delivered to your home.
 Lock up your personal papers and canceled checks in your home, in case of a break-in.
 Be cautious on the telephone. Never give out your name, address, Social Security number, or
   other personal information unless you initiate the call and you check to see that the number
   of legitimate.
 Secure all your financial files on your computer and don’t store your personal information on
   the web storage files that can be hacked into. Don’t disclose personal information on social
   networking sites.
 Demand secure information handling. If you’re filling out a credit application at a department
   store or auto dealership, find out what the establishment does with old applications. If it
   doesn’t lock them in file cabinets or shred them, take your business elsewhere.
 Pay attention to your bills. If you suddenly stop receiving your mail, particularly bills, that
   could be a sign that someone has taken over your account.

Fraud examiners recommend that people review their credit reports once a year; all three
bureaus will need to be contacted.
        Equifax – To order a credit report: 800-685-1111. To report fraud: 800-525-6285
        Experian – To order a credit report and report fraud: 888-EXPERIAN (888-397-3742)
        Trans Union – To order a credit report: 800-888-4213. To report fraud: 800-680-7289

It’s also wise to opt out of pre-approved credit offers by calling 888-5-OPT-OUT (888-567-8688).
A scam artist can retrieve a discarded credit card offer and send it to the company, saying, ―Yes,
I’m interested – and here’s my new mailing address!‖ Sign up on the National ―Do Not Call‖
Registry (www.donotcall.gov or 1-888-382-1222) to eliminate telephone calls.




                                                                                      2009 Page 22
Future Financial Behavior Evaluation


The goal of all financial education is to get you to adopt important               Check if you
behaviors that will ensure your financial security. Check all the financial        will adopt in
behaviors that you engage in. Do this inventory every year.                        the next
                                                                                   year.
Pay all my bills and loan payments on time.
Have a recordkeeping system for my financial affairs.
Balance my checkbook and monitor all my financial transactions monthly.
Track all my expenses.
Use a spending plan or budget.
Have an emergency savings fund.
If yes, how many months of expenses: 1-3 months ____4-6 months ____
Save or invest money from every paycheck. If yes, percent paycheck saved
__%
Save for long-term goals.           If yes, which goals: (Check any that apply.)
Education____ Car ____ Home ____ Home upgrade ____ Vacation _____
Plan and set goals for financial future.
Have money in more than one type of investment. If yes, check any that
apply:
Individual stocks ____ Mutual Funds ____ Bonds ____ Real Estate ____
Treasury bills or CDs ____ International ____ Commodities ____
Calculated net worth in the past two years.
Participate in employer’s retirement plan. 401(k) ___ 403 (b) __ Other: ____
Have insurance to protect my loved ones.    If yes, check any that apply:
Health ___ Life___ Property___ Auto___ Disability ___ Umbrella _____
Put money into other retirement plan:
Roth IRA ___ Traditional IRA __ SEP or SIMPLE IRA __
Review my credit report annually.
Pay credit card balances in full each month.
Research and compare offers before applying for a credit card or loan.
Do my own taxes.
Read about personal money management to improve how I’m doing.




                                                                                   2009 Page 23
              Unit 1: Buying Your Home Overview
Real estate is one of the most popular investments around even though most people don’t think
of it as an investment like stocks or bonds. How can that be? Well, let’s look back at your financial
plan. Just about the first financial goal for anybody is buying a house. In fact, about 70% of the
homes in America are owned by the people who live in them as can be seen by the chart below.




The U.S. government provides us with incentives to own our homes. For instance, some of our
expenses like interest on our mortgage and property taxes are deductible from our income at tax
time. The Department of Housing and Urban Development (HUD) has programs to help low-
income families buy houses. Entities like Ginnie Mae, Freddie Mac, and Fannie Mae also help by
making it less risky for banks to offer mortgages to people with less income. Finally interest rates
have been helpfully low in the past decade making financing a lot easier.

Pride of ownership does a lot for a community. People who own houses take care of them. They
renovate and improve them. They work on making the places they own better places to live in.
They care more about what happens in the neighborhood. More home ownership also drives the
economy. When people buy homes, they also pay for home improvements, furniture, and other
items.

 Home ownership is great for the economy but is your home really an investment? Well, for most
families who earn under $50,000 a year, their house accounts for a big chunk of their net worth.
Folks who bought 20 or 30 years ago in the right areas think that investing in a house is a pretty
good deal. The value of their houses has appreciated, or increased, and these folks are able to




                                                                                     2009 Page 24
sell the house at a much higher price than what they purchased the home for. If it is their primary
residence there is an exclusion for up to a certain dollar threshold of the gain. Check with
www.irs.gov for current thresholds and rules regarding primary residence requirements. If it is not
their primary residence, and they held the property for over a year, they can report their gain at
the lower capital gain tax rate. There is a third possibility that involves a ―1031 Tax Free
Exchange‖, but it is beyond the scope of this course.

Some people sell their homes when they retire. They may also buy or rent a smaller place, and
use the rest of their proceeds to support themselves. Some continue to live in their homes but
take out home equity loans to take advantage of the appreciated value of their homes. This option
is particularly attractive when interest rates fall. Homeowners can borrow money in excess of their
home’s appreciation while pretty much keeping their mortgage payments the same. This option is
not advised for people who are retired as you should have earned income to support any debt.
Most people (about 70%) who retire don’t touch their home equity to support their retirement.
Folks tend to look on their homes as having emotional value that far exceeds their financial value.

Relying on your own home as an investment to achieve other financial goals might be a bit risky
though. Depending on your time frame and the part of the country you live in, the value of a home
might not appreciate. Housing values are linked to the economy of the local area and the fortunes
of a region can fall. Three factors can determine whether housing prices in an area will fall. The
first is unemployment. If people are being laid off in the area, there is a 30% chance that housing
prices will fall. If there is a massive layoff in the area, it is almost certain that housing prices will
fall. Overbuilding is another factor that can bring on a fall in prices. This goes hand-in-hand with
overheating. Overheating in housing prices happens when speculators come in. They can drive
up house prices by buying in hopes of selling for a quick profit. Overheating happens when there
are double-digit increases in prices. Most data shows if there are double-digit increases over
three years, a fall is bound to happen. While the market is overheating, builders respond by
building more houses. At some point, the bubble has to burst. All these factors in combination
have been at play in places like Las Vegas where housing prices went up 42% in 2005. By 2007,
housing prices had fallen badly.

Just as with stocks, if you buy when the investment is at its peak price and the value
subsequently drops, it might be a long time before you recover your money. As an added
complication, selling a house is a lot more costly and difficult than selling stocks. There are real
estate brokers’ fees, lawyers’ fees, and other fees involved.

Eighty-five percent of home buyers use a real estate broker to assist in the purchase of their
property. In exchange for a commission on the sale, the real estate broker will provide
information about the area and compile a list of houses that meet your requirements for you to
look at. You’ll want to know the quality of schools, crime, traffic, noise levels, any potential
environmental hazards, local amenities such as parks and other facilities. Most people choose an
area for convenience (it may be close to work, for instance) but it’s most important to really know
the area before you buy.

One of the first questions a real estate broker will ask is what price you can you afford? For home
buyers, it makes sense to go to a mortgage lending institution to prequalify for a loan. When you
prequalify for a loan, the lender checks your credit rating which is tied to the four Cs:

Capacity to pay as determined by your job and future prospects.

Credit, or how much you owe for credit cards or car loans..




                                                                                        2009 Page 25
Character Do you pay on time? Has anybody sued you?

Collateral How much is the property you’re buying worth? How many other assets do you have?

The lender will give you an indication of how much it will lend you and what your monthly
payments will be. They will also prepare a good faith estimate of your closing costs which can
include a lender’s fee (also called points) for giving you the loan. Study this document carefully so
that there are no surprises when you actually buy.

Most lenders will not allow you to borrow such that your mortgage payments (which include both
interest and some repayment of principal) exceed 28% to 33% of your income. They don’t want
your total debt to income ratio to be more than 41% to 43%.

Remember--anywhere there is money to be made, scam artists move in. Select only reputable
lenders and make sure you do research on what current mortgage rates are. These are freely
available on the internet. Don’t forget that you must evaluate the combination of the interest rate
that you pay and the points that lenders charge for originating the loan. An interest rate that is
½% below what others are offering may seem great but if you’re paying 4% upfront to get the
loan, it might not be such a good deal.

It is good to keep in mind that most people refinance in 7 years for any number of reasons. They
may have been transferred to another city for a job. They may have decided to move into a bigger
or smaller house. They may have decided to go for a lower interest rate.

Once you’ve selected the area where you want to live, you’re going to select the house. The
typical house in America was built in the 1970s, is 1800 square feet, has three bedrooms, two or
more baths, and sits on about a third of an acre. New homes average about 2000 square feet.
Home buyers might look for features such as the style of the house, fireplaces, decks, up-to-date
kitchens and bathrooms. Some buyers look for diamonds in the rough. They find a house that
may have been neglected and then invest their own time and effort into fixing it up. Bathroom and
kitchen renovations rank the highest among the improvements made. Whether you’re buying a
fixer-upper or a house in pristine condition, it’s important that you or a professional you hire do a
thorough inspection of the house. This includes looking at the heating system, the roof, the
plumbing, electrical, or any other equipment that might be expensive to fix or replace. Check also
for health hazards such as lead paint, asbestos, and radon.

Now you want to make sure that the property you buy is the right one because the costs of buying
and selling, or closing costs, are quite hefty. They average 4% to buy a house and 6% to sell a
house. Here’s a list of some of them:

       Real estate broker’s fee: These can vary considerably from place to place. Some brokers
        will negotiate their fees. There are also online services that provide listings for less
        money.

       Lender’s fee: Sometimes called points, these cover the lender’s expenses for processing
        your mortgage loan. Sometimes lenders may add more points and reduce the rate of the
        mortgage.

       Title search and title insurance: You want to check that the property really belongs to the
        seller and you want insurance against defects.




                                                                                     2009 Page 26
      Attorney’s fee: In many places, attorneys are required for a real estate closing. In other
       places, a settlement agent may handle the closing and charge a fee.

      Home inspection fee: Having a professional inspect the house before you buy may alert
       you to expensive electrical, plumbing, or other types of repairs that need to be done.

      Appraisal fee: Charged for an evaluation of the fair market value of the property by an
       appraiser.

      Closing costs may also include insurance costs, state taxes, and property taxes.
       Sometimes they are held in escrow or put into an account for future payments so you
       have to come up with several months’ worth of payments.

Using online tools available at the Ginnie Mae website, www.ginniemae.gov, you can calculate
what your costs will be. Research on the purchase price for King County, Washington gave the
following results. The results include government subsidized loans (FHA and VA). The
conventional loan requires $36,851 in cash for closing with monthly mortgage payments of
$1518.

                                           Loan A:         Loan B:
                                                                            Loan C:
                                           FHA             VA
                                                                            Conventional
                                           Regular         Regular


       Max Sale Price                          $200,000       $200,000          $200,000
       Loan Amount                             $198,365       $204,100          $170,000


       Loan Type                               Fixed           Fixed            Fixed
       Loan Rate /                             7.0 /          7.125 /         6.875 /
       Term                                    30 yr           30 yr           30 yr


       Monthly Mortgage
                                                  $1,691         $1,667            $1,518
       Payment
       Other Monthly Housing
                                                    $442           $442              $442
       Costs
       Total Monthly Housing
                                                  $2,132         $2,108            $1,959
       Cost


       Downpayment                                $6,000               $0         $30,000
       Closing Costs                              $1,984         $7,542            $6,851
       Total Cash Required at
                                                  $7,984         $7,542           $36,851
       Closing

Allocate 1% of the price of the house for maintenance. For example, if your house is worth
$250,000, set aside $2,500 every year for maintenance. That doesn’t mean you will spend $2500




                                                                                    2009 Page 27
each year but you will have a reserve set aside for large items such as a new roof, driveway or
furnace when you need them.

                              Renting vs. Buying




Buying a home is a big investment and offers great personal satisfaction. Many considerations go
into the purchase of a home. Some considerations are primarily emotional and cannot be
evaluated objectively by someone from the outside looking in. It’s important to consider whether
you should rent or buy before you do jump into purchasing a home. Depending on one’s
circumstances, renting might be a better option than buying:

    1. If you’re planning to move within five years, renting gives you more flexibility. Because
       buying and selling a house involves transactions costs of 4% to 6% of the value, you are
       not always able to get out quickly and with all your money intact.
    2. If you’re uncertain about your present or near-future financial circumstances, renting
       required less financial commitment and risk. If your income is unstable, it is best not to
       take on this additional financial burden.
    3. If time does not permit you to evaluate the area you would be buying into. You should
       research very carefully before you buy a house.
    4. If you would prefer not to take on responsibilities such as repairs, yard maintenance or
       appliance purchases, which could be expensive and take time.

If you will pay the same in housing expenses whether you rent or buy, then buying does have
some advantages over renting. First, rent payments are not deductible whereas mortgage interest
payments are. Second, home equity can provide all kinds of financial advantages in that you can
borrow money against the value of your home to get lower interest loans to finance other items.




                                                                                   2009 Page 28
As a renter you can’t change anything you want about your home, but as a homeowner you can
renovate to your liking. Rent, payments can be raised or the landlord can decide to stop renting to
you. If you have a fixed-rate mortgage, however, you pretty much know what your monthly
payments will be until you own the house outright.

In addition to home mortgage interest, homeowners may deduct property taxes. If the house is
their primary residence there is an exclusion for capital gains of a primary home with a certain
dollar threshold. Check with www.irs.gov for current thresholds and rules regarding primary
residence requirements. There may be other tax breaks as well.

Homeowners tend to have higher incomes than renters so it’s difficult to compare the two on an
apples-to-apples basis. Here are the costs of a typical homeowner versus a typical renter as
obtained from the 2005 American Housing Survey.

                    Monthly Costs                Owner with             Renter
                                                  mortgage          (Unsubsidized)
            Electricity                              71                   52
            Gas                                      71                   49
            Fuel Oil                                104                   70
            Property Insurance                       52                   19
            Trash                                    19                   17
            Mortgage (Principal and                 767                   0
            Interest)
            Real Estate Taxes                        127                   0
            Routine Maintenance                       27                   0
            Monthly Housing Costs                    853                  694
            Percent of Income                        20%                  32%


Owners pay more than renters for housing costs but get the benefit of tax breaks from mortgage
interest and real estate taxes, and their homes will appreciate in value. Here’s how appreciation
works: Assume that you put $25,000 down on a house that cost $100,000 and appreciation is in
line with inflation (about 3%). In five years your house will be worth about $115,000. So your
$25,000 equity in the house grew to about $40,000 ($25,000 original down payment plus $15,000
gain). This increase does not include any payments made towards the principal balance of the
loan.

Now the big ―if‖ is appreciation. In the Seattle area, in the last five years, we’ve seen homes
appreciate well beyond the inflation rate. It would not be uncommon to see a home valued at
$100,000 ten years ago selling for $300,000 currently. This is not always been the case in this
area, many people remember the economic downturn in the 1970’s when home prices dropped
dramatically.


Question

All the items listed below would most likely go up. Which of them not increase?
     a. A rental payment
     b. An ARM
     c. A fixed rate mortgage payment
     d. All the above, equally




                                                                                   2009 Page 29
Question

When comparing a mortgage payment to a rental payment, which of the following is         not
taken into consideration.
    a. The homeowner’s equity in the property
    b. Whether the mortgage interest rate is fixed or adjustable (can affect rental payment)
    c. No consideration of the appreciation of the property
    d. The tax deduction for mortgage and none for rental property

Question

The main disadvantage of investing in real estate/property is:
   a. Lack of liquidity
   b. Consistence and uniformly low returns
   c. The upkeep of the real estate/property
   d. There is a constantly increasing supply which decreases values

Activity

Rent vs. Buying

Review a sample rental lease agreement.
http://www.buyincomeproperties.com/realestateform/Apartment_Lease.html
Generate a list of questions and be prepared to discuss in class.


Activity – What can you afford?

How much can you afford in monthly housing expense?

           1      your monthly gross income is                          $_________________

           2      now, divide that figure by 3.                         $_________________


Answer to part 2, represents your estimated affordable monthly housing expense and includes
your monthly real estate tax and home insurance payment (principal & interest)

Compare your actual housing expense to what you can afford.

Monthly net income (include take home pay, dividends, alimony, and etc.) $________

Actual housing expenses                                                   $_________

Divide line 2 by line 1                                                 _________%

How do you compare?

Activity – Calculate debt income ratios

Calculate debt income ratios and determine how much house you can afford:
http://www.ginniemae.gov/2_prequal/intro_questions.asp?Section=YPTH




                                                                                 2009 Page 30
You can use your estimated earnings when you graduate.


Activity – Do a rent versus buy

Using your personal situation, do a rent versus buy analysis using this calculator
http://www.ginniemae.gov/rent_vs_buy/rent_vs_buy_calc.asp?Section=YPTH




               Unit 2: Six Steps to Buying a Home
Once you’ve decided that you want to buy a home, you should take the time to do research and
prepare. Below is a five-step process for purchasing your home. All of these steps will be
described in detail in the following pages:

    1. Determine how much you can afford to buy and if it is the right time to buy. Check out
       resources to help you buy a home.
    2. Recruit a team to help you find your home. Find a good broker, attorney, home inspector
       and insurance agent. Do research yourself on the area that you want to buy in.
    3. Determine what you need in a home. What features are important to your family?
    4. Outline the terms that you need to include in the contract. Negotiate towards mutual
       acceptance.
    5. Take the time to evaluate and shop for the best mortgage.
    6. Satisfy all contingencies and sign the closing document at escrow.


Step 1 – Prepare and determine affordability
A home buyer’s investment in real estate requires control measures, discipline and long-term
planning for the investment to be successful. Before getting your mind set on the big house on
the hill, you need do some important analysis on what you can afford. A home in the valley might
be better for you. The first step you need to take is to check out your credit rating.

Credit Report
Your credit score will figure prominently in the purchase of your home. It can make a huge
difference in the interest rate you are charged. It is best to check your credit rating before you
purchase a house and clean up any errors that might affect your credit score. Along with an
accurate credit report, you should gather any information on former bankruptcies, pending
lawsuits, divorce decrees outlining child support and alimony, foreclosures, and documentation
for special loans such as Veterans’ Administration.




                                                                                     2009 Page 31
Source: www.fico.com

Your credit score figures very much in the amount of interest you will be charged as can be seen
by the table below. A person with a good FICO score could pay $200 less per month or almost
$2500 per year. Over the life of a 30-year mortgage for $200,000, that could account for over
$75,000 in interest.



                                                         Monthly payment $200,000
            FICO score              Interest rate
                                                           30-yr fixed mortgage

             760 - 850                  5.78%                       1,182.45
             700 - 759                   6%                         1,210.82
             680 - 699                  6.18%                       1,234.23

             660 - 679                  6.39%                       1,261.77

             640 - 659                  6.82%                       1,318.90

             620 - 639                  7.37%                       1,393.37
Source: www.fico.com 3/07




                                                                                  2009 Page 32
Activity – Review a Credit Report
Check out the following websites and review what is contained in a credit report:

http://www.experian.com/credit_report_basics/pdf/samplecreditreport.pdf

The Canadian government has an excellent explanation of credit reports. http://www.fcac-
acfc.gc.ca/eng/publications/CreditReportScore/CreditReportScoreTOC-eng.asp. Review the two
sample credit reports provided.

The San Francisco Federal Reserve has information on credit reports.
http://www.frbsf.org/publications/consumer/creditreport.html

Debt to Income Ratio
According to the Department of Housing and Urban Development FHA guidelines, your debt to
income ratio should be 29/41. The numerator 29 specifies the total housing costs as a percent of
your income. Add up the total mortgage payment (principal and interest, escrow deposits for
taxes, hazard insurance, mortgage insurance premium, homeowners' dues, etc.) and divide it by
your gross monthly income. The maximum ratio to qualify for a FHA-insured mortgage is 29%.

The number 41 converts your total debt to a percentage of your income. To calculate, add up the
total mortgage payment (principal and interest, escrow deposits for taxes, hazard insurance,
mortgage insurance premium, homeowners' dues, etc.) and all recurring monthly revolving and
installment debt (car loans, personal loans, student loans, credit cards, etc) and divide it by the
gross monthly income. The maximum ratio to qualify is 41%.

Your debt to income ratio will help you to determine how much house you can afford based on
your gross monthly income. Check out the Ginnie Mae website
http://www.ginniemae.gov/2_prequal/intro_questions.asp?Section=YPTH to determine how much
house you qualify for.

Recently, unethical lenders have allowed homebuyers to purchase homes that have strained their
finances. To avoid being put in this difficult situation, it is helpful to determine how much you can
afford before you meet with a mortgage broker or bank loan officer. You need to shop for a home
that is within your financial means. Once you do this analysis, you can meet with a mortgage
broker or loan officer and speak more knowledgably about what you can buy. Once you are
approved for a loan, you can make a more qualified, stronger and confident offer to any seller.

Down Payment
Determine how much money you can put as down payment. Some lending institutions like to see
at least 20% down payment. With that amount you will not have to purchase private mortgage
insurance which can add to the cost of your monthly payments. Many lenders accept smaller
down payments and some will offer you products with no down payment. Remember that the
smaller the down payment, the more you will have to pay in monthly payments. Large monthly
payments can put considerable strain on your family finances. There are resources to help you
come up with a down payment. Check for home buying resources in Washington State at
http://www.hud.gov/local/wa/homeownership/buyingprgms.cfm.

How to Hold Title
Different family and living arrangements require that you consider different ways of holding title.
Real property may be held by one person or entity and this is called tenancy in severalty. When




                                                                                     2009 Page 33
one person holds title to property, that person is free to dispose of the property at will. Real
property may be owned by a person or an entity such as a partnership, corporation, a city, or a
state.

 Concurrent ownership applies to two or more people who purchase a home together. It is
important that you determine the best way to hold title. Family situations can change and
although it seems to pessimistic to do so, it’s important to anticipate divorce and how you would
want to dispose of the property if unfortunate events come about. Some types of concurrent
ownership are:

Joint tenancy - equal ownership of property by two or more parties, each with the right of
survivorship. This means that if one of the owners dies, the property will go to the other owners.
Tenancy by the entirety - Ownership of property only between husband and wife in which
neither can sell without the consent of the other and the property is owned by the survivor in the
event of death of either party.
Tenancy in common - Equal ownership of property by two or more parties without the right of
survivorship. This means that if one of the owners dies, the share of the property owned by the
deceased would go to his or her heirs.

Question:
You are in your second marriage, have decided to buy a house with your spouse, and want to
leave your share of the house to your children. How should you hold title:

    a) Joint tenancy
    b) Tenancy by the entirety
    c) Tenancy in common

Question:
You are just married and want to leave your house to your wife. How should you hold title?

    a) Joint tenancy
    b) Tenancy by the entirety
    c) Tenancy in common


Step 2: Choose the right team
You can’t buy a home on your own. You need to assemble a good team to help you select the
house, get the right deal and put everything in place for you to move in. One of the key people will
be your real estate broker. Be aware that real estate brokers can work for both the buyer and
seller, but the incentives are clearly on the seller side as commissions are paid out of the sale.
Don’t be afraid to question what your realtor is doing. Don’t be afraid to change realtors if you feel
he or she is not delivering or executing your wishes. Realtor fees are negotiable.

Real estate broker
Here are some pointers for choosing the real estate professional who is right for you and your
family:

       Choose a realtor who knows the housing market in the area of your choice well. The
        realtor should be able to assist the home buyer with any types of homes they desire to
        look at.




                                                                                      2009 Page 34
       Interview your realtor. How does the realtor work with buyers? Have the realtor explain
        their buying process, including the follow-up. How much time will the realtor spend with
        you? How many homes has your realtor sold?
       Your realtor should be resourceful and able to assist or refer you to sources of
        information for the community and schools.
       What fees are paid to the realtor when buying a home? Is the home buyer expected to
        pay any of these fees?
       What hours does the realtor work? Are these hours convenient to you?
       Are you able to communicate with the realtor? Does he or she take the time to answer
        your questions thoroughly?


Your Real Estate Consultant           Realtor 1          Realtor 2             Realtor 3
Knowledgeable of the area where
you want to buy
Experienced (Years in business
and number of homes sold)
Resourceful (Was able to provide
accurate information sources)
Company reputable

Professional and accessible
(Returns calls and easy to make
an appointment with )
Good communication skills
(Answers all questions
thoroughly)
Fees charged



Home inspector

A home inspector will also be part of your team and can save you money by identifying potential
problems with your home. Here are some areas you should cover with a home inspector as
outlined by the Department of Housing and Urban Development (HUD):

Get a list of the items the home inspector will cover: The inspector should ensure that their
inspection report meets all applicable state requirements and complies with a well-recognized
standard of practice and code of ethics. Ask to see a copy of these items ahead of time and ask
any questions you may have. If there are any areas you want to make sure are inspected, be
sure to identify them upfront.

Ask for referrals. The inspector should be able to provide his or her history in the profession and
a few names as referrals. Newer inspectors can be very qualified, and many work with a partner
or have access to more experienced inspectors to assist them in the inspection.

Check to make sure that your home inspector is experienced in residential inspections.
Related experience in construction or engineering is helpful, but is no substitute for training and
experience in the unique discipline of home inspection.




                                                                                     2009 Page 35
The average on-site inspection time for a single inspector is two to three hours for a typical
single-family house. Anything significantly less may not be enough time to perform a thorough
inspection.

Negotiate a price prior to the inspection. Costs vary dramatically, depending on the region,
size and age of the house, scope of services and other factors. A typical range might be $300-
$500, but consider the value of the home inspection in terms of the investment being made. Cost
does not necessarily reflect quality. HUD does not regulate home inspection fees.
Ask to see samples of the inspection report and determine if you can understand the inspector's
reporting style. Most inspectors provide their full report within 24 hours of the inspection.

Attend the inspection. An inspector's refusal to allow this should raise a red flag. Never pass up
this opportunity to see your prospective home through the eyes of an expert.

Make sure the inspector is up-to-date by asking if they are part of an association or attend
classes. There are always new developments in this area and you want the most knowledgeable
person.

Others

Other people on you team include your attorney, insurance agent and your lender. Inform your
insurance agent that you are in the market for a new home. Get him or her prepared to give you a
quote quickly. Often good real estate deals will require a fast turnaround.

Step 3 – Selecting a home
Selecting a home can be both risky and rewarding. ―Buyer beware‖ is a good maxim for this
stage. A home buyer should put in considerable amount of time into deciding the features that he
or she needs and wants in a home.

Age of the home
Some folks want a new home because they can move in without much trouble. They also have
the opportunity to choose the décor. New homes often come with warranties which minimize
maintenance for the homebuyer. New homes are priced accordingly and often require a premium
over an older home with the same features. Be aware that there are risks with new homes in that
problems in the environment or with the construction may not have surfaced when you buy. In
selecting a resale or an older home, it is important to make sure the home meets current building
codes.
.
Location
―Location, location, location‖ might be the other maxim when it comes to home buying. The right
neighborhood, a good school district, accessibility to freeways and shopping are extremely
important to homebuyers. The best way to get to know a neighborhood or community is to spend
some time there. Walk up and down the area streets because neighborhoods can change from
block to block. Talk to homeowners who live there. Attend a homeowner’s association meeting.
Call local environmental agencies or go to the library to research any possible hazards. Check
with the police department to see the crime statistics. Look at test scores at the local school
district. Are the foods that you buy available in the neighborhood? Do you need to be close to a
hospital? If you need child care, is it close by? Look at the local parks and recreation programs. Is
public transportation available?




                                                                                     2009 Page 36
Homebuyer programs
There are many homebuyer programs to help those who might not be able to afford housing.
HUD's Good Neighbor Next Door Sales Program offers a substantial incentive in the form of a
discount of 50% from the list price of the home for law enforcement officers, pre-Kindergarten
through 12th grade teachers and firefighters/emergency medical technicians in areas that are
targeted for revitalization. There are opportunities for public housing residents to buy their homes.
An Indian Native American loan program may also assist homebuyers. Check these out at
http://www.hud.gov/buying/index.cfm#afford.

Use the worksheet below to help you to focus your thinking on those things that are important to
you in selecting a home. You should share this with your realtor.

                                 Worksheet for Finding a Home
                                  (Adapted from HUD form)

What part of town do you want to live in? Specific all neighborhoods that are acceptable to you:


What price range do you want to consider? Minimum ____________ Maximum _____________

Are schools a factor? List schools that are preferable to you:

What age house do you want? Minimum _________ Maximum ___________

What style house do you want? List all that are acceptable to you:


How much renovation are you willing to do? _________________

Do you have to be close to public transportation? __________________

Do you have to be close to highway? ___________________________

Do you have to be close to hospital? __________________________

Are there any specific needs such as wheelchair or other access? ________________________

Do you have animals that require special facilities? _________________________



List exterior requirements: (Mark A for “must have” and B for “like to have”)
Acreage
Small yard
Fenced yard
Garage
Carport
Patio/deck
Pool
Outdoor spa
Extra parking




                                                                                     2009 Page 37
Other buildings (storage, workshop, barn, etc.)
Special view
Close to lake

List interior requirements: (Mark A for “must have” and B for “like to have”)
Square footage
Eat-in kitchen
Number of bedrooms
Number of baths
Separate dining room
Formal living room
Family room
Great room
Den or library
Basement
Air conditioning
Type of flooring
Laundry room
Fireplace
Workshop
No interior steps
In-law apartment
Spa in bathroom
Lots of windows
Cable
Access to broadband

List community requirements: (Mark A for “must have” and B for “like to have”)
Community pool
Golf course
Basketball court
Tennis courts

Other requirements


Once you’ve narrowed down what you’re looking for in a home, then you can go about the hard
work of looking at houses. If this is your first time buying a home, it pays to look at many homes
to really refine what you want. Don’t feel rushed into buying. Other opportunities will come along.
In your search, you can use the following checklist to evaluate the homes you look at:

Feature                         Value and notes            Good           Average         Poor
Square footage
Number of bedrooms
Number of baths
Floorplan
Interior walls
Closet/storage
Basement
Fireplace
Cable/Internet




                                                                                    2009 Page 38
Dampness
Exterior
Lawn/yard
Fence
Patio/deck
Garage
Energy efficient
Screens, storm
Roof (age)
Gutters
                            Neighborhood
Nearby homes
Traffic
Noise
Safety/Security
Mix of neighbors
Number of children
Pet restrictions
Parking
Zoning restrictions
Neighborhood restrictions
Fire protection
Police
Snow removal
Garbage service
                              Schools
Age/condition
Reputation
Quality of teachers
Test scores
Funding
Curriculum
Class size
Busing distance
                            Accessibility
Supermarket
Work
Shopping
Child care
Hospitals
Doctor/dentist
Parks
Restaurants
Place of worship
Airport




                                            2009 Page 39
Step 4 – Making an offer and getting mutual acceptance
Once you’ve identified a house that you want to purchase, you will make an offer with a deposit or
earnest money. Typically, you make an offer which is lower than the listing price and the seller
will counter. This may go for two or three rounds. Doing considerable research is the key to
negotiating a good deal for yourself. Your realtor should pull a series of comparable sales for
houses similar to the one you want to purchase. Carefully review all the information to come up
with your offer. Although you want to get the best price, offering too low may insult the seller.
Even though most realtors use a standard purchase agreement, don’t feel uncomfortable about
crossing out any clauses that you don’t like.

The amount of the earnest money is not set in stone. You just want to show the seller that your
offer is serious. Depending on how hot the real estate market is, you can offer $1000 or 1% of the
purchase price. Don’t allow the seller to receive the earnest money, it should be kept in an
escrow account. Before you put down your earnest money, check to make sure that you have
considered each of these items:

Sales Price. For most home purchasers, the sales price is the most important consideration.
Research the area thoroughly and know the prices of homes. It is always best to negotiate the
lowest price and much of that comes from buying when it’s a buyers’ market, that is when the
economy has slowed. You may be at a disadvantage if it is a seller’s market but recognize that by
doing your homework, you can often negotiate other non-monetary terms of the agreement that
may be worth the price.

Title. The seller should provide the title, free and clear of all claims by others against your new
home. You want to make sure that there are no competing claims to the property (also called
liens or encumbrances). A title search will determine if there are any claims. You may be able to
negotiate who is to pay for a title search. Also ask the seller for a survey of the property and
check to see that there are no encroachments.

Contingencies. Although you may fall in love with the house, it’s important to be able to back out
in the event that it becomes a financial burden or has other problems. A contingency allows you
to walk away from the sales agreement if you encounter difficulty in getting financing or find other
problems with the house. Getting all your earnest money back may depend on having these
contingencies in your agreement:

        Selling your house. Some families shop for another house before their house is sold. In
        this case, include a contingency that says the sale is contingent on selling your house.
        Carrying two mortgages can be a significant financial drain.

        Mortgage Clause. The agreement of sale should provide that your earnest money or
        ―deposit‖ will be refunded if the sale has to be canceled because you are unable to get a
        mortgage loan. Be sure to put the amount, rate and time frame for obtaining the
        mortgage.

        Pests. Your lender will require a certificate from a qualified inspector stating that the
        home is free from termites and other pests and pest damage. You may want to reserve




                                                                                     2009 Page 40
        the right to cancel the agreement or seek immediate treatment and repairs by the seller if
        pest damage is found.

        Appraisal. Your lender will require that an appraisal of the property be done. You should
        reserve the right to cancel if the appraisal comes in significantly less than the purchase
        price.

        Home Inspection. An inspection will determine the condition of the plumbing, heating,
        cooling and electrical systems. The structure should also be examined to assure it is
        sound and according to code. The condition of the roof, siding, windows and doors needs
        to be checked. Other hazards such as asbestos should be uncovered in an inspection as
        well as building code violations. You should include the right to cancel if you are not
        satisfied with the inspection results. In that case, you may want to re-negotiate for a lower
        sale price or require the seller make repairs.

        Lead-Based Paint Hazards. If you buy a home built before 1978, you have certain rights
        concerning lead-based paint and lead poisoning hazards. The seller should disclosure all
        information about lead in the house. You have at least ten (10) days to do an inspection
        or risk assessment. However, you will need to negotiate the right to cancel the sale
        based on the results of an inspection or risk assessment. The seller must attach a
        disclosure form to the agreement of sale which will include a Lead Warning Statement.
        You, the seller, and the sales agent will sign an acknowledgment that these notification
        requirements have been satisfied.

        Other Environmental Concerns. Your city or state may have laws requiring buyers or
        sellers to test for environmental hazards such as leaking underground oil tanks, the
        presence of radon or asbestos, lead water pipes, and other such hazards, and to take the
        steps to clean-up any such hazards. Require that the seller fill out a Real Property
        Transfer Disclosure Statement to uncover other issues. You may negotiate who will
        pay for the costs of any required testing and/or clean-up.

Sharing of Expenses. You need to agree with the seller about how expenses related to the
property such as taxes, water and sewer charges, condominium fees, and utility bills, are to be
divided on the date of settlement. Look over all expenses carefully to see that you were allocated
the right proportion. Unless you agree otherwise, you should only be responsible for the portion of
these expenses owed after the date of sale.

Here are the forms that you will encounter in making and negotiating your offer:

       Purchase and Sale Agreement
       Financing Contingency
       Home Inspection Contingency
       House Sale Contingency
       Buyer’s Agency Representation Addendum
       Mutual Acceptance
       Receipt of Earnest Money
       Washington State Real Estate Law
       Pamphlet on Lead-Based Paint Addendum

Activity – Determine what you want in a home




                                                                                     2009 Page 41
Using the Worksheet for Finding a Home, select your needs and wants for your dream home.

Activity – Review a purchase agreement

Check out a sample purchase agreement
http://www.buyincomeproperties.com/html/ContractToPurchaseLong.html.


Step 5 – Obtain a loan
Prior to making loan application, you must visit different financial institutions to find the best
possible mortgage rates or homebuyer programs for your situation. It is important for the home
buyer to understand all fees charged on the HUD 1 or the Settlement Statement (this document
discloses all the costs involved in your purchase). The section on mortgages will cover this in
detail.

Step 6 – Close the deal
A contract can become void at different points throughout the sale, based upon the
conditions/contingencies that are outlined in the purchase and sale agreement. Unless the
specified event occurs, the contract can become null and void. It is imperative that both the
buyer’s agent and the seller’s agent ensure that all forms are signed properly, deadlines are met,
copies of all waivers and removal of contingencies have been sent to the escrow company. At
any point if one or more of these items is left unattended, the contract could become void,
meaning there is no longer mutual acceptance, which is an essential part of a contract.

If all goes well, you will have the money ready to for final settlement. This is usually done with an
escrow agent. The escrow agent is a neutral third party who, on behalf of the buyer and the
seller, transfers money and ownership between the two. The escrow agent’s instructions are in
the purchase and sale agreement. The escrow company ensures that the seller receives all
money owed and that the buyer receives clear title to the property.

An escrow agent has many responsibilities and performs a variety of services in preparation for
closing:

       Gathers the purchase and sale agreement and other necessary information that is
        needed for closing

       Obtains preliminary title report from the title insurance company. They ensure that the
        title is not cloudy

        Pays off all debts secured by the property and prepares the deed and other necessary
        documents

        Deposits all money from the buyer and seller

        Prorates expenses and allocates closing costs

        Prepares the Settlement Statement




                                                                                      2009 Page 42
       Obtains title insurance policies

       Collects all records documents

        Delivers funds and other important documents

Don’t forget that there is no rescission, or option to cancel the agreement when you finance your
mortgage for your house. There is no right to rescind after you have signed the closing
documents for the purchase of your house. The time to rescind passed when all the
contingencies of the purchase and sale agreement were met. The right to rescind also does not
apply to refinances of mortgages under the same terms and conditions where no additional funds
will be added to the existing loan. However, it is very rare to refinance a mortgage with the same
terms and conditions.

Buying a Condominium
Condo buyers usually fall into three main groups:
   1. First-time buyers making the jump from renting
   2. People looking to buy a second home that they will use part-time
   3. Retirees who are trading in high-end homes for the low-maintenance lifestyle a condo
       provides.

A condominium can be a great purchase under the right set of circumstances, Living in a
condominium can be much like living in an apartment. You don’t have to maintain the exterior.
However, there are rules and restrictions to follow. You will also live in close proximity to others.
Before you buy a condominium, take time to understand the difference between buying
condominium and buying a home.

A condominium development can take the form of apartment-style complexes, townhouses or
converted multi-family dwellings. It is different from an apartment rental building because the
developer has legally declared it a condominium and individuals can purchase units in the
building or complex. In most states, this means that the development falls under specially
designated laws and regulations that apply.

A purchaser buys the title to his or her individual unit (up to but not including the walls) when
purchasing a condominium. Common areas of the development, such as stairwells, dividing and
outer walls, fitness centers and rooftop gardens, are under shared ownership. Each unit owner
holds an interest in these spaces. In order to manage the maintenance and repair of the shared
common areas, every condo development has a condominium association, which is typically
elected by condo owners. This association makes decisions in the interest of all the owners.

When you buy a condo, you have the same costs as with a house. You will need to make a down
payment. Any loans will result in addition to your mortgage payments. There will be property
taxes. In addition, you will have condo fees (also known as maintenance fees). Condo fees are
paid by every resident to help with the maintenance of the building, pay the salaries of
groundskeepers, concierges or handymen, and to provide facilities such as a pool, gym or rooftop
garden. Condo fees are paid monthly and are subject to change, unlike a mortgage. There may
also be special assessment fees. These fees may be requested when an unexpected repair or
planned modification exceeds the cost of the condo fees collected.




                                                                                      2009 Page 43
The rules vary from one condominium development to another. They may impose restrictions on
pet ownership, noise levels, remodeling projects, and renting. The covenants, conditions, and
restrictions are enforced by the condominium association. It's a good idea to read these to make
sure that you are comfortable with them before you purchase a condominium.

Here are some questions to ask if you are buying a condominium:
    Does the association maintain a reserve of funds to pay for unexpected and potentially
       expensive repairs?
    Has the association maintained the building in good repair?
    Do they handle repairs and maintenance before they become big problems?
    Does the association have plans to add any facilities, such as a swimming pool or gym, in
       the near future?
    Does the development have any pending legal actions?
    Are there any disputes between owners, with developers or with the association that you
       should know about?
    What is the association's reputation in the building?
    It is a good idea to go to an association meeting as a potential condominium owner, talk
       to neighbors, and walk the community.


New Home Warranties
A new home warranty may be issued by the builder to cover defective systems, workmanship,
materials, plumbing, electrical and mechanical systems, appliances, fixtures, and equipment, and
major structural defects. Usually these warranties cover mechanical, electrical, and plumbing
systems and major structural defects for one to two years. After that period of time, only major
structural defects are covered for a certain number of years. Be aware that the agreement may
require that you enter binding arbitration, that is your dispute will be referred to an arbitration
panel for settlement.


Home Remodeling
Home remodeling has become a $300 billion industry. More homeowners are engaging in
remodeling. Part of the reason is that many houses in the US were built in the 1960s and 1970s
and require replacement and upgrading of kitchens, baths, siding, roofs, and heating systems.




                                                                                    2009 Page 44
As a homeowner, it is very important that you plan for remodels. Know that only a few upgrades
pay themselves back. This includes kitchen and bath remodels, new siding, and new windows.
Putting a lot of money into customized features such as fancy appliances or fixtures does not
increase the value of the house. Here are the typical costs for home improvements:

                                                                        Average Cost $ (2007)
Kitchen remodels                Minor                                                    4001
                                Major                                                  29790
Bathroom remodels               Minor                                                    2000
                                Major                                                  15482
Room additions                  Kitchen                                                35904
                                Bath                                                   11622
                                Bedroom                                                36941
                                Other                                                  24735
Replace Deck/Porch                                                                       8533
Replacements                    Plumbing                                                 1763
                                Electrical Systems                                       1700
                                Plumbing fixtures                                        1433
                                HVAC                                                     4058
                                Appliances                                                821
                                Roofing                                                  5801
                                Siding                                                   6673
                                Window/Door                                              3801




                                                                                 2009 Page 45
                                     Insulation                                                2240
                                     Flooring/Paneling/Ceiling                                 3284
Add/Replace Garage/Carport                                                                    13599

Source: Joint Center for Housing Studies of Harvard University

Homeowners tend to spend more on remodeling if home prices appreciate more. They also tend
to spend more if their homes are more expensive. It appears that these trends are slowing down
as more homeowners realize that there is limited payback from expensive remodeling.
Homeowners between the ages of 35 and 45 spend the most on remodeling. This makes sense
as most families must accommodate for children and other growing needs at that time.

Question

In a purchase and sale agreement, the saying, ―Time is of the essence‖ means:

           a. the seller is in a hurry to sell the property
           b. the broker’s commission must be paid before closing or interest will incurred
           c. the purchase & sale agreement provisions must be performed on or before the
              specified dates
           d. only the buyer needs to be concern with contingencies dates

Question


The closing date specified in the purchase and sale agreement

           a.   is an estimation of time and is highly unrealistic
           b.   can be changed by the realtor only, no other signatures are required
           c.   should take into consideration all contingencies dates
           d.   can be changed; however all parties must agree and sign

Question

3A seller receives an offer by a home buyer and counter offer. The initial contract is void, and the
buyer does not have to accept the counteroffer.
        T

           F

Activity

After studying the completed Settlement Statement (provided by instructor), Complete one of your
own from the information and forms provided.
For more detail instruction see:
www.dfi.wa.gov/consumers/education/home_loan/home_loan_files/HUD.pdf
for blank settlement statement, visit www.homebuying.about.com/library/bl/nhud1.htm?p=1

Question

On a settlement statement, the purchase price should be listed as:
   a. A debit to the buyer




                                                                                       2009 Page 46
    b. A debit to the seller
    c. Both A & B
    d. Neither A nor B

Question

What happens to the buyer’s earnest money deposit on the settlement statement?

    a.   Debit on the buyer’s side & credit on the seller’s side
    b.   Credit on the buyer’s side & not listed on the seller’s side
    c.   Credit on the seller’s side & not listed on the buyer’s side
    d.   Debit on both the buyer’s side and on th4 seller’s side

Question

Go to the sample HUD Settlement Statement

http://www.mbh.com/library/downloads/MBH_HUD1.pdf

Answer the following questions:
Who is paying the realtor commissions?
Where is your earnest money accounted for?
What will be the principal amount of your mortgage?
How much cash does the buyer have to come up with at closing?
What are the total dollar value of the points on the mortgage?
What house expenses have to be divided between seller and buyer for at closing?
What other expenses are incurred?


Answer

Who is paying the realtor commissions? Seller
Where is your earnest money accounted for? Line 201
What will be the principal amount of your mortgage? $400,000 (Line 202)
How much cash does the buyer have to come up with at closing? $106,371.53 (Line 302)
What is the total dollar value of the points on the mortgage? $8,000 total
What home expenses have to be divided between seller and buyer for at closing? Property taxes
What other expenses are incurred? Title insurance, recording and transfer charges, title search,
appraisal, courier and document preparation.


Assignment – Buy a House

    1. Determine whether it makes sense for you to buy or rent. Go to www.ginniemae.gov and
       use their rent versus buy calculator.
    2. Determine how much house you can afford. Use the affordability calculator at
       www.ginniemae.gov.
    3. Determine what type of mortgage you should get (variable versus fixed, 30-year versus
       15-year, how many points versus the rate, etc.) Using current interest rates, what your
       monthly mortgage payments will be? (www.ginnie.mae has a loan calculator)
    4. Go to the National Realtors Association website www.realtor.com. Do research on your
       local area. Select a community you want to buy in. Make sure you look at all the criteria
       that are important to you (close to work, good schools, low crime, local parks, noise




                                                                                  2009 Page 47
       levels, etc.). Go to a broker website, choose a local one from your newspaper or select a
       national broker like www.century21.com. Then select a house in your price range.
    5. Research and list the following expenses: property taxes (should be on the listing),
       insurance (Do research on the type of coverage. Consider flood, earthquake or other
       coverage, if appropriate.), utilities (What kind of heating system does the house have?
       How much will that cost you?), and maintenance (Consider how old the house is and how
       much work you will do to maintain it.) Compare your results to the results given by Ginnie
       Mae.

Activity – Case study on buying a house


                                          CASE STUDY

                                 Mr. and Mrs. Lee Buys a Home


Follow the six step buying process and determine what Mr. and Mrs. Lee need to consider in
purchasing a home. All analysis must be included in your written presentation.


       Mr. and Mrs. Lee are relocating to Seattle Washington from Houston Texas. They have
        three children: ages 13, 5, and 15. They want a 4 bedroom homes with a minimum of 3
        baths.

       Mrs. Lee’s concerns are schools, shopping, and community activity for the children to
        participate in. She wants to live in suburban area. They are moving from a 3200 sq feet
        home on 1.5 acres; which just sold for $250,000 so they have a down payment of
        $50,000.

       Mr. Lee concern is the distance from his job site to his home. He also likes to work on
        small projects in the garage. A shop will be ideal.

       Their joint income is $150,000 per year.

       Debts: $30,000 on two cars, $15,000 in credit card, rental home with outstanding
        mortgage of $35,000. Total debt payments are $2000 per month.



                               Unit 3. Mortgages
Mortgage Summary
    1. Make sure that buying a house is the right thing for you to do right now.
    2. Negotiate the best deal you can on the house.
    3. Check your credit report and figure out how much you can afford in a mortgage. Don’t let
       your mortgage broker do this for you.
    4. Comparison shop for mortgages by filling out the mortgage evaluation sheet.
    5. Use the APR to compare offers. Make sure that you have included all costs.




                                                                                   2009 Page 48
    6. If you are getting a variable-rate mortgage, look at the highs and lows for the index that is
        used for your mortgage. Figure out what your maximum payment might be and make
        sure that you can afford it.
    7. Understand what and when you are paying back. Ask the lender to show you both
        principal repayment and interest charges for the term of the loan. Will you be required to
        make a balloon payment?
    8. Obtain the disclosure of all .
    9. Read all document Once you sign the mortgage agreement, you cannot cancel.
    10. If you are denied credit, ask why.
    11. If you have a dispute about payment, the lender must respond to you.
    12. If you have problems that persist, report them to the FTC.

A big part of the American dream is getting a home. However, buying a home may not be right
for you at this time. Here are some factors you need to consider when you are thinking of buying
a home or refinancing your home:
 Do I expect to live in the house for over five years? It’s true that most people don’t live forever
     in their homes but if you plan to move in a few years or you are uncertain, it’s best not to buy
     a house because you cannot recover the transaction costs of buying and selling in a short
     period of time.
 Is my income stable? Although it’s tough to predict whether what your employer will do, any
     reduction in salary can affect you ability to pay your mortgage. Many folks are depending on
     two salaries to support a mortgage. What happens if one salary is gone?
 Is this a good time to buy? Many factors play into the price of a house. Prices tend to rise
     when interest rates fall as seen by the figure below. Housing can go through times when
     prices are extremely high only to drop quickly. Assess whether this might be such a time. If it
     is, it might not be a good time to buy.
 For refinances, it is important to ask if you really need the money. Some folks refinance to get
     money to remodel the house. They reason that this is an investment and will be returned
     when the house is sold. Not all renovations result in increased value. You need to evaluate
     this carefully.




                                                                                     2009 Page 49
How mortgages work
Consumer surveys show that about one-third of people who have mortgages don’t know what
kind of mortgage they have. A mortgage is a loan that you take out to finance the purchase of
your house. Typically mortgages go over a span of 30 years or 15 years, although they can go for
other time periods as well. As with installment loans, the longer your term, the smaller the
monthly payment but the more interest you pay. People can get a mortgage when they buy a
house or they can also refinance by paying back the mortgage that they have and taking on a
new mortgage.

Mortgages can be fixed-rate meaning that you pay the same interest through its life or they can
be adjustable-rate meaning that they will change based on a stated benchmark. You can also
have balloon mortgages where the principal will come due in a given year. According to the 2004
Consumer Finance Survey, 11.4% of families had adjustable-rate mortgages. 57.5% had 30-year,
32.9% had 15-year or less, and 4.1% had balloon mortgages.




                                                                                 2009 Page 50
Typically more mortgages are taken out when interest rates are low. In 2003, when mortgage
interest rates were low, there were $3.8 trillion in purchase and refinance mortgages taken out by
people in the US.




                                                                                   2009 Page 51
Easy-to-get mortgage debt has had an impact on the wealth of families. The home is the largest
part of most folks’ net worth of wealth. Paying down the mortgage of a house is a form of savings.
In the 1950s, families preferred to have less mortgage debt and the typical family had almost 80%
equity in their homes (meaning their mortgage only accounted for 20%). Now the typical family
has only 55% equity in their home.




                                                                                  2009 Page 52
How Much Can You Afford?
The lending institution will check your employment and credit history to determine whether or not
you are a good lending risk. They will also look at the amount of down payment and your assets
and liabilities. In qualifying you for a mortgage, the lending institution will use ratios such as the
debt to income ratio. For example, a lending institution may require a 28/36 debt to income ratio.
The first number is 28% and it signifies the largest percent of monthly income that goes to
housing. This includes mortgage, insurance, and taxes. Say if your monthly income is $3600,
28% of that would equal $1008. The lending institution would require that the monthly expenses
from your house not exceed $1008. The second number in the ratio (36%) represents the total
amount of debt payment as a percent of monthly income. This will include auto, student, credit
card, and personal loans along with any alimony that has to be paid. Debt-to-income ratios can
vary from 28/36 to 33/41, depending on the institution. Be aware that you should also consider
how much of your monthly income is put to these costs. The higher the percent of your monthly
income you put to payment for loans of any kind, the more financial risk you put yourself in.

Home loans are available from several types of lenders—thrift institutions such as saving banks,
commercial banks, mortgage companies, and credit unions. Different lenders may quote you
different prices, so you should contact several lenders to make sure you’re getting the best price.
You can also get a home loan through a mortgage broker. Brokers arrange transactions rather
than lending money directly; in other words, they find a lender for you. Brokers will generally
contact several lenders regarding your application, but they are not obligated to find the best deal
for you unless they have contracted with you to act as your agent. To get the best deal, you
should consider contacting more than one broker, just as you would comparison shop with
mortgage lenders.

Whether you are dealing with a lender or a broker may not always be clear. Therefore, be sure to
ask whether a broker is involved. This information is important because brokers are usually paid a
fee for their services that may be separate from and in addition to the lender’s origination or other
fees. A broker’s compensation may be in the form of "points" paid at closing or as an add-on to
your interest rate, or both. You should ask each broker you work with how he or she will be
compensated so that you can compare the different fees. Be prepared to negotiate with the
brokers as well as the lenders.

Information to Get When You Take Out a Mortgage
Be sure to get information about mortgages from several lenders or brokers. Know how much of a
down payment you can afford, and find out all the costs involved in the loan. Knowing just the
amount of the monthly payment or the interest rate is not enough. Ask for information about the
same loan amount, loan term, and type of loan so that you can compare the information. Here is
the average statistics for Washington state residents on conventional mortgages from 1978 to
2003.




                                                                                       2009 Page 53
  Year     Contract   Initial Effective       Term      Purchase     Loan-     Adjustable-
           Interest   Fees     Interest        to         Price     to-Price      Rate
             Rate      and       Rate        Maturity    ($000)       Ratio      Loans
             (%)    Charges      (%)                                   (%)        (%)
                       (%)
    1978       9.67      1.80      9.97          28.1       55.4       77.3           NA
    1979     10.75       1.88     11.09          28.5       68.6       74.8           NA
    1980     12.41       2.30     12.85          28.9       78.1       75.1           NA
    1981     14.08       3.12     14.73          28.8       77.8       77.9           NA
    1982     14.17       3.35     14.89          26.6       83.1       74.5           NA
    1983     12.52       2.57     13.01          27.9       86.4       77.5           NA
    1984     11.71       2.59     12.18          29.5       89.7       79.6           NA
    1985     10.75       2.34     11.16          29.3       90.4       80.7           NA
    1986       9.87      2.22     10.24          28.3      109.8       77.2           22
    1987       8.85      1.92      9.17          28.4      116.8       77.7           51
    1988       8.88      1.80      9.17          28.6      119.0       76.1           59
    1989       9.93      1.71     10.22          28.6      134.7       74.4           36
    1990     10.06       1.80     10.37          28.4      144.5       73.6           23
    1991       9.20      1.61      9.47          27.3      160.7       72.3           19
    1992       7.92      1.69      8.22          24.9      147.1       75.1           17
    1993       6.84      1.29      7.05          25.7      148.6       72.5           18
    1994       6.82      1.03      6.98          28.5      150.8       79.2           55
    1995       7.50      1.07      7.66          28.2      162.0       78.7           29
    1996       7.47      1.07      7.64          27.9      186.3       77.8           34
    1997       7.52      1.10      7.69          27.1      190.6       76.7           17
    1998       6.93      0.98      7.08          27.5      194.6       75.4            9
    1999       6.95      0.82      7.08          28.3      209.1       75.9           26
    2000       7.59      0.66      7.69          29.1      223.0       75.8           30
    2001       6.85      0.57      6.94          27.4      234.8       72.8           12
    2002       6.31      0.44      6.37          26.6      245.9       71.1           20
    2003       5.50      0.26      5.54          26.0      252.6       69.8           19
Source: Federal Home Finance Board


Rates
There are two general ways in which interest can be determined. The first is a fixed-rate
mortgage where the interest rate is fixed for the entire time that the money is borrowed. The
lower the interest rate the less you pay to borrow the money. Most people like to buy a home and
take a mortgage when interest rates are low, but unfortunately, that is usually the time when the
prices of houses are higher. Here is how interest rates can affect the monthly payment on your
mortgage:




                                                                                  2009 Page 54
Adjustable-rate mortgages are where the interest rate can be reset based on a benchmark
interest rate such as treasury (money the federal government borrows) bill rates. Sometimes
adjustable-rate mortgages will be offered with a ―teaser‖ rate (a rate is low relative to other rates)
that will be fixed for a set number of years. For example, an adjustable 5/1 would be one in which
the initial interest rate would hold for 5 years and then it would reset every year after that. The
rate resets based on the benchmark. Since interest rates can vary, your interest rate on an
adjustable-rate mortgage can change. Loans secured by a dwelling need to have a maximum
(cap) on how high the rate can go. The good news about adjustable-rate mortgages is that often
they are offered at low interest rates that allow you to qualify to buy a higher-priced house. The
bad news is that they can make your monthly mortgage payments go up substantially.

As you can see from the chart above, if you got an adjustable-rate mortgage in 2004 that was
fixed for two years on a low teaser rate or 4%, when the rate resets in 2006 you will move up to
6%. Looking at the rate chart above, your monthly payment will go up 26%.

Each of your mortgage payments is divided between interest and repayment of principal or the
money borrowed. Over the life of a mortgage even though the monthly payment stays the same,
the interest portion of the monthly decreases while the principal increases. The number of years
that you hold a mortgage determines how much interest you pay. The longer the term of the
mortgage, the more interest you pay. Now some folks may protest that the interest is tax
deductible. But interest is still an expense even if you get some taxes back for it. So if you pay
$100 in interest and after tax it’s $70, that is still $70 out the door.

Here is a comparison of a 30-year mortgage versus a 15-year mortgage at 6%. Although the
annual payments are lower with a 30-year mortgage, you pay twice as much interest.




                                                                                      2009 Page 55
Given all the options you have for a mortgage, it is important that you get as much information as
possible when you comparison shop. Ask each lender and broker for a list of its current mortgage
interest rates and whether the rates being quoted are the lowest for that day or week.

Ask even more questions about adjustable-rate mortgage. Some adjustable-rate mortgages are
fixed for a few years and then they reset. Looking at how interest rates can vary in the chart
above, it’s important to understand what your risk is. Some people think that they can predict
where interest rates will go and will use an adjustable-rate mortgage for the lower rates in the
hopes that interest rates will fall and they can refinance when they do. Even the experts have a
hard time predicting where interest rates will go. Ask what the maximum rate is. Some mortgages




                                                                                   2009 Page 56
have balloons meaning they require payment in full in a few years. Understand exactly how the
mortgage works before you sign on.

Given the exotic combinations that some lenders can offer, one of the key measures is the loan’s
annual percentage rate (APR). The APR for a mortgage takes into account not only the interest
rate but also points, broker fees, and certain other credit charges that you may be required to
pay, expressed as a yearly rate. But be aware, APRs generally do not include appraisals, credit
report fees, house inspections or title fees. You can include those fees and do your own
calculation with an APR calculator on the internet. (http://www.occ.treas.gov/aprwin.htm has the
Comptroller of Currency’s APR calculator for download.)

Points

Points are fees paid to the lender or broker for the loan and are often linked to the interest rate;
usually the more points you pay, the lower the rate. For example if you are borrowing $100,000, 3
points or 3% of the value of the mortgage may be linked with a 6% rate while 2 points or 2% of
the value may be linked with a 6.5% rate. Check your local paper to see a comparison of the
rates and points. Ask the lender to calculate the points as a dollar amount so you can see what it
will cost. Often the lender will match lower points with higher interest rates making it difficult to
see what is the better deal. In this case, be sure to ask for the APR (Annual Percentage Rate)
which takes into account all the fees and points in calculating the rate you have to pay.

Fees
A home loan often involves many fees, such as loan origination or underwriting fees, transaction,
settlement and closing costs. Your lender or broker should be able to give you an estimate of its
fees. Many of these fees are negotiable. Some fees are paid when you apply for a loan (such as
application and appraisal fees), and others are paid at closing. In some cases, you can borrow
the money needed to pay these fees, but doing so will increase your loan amount and total costs.
"No cost" loans are sometimes available, but they usually involve higher rates.

Down Payments and Private Mortgage Insurance
Down payments are cash payments that lenders require and represent the buyer’s equity in the
house. It follows that the bigger the down payment you put on a house, the less your monthly
payment will be. This provides for some security in that if you lose your job or your salary is
reduced, you will have less of a financial strain.

          Effect of Down Payment on $100,000 Purchase at 6% for 30 years

 Down        Monthly
 Payment     Payment
      0%      $605.41
      5%      $575.14
    10%       $544.87
    15%       $514.60
    20%       $484.33
    25%       $454.06
    30%       $423.79




                                                                                     2009 Page 57
Some lenders require 20 percent of the home’s purchase price as a down payment. Some
lenders will require that you show where the down payment is held. However, many lenders now
offer loans that require less than 20 percent down--sometimes as little as 5 percent. If a 20
percent down payment is not made, lenders usually require the home buyer to purchase private
mortgage insurance (PMI) to protect the lender in case the home buyer fails to pay. If PMI is
required, ask how much it add to your monthly payment and ask how long you will have to pay it.
When government-assisted programs such as FHA (Federal Housing Administration), VA
(Veterans Administration), or Rural Development Services are available, the down payment
requirements may be substantially smaller.


Subprime Mortgages
The homeownership rate has grown to 69% from 65% over the past decade, about half of this
growth was subprime lending or lending to people who would not qualify under the conventional
mortgage criteria, according to a study by the Federal Reserve Bank of Chicago. Subprime loans
made up 12.75% of the $10.2 trillion mortgage market in 2006, up from 8.5% in 2001.
Although it appears that subprime lending is helping folks who might otherwise not get to buy a
home, this is not the case. In fact, many of the people who borrowed subprime money were put in
a situation where they were forced to live beyond their means. These mortgages were adjustable
rate and rates increased by as much as 2% and many of these homeowners face losing their
homes and foreclosure. By the end of 2007, 14.4% of subprime mortgages were in foreclosure.
The Center for Responsible Lending estimates 2.2 million families with subprime loans will lose
their homes to foreclosure.

Although it is enticing to be offered the opportunity to buy a house, it’s important to think about
securing your financial future. This can be done by saving enough for a good down payment,
making sure that your debt-to-income ratio is low, and preparing for bad times by having an
emergency reserve.

Once you know what each lender has to offer, negotiate for the best deal that you can. On any
given day, lenders and brokers may offer different prices for the same loan terms to different
consumers, even if those consumers have the same loan qualifications. The most likely reason
for this difference in price is that loan officers and brokers are often allowed to keep some or all of
this difference as extra compensation. Generally, the difference between the lowest available
price for a loan product and any higher price that the borrower agrees to pay is an overage. When
overages occur, they are built into the prices quoted to consumers. They can occur in both fixed
and variable-rate loans and can be in the form of points, fees, or the interest rate. Whether
quoted to you by a loan officer or a broker, the price of any loan may contain overages. According
to research by Harvard professor Howell E. Jackson, who testified before the U.S. Senate
Committee on Banking in 2002, the average customer paid $1,850 in the form of an overage.
Professor Jackson also testified that African Americans ($474 more) and Hispanics ($580 more)
pay mortgage brokers more for their services.

Have the lender or broker write down all the costs associated with the loan. Then ask if the lender
or broker will waive or reduce one or more of its fees or agree to a lower rate or fewer points.
You’ll want to make sure that the lender or broker is not agreeing to lower one fee while raising
another or to lower the rate while raising points.

If you are satisfied with the terms you have negotiated, you may want to obtain a written lock-in
from the lender or broker. The lock-in should include the rate that you have agreed upon, the
period the lock-in lasts, and the number of points to be paid. A fee may be charged for locking in




                                                                                       2009 Page 58
the loan rate. This fee may be refundable at closing. Lock-ins can protect you from rate increases
while your loan is being processed; if rates fall, however, you could end up with a less favorable
rate. Should that happen, try to negotiate a compromise with the lender or broker.

Be aware that some disreputable lenders disclose that they can change the terms of the
mortgage at any time and may jack up the rates considerably just before closing in hopes the
prospective buyer will feel obliged to continue with the transaction. Be very careful and evaluate
the situation. It may be best to walk away from the deal.


Mortgage Shopping Worksheet
(From the Federal Reserve)

                                                          Lender 1                   Lender 2
Name of Lender:                                    ___                         ___
Name of Contact:                                   ___                         ___
Date of Contact:                                   ___                         ___
Mortgage Amount:                                   ___                         ___
                                          mortgage 1 mortgage 2 mortgage 1 mortgage 2
Basic Information on the Loans
Type of Mortgage: fixed rate,
                                          ___            ___             ___            ___
adjustable rate, conventional, FHA,
other? If adjustable, see below
Minimum down payment required             ___            ___             ___            ___
Loan term (length of loan)                ___            ___             ___            ___
Contract interest rate                    ___            ___             ___            ___
Annual percentage rate (APR)              ___            ___             ___            ___
Points (may be called loan discount
                                    ___                  ___             ___            ___
points)
Monthly Private Mortgage
                                          ___            ___             ___            ___
Insurance (PMI) premiums
How long must you keep PMI?               ___            ___             ___            ___
Estimated monthly escrow for taxes
                                   ___                   ___             ___            ___
and hazard insurance
Estimated monthly payment
(Principal, Interest, Taxes,              ___            ___             ___            ___
Insurance, PMI)




                                                                                     2009 Page 59
Fees
Different institutions may have
different names for some fees and
may charge different fees. We have
listed some typical fees you may   ___        ___   ___      ___
see on loan documents.

Application fee or Loan processing
fee
Origination fee or Underwriting fee     ___   ___   ___      ___
Lender fee or Funding fee               ___   ___   ___      ___
Appraisal fee                           ___   ___   ___      ___
Attorney fees                           ___   ___   ___      ___
Document preparation and
                                        ___   ___   ___      ___
recording fees
Broker fees (may be quoted as
points, origination fees, or interest   ___   ___   ___      ___
rate add-on)
Credit report fee                       ___   ___   ___      ___
Other fees                              ___   ___   ___      ___
Other Costs at
Closing/Settlement
                                        ___   ___   ___      ___
Title search/Title insurance
   For lender
  For you                               ___   ___   ___      ___
Estimated prepaid amounts for
interest, taxes, hazard insurance,      ___   ___   ___      ___
payments to escrow
State and local taxes, stamp taxes,
                                        ___   ___   ___      ___
transfer taxes
Flood determination                     ___   ___   ___      ___
Prepaid Private Mortgage
                                        ___   ___   ___      ___
Insurance (PMI)
Surveys and home inspections            ___   ___   ___      ___
Total Fees and Other
Closing/Settlement Cost                 ___   ___   ___      ___
Estimates




                                                          2009 Page 60
                                                  Lender 1           Lender 2
Name of Lender:
                                       mortgage 1 mortgage 2 mortgage 1 mortgage 2
Other Questions and
Considerations about the Loan
                                       ___        ___        ___        ___
Are any of the fees or costs
waivable?
Prepayment penalties
                                       ___        ___        ___        ___
Is there a prepayment penalty?
If so, how much is it?                 ___        ___        ___        ___
How long does the penalty period
last? (for example, 3 years? 5         ___        ___        ___        ___
years?)
Are extra principal payments
                                       ___        ___        ___        ___
allowed?
Lock-ins
                                       ___        ___        ___        ___
Is the lock-in agreement in writing?
Is there a fee to lock-in?             ___        ___        ___        ___
When does the lock-in occur—at
application, approval, or another      ___        ___        ___        ___
time?
How long will the lock-in last?        ___        ___        ___        ___
If the rate drops before closing, can
                                      ___         ___        ___        ___
you lock-in at a lower rate?
If the loan is an adjustable rate
mortgage:                              ___        ___        ___        ___
What is the initial rate?
What is the maximum the rate
                                       ___        ___        ___        ___
could be next year?
What are the rate and payment
caps each year and over the life of    ___        ___        ___        ___
the loan?
What is the frequency of rate
change and of any changes to the       ___        ___        ___        ___
monthly payment?
What is the index that the lender      ___        ___        ___        ___




                                                                     2009 Page 61
will use?
What margin will the lender add to
                                           ___             ___             ___             ___
the index?
Credit life insurance
Does the monthly amount quoted to
                                     ___                   ___             ___             ___
you include a charge for credit life
insurance?
If so, does the lender require credit
life insurance as a condition of the       ___             ___             ___             ___
loan?
How much does the credit life
                                           ___             ___             ___             ___
insurance cost?
How much lower would your
monthly payment be without the             ___             ___             ___             ___
credit life insurance?
If the lender does not require credit
life insurance, and you still want to
                                           ___             ___             ___             ___
buy it, what rates can you get from
other insurance providers?

Laws That Protect You
A house is probably the single largest loan for most people and one of the most complicated. The
Real Estate Settlement Procedures Act, like Truth in Lending, requires that the lender to give you,
in advance, certain information about the costs you will pay when you close the loan. The act also
requires that lenders give you the booklet ―Buying Your Home: Settlement Costs and Information‖
to help you understand the closing process and shop for lower settlement costs. The Federal
Reserve pamphlet ―A Consumer’s Guide to Mortgage Closing Costs‖ also contains useful
information.

The Equal Credit Opportunity Act prohibits lenders from discriminating against credit applicants in
any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital
status, age, whether all or part of the applicant’s income comes from a public assistance
program, or whether the applicant has in good faith exercised a right under the Consumer Credit
Protection Act.

The Fair Housing Act prohibits discrimination in residential real estate transactions on the basis of
race, color, religion, sex, handicap, familial status, or national origin. Under these laws, a
consumer cannot be refused a loan based on these characteristics nor be charged more for a
loan or offered less favorable terms based on such characteristics.

Although there are many laws to protect you, be aware that many studies have shown that
minorities often receive rates that are higher than their economic status warrants. It is important
that you assert your rights and ask questions. If you feel that you have been discriminated
against, file a complaint.




                                                                                       2009 Page 62
Canceling a Mortgage
The right to cancel (or right of rescission) was provided to protect you from decisions that are
hasty or made under pressure, possibly putting your home at risk if you are unable to repay the
loan. The law does not apply to a mortgage to finance the purchase of your home; for that, you
commit yourself as soon as you sign the mortgage contract.

Question

A debt-to-income ratio of 28/36 refers to:

a) the percent of your monthly income after tax put to debt
b) the percent of your loan payments put to mortgage payment
c) the percent of your gross monthly income put to housing expenses and other loan payments
d) the percent of your mortgage payments put to other loan payments

Answer
A debt-to-income ratio of 28/36 refers to:

a) the percent of your monthly income after tax put to debt
b) the percent of your loan payments put to mortgage payment
c) the percent of your gross monthly income put to housing expenses and other loan payments
d) the percent of your mortgage payments put to other loan payments
Correct answer c.

Question

Which payments are included in the first number in the debt –to-income ratio?
Auto loan payments ____
Student loan payments _____
Personal loan payments _____
Mortgage payments _____
Alimony paid out _____
Real estate taxes ____
Home insurance ______

Answer

Which payments are included in the first number in the debt –to-income ratio?
Auto loan payments ____
Student loan payments _____
Personal loan payments _____
Mortgage payments __X__
Alimony paid out _____
Real estate taxes __X__
Home insurance ___X___

Question

Which payments are included in the second number in the debt –to-income ratio?
Auto loan payments ____
Student loan payments _____




                                                                                   2009 Page 63
Personal loan payments _____
Mortgage payments _____
Alimony paid out _____
Real estate taxes ____
Home insurance ______

Answer

Which payments are included in the second number in the debt –to-income ratio?
Auto loan payments __X__
Student loan payments ___X__
Personal loan payments __X___
Mortgage payments _X____
Alimony paid out __X__
Real estate taxes __X__
Home insurance ___X___

Question

Your gross household income is $60,000. Using the 28/36 debt to income ratio. How much
mortgage can you afford? Assume housing expenses other than mortgage is $400 per month.

Answer

Your gross household income is $60,000. Using the 28/36 debt to income ratio. How much
mortgage can you afford?


Your gross monthly income is $5000 ($60,000/12). 28% of $5000 is $1400. $1400 less $400 for
other housing expenses leaves you $1000 for monthly mortgage payments.

Question

True or False

Going to one lender is enough when you want to get a mortgage.

A mortgage broker is not obligated to get the best deal for you.

It’s not important to know whether you’re dealing with a lender or a mortgage broker.

Answer

True or False

Going to one lender is enough when you want to get a mortgage.

False. There are many different rates and offers. You need to comparison shop for your
mortgage. It can cost you a lot over a long period of time of you don’t.

A mortgage broker is not obligated to get the best deal for you.




                                                                                   2009 Page 64
True. Unless you contract with the mortgage broker to act on your behalf, he or she is not
obligated to get the best deal for you. And even if the broker is contracted by you, be sure to go to
a few mortgage brokers to comparison shop.

It’s not important to know whether you’re dealing with a lender or a mortgage broker.

False. A mortgage broker will charge a fee on top of the cost of the mortgage so you need to
know what that will cost you.

Question

What do the following do to your finance charges in a mortgage? Indicate whether it makes the
charges higher or lower.

Higher down payment ____________

30-year term as compared to 15-year term _____________

3 points as compared to 1 point ______________

Answer

What do the following do to your finance charges in a mortgage?

Higher down payment _Lower_

30-year term as compared to 15-year term __Higher___

3 points as compared to 1 point ___Higher____

Question

When is it good to use an adjustable-rate mortgage over a fixed-rate mortgage?

Answer

When is it good to use an adjustable-rate mortgage over a fixed-rate mortgage?

When interest rates are high, often people will do an adjustable-rate mortgage so that they can
get a lower rate. They plan to lock into a fixed-rate mortgage when interest rates fall.
Unfortunately, it’s not possible to predict for certain where interest rates will go.

Question

A lender is advertising 5% mortgages with an APR of 5.2%. How is the noted (nominal) rate different from
the APR? Which should be used to evaluate a mortgage?

Answer

A lender is advertising 5% mortgages with an APR of 5.2%. How is the noted (nominal) rate
different from the APR? Which should be used to evaluate a mortgage?




                                                                                          2009 Page 65
The APR is the cost of credit on an annual basis. Lenders are required to disclose this so that
consumers can compare across different lenders. It is important that you ask for the APR when
you are comparison shopping on mortgages. It is also important to ask whether all fees are
included in the calculation of the APR.

Question

You have an adjustable-rate mortgage that resets after a year. The rate is set at 2% above the
90-day treasury bill. When you assumed the mortgage a year ago, you were given the rate of
4.97%. The treasury bill rate is 5.03%. What will your rate be changed to? What increase will you
see in your monthly payments?

Answer

You have an adjustable-rate mortgage that changes annually. The rate is set at 2% above the 90-
day treasury bill. When you assumed the mortgage a year ago, you were given the rate of 4.97%.
The treasury bill rate is 5.03%. What will your rate be changed to? What increase will you see in
your monthly payments?

The new rate will be 7.03%. You add 2% to 5.03% to get the new rate. Your monthly payments
will increase about $125 for every $100,000 that you borrowed.

Question

You are comparing two mortgage lenders for a $200,000 mortgage. The first is offering a 5.75 rate with 3
points, while the second is offering 6.00% with 1 point. Which is the better deal?

Answer

You are comparing two mortgage lenders for a $200,000 mortgage. The first is offering a 5.75 rate with 3
points, while the second is offering 6.00% with 1 point. Which is the better deal?

You have to do an APR calculation on this one to determine which is the better deal. Go to:
http://www.dinkytown.net/java/MortgageApr.html and input the numbers. The 6% with 1 point
wins by a hair.

Question

The local newspaper had these rates for 30-year fixed rate mortgages with 20 percent down.
Using an APR calculator determine http://www.dinkytown.net/java/MortgageApr.html determine
what the APRs are for each decide which is the best deal.

Company               Interest rate         Points                APR
A                     5.75                  0
B                     5.875                 1
C                     4.875                 5.875
D                     5.25                  2.875

Answer




                                                                                           2009 Page 66
The local newspaper had these rates for 30-year fixed rate mortgages. Using an APR calculator
determine http://www.dinkytown.net/java/MortgageApr.html what the APRs are for each:

   Company              Interest rate           Points              APR
      A                     5.75                  0                 5.75
      B                     5.875                 1                 5.967
      C                     4.875               5.875               5.31
      D                     5.25                2.875                5.5

Question

The following is data for a loan of $200,000 for an adjustable rate mortgage that is fixed for the
next five years and then resets (interest rate adjusted based on going rate) ever year after that.
The cap on the increase for the first year is noted and each additional year plus the maximum for
the loan. For each determine what is the maximum rate each can charge on the loan

                                       Caps on Increase
                              First      Add.
                 Rate         Year       Year       Maximum
 US Bank                5.5           2         2         6
 Seattle Bank           4.5           5         2         5
 Wells Fargo            4.5           2         2         5

Answer

In evaluating these loans you have to make sure that you can pay the monthly payment at the
maximum rate.
                 Rate         Maximum Total
 US Bank                5.5         6     11.5
 Seattle Bank           4.5         5       9.5
 Wells Fargo            4.5         5       9.5


Assignment: Buying a house

Go to zillow.com. Identify a house that you want to buy. The sky is the limit.

Find at least two mortgage rates on the internet. Estimate the other closing costs. Assume a
reasonable down payment.

Cost of house
Broker’s fee (if any)
Home inspection fee
Title search and insurance
Attorney’s fee
Other closing fees
TOTAL




                                                                                   2009 Page 67
Mortgage (Select two from any internet site (e.g. bankrate.com) and compare). Vary the down
payment and vary the term to determine the effect on the monthly payment.

Use the calculators at Freddie Mac:
http://www.freddiemac.com/corporate/buyown/english/calcs_tools/

                    Mortgage 1             Mortgage 2         Mortgage 1A         Mortgage 2A
Down payment
Loan Amount
(Total minus
down payment)
Fees
Term (15-year,
20-year, 30-
year)
APR
Monthly
Payment

Reflect on what you should do when you actually buy a house.



                 Unit 4. Home Equity Line of Credit
Home Equity Summary
    1.    Don’t use home equity loans to finance spending on day-to-day items.
    2.    Evaluate the home equity loan against refinancing your mortgage.
    3.    Comparison shop for home equity loans.
    4.    Use the APR to compare offers but remember that APRs for home equity loans do not
          include closing costs. Look at all costs.
    5.    Look at the highs and lows for the index that is used for your home equity loan. Figure
          out the maximum payment you will need to pay.
    6.    Understand what you are paying back. Ask the lender to show you both principal
          repayment and interest charges. Will you be required to make a balloon payment?
    7.    On a home equity line of credit, determine a repayment schedule. You do not want the
          loan to be outstanding for an indeterminate period of time.
    8.    You have 3 days to cancel the credit lines and they have to pay everything back to you.
    9.    If you are denied credit, ask why.
    10.   If you have a dispute about payment, the lender must respond to you.
    11.   If you have problems that persist, report them to the FTC.

A home equity line of credit is a form of revolving credit in which your home serves as collateral.
Because the home is likely to be a family's largest asset, many homeowners use their credit lines
only for major items such as education, home improvements, or medical bills and not for day-to-
day expenses. According to the 2004 Consumer Finance Survey 1.3% of families used a home
equity line for a median balance of $4,200. Many of these families use a home equity loan to pay
for home improvements.




                                                                                    2009 Page 68
Homeowner remodeling has become a huge industry accounting for almost $300 billion a year. It
makes sense that when you buy a home, there will be the need to maintain or upgrade parts of
your house. This can run from $500 to $1000 for appliances such as a refrigerator or dishwasher,
$5000 for a furnace, and more for items like a new roof or driveway. Other homeowners may
want to upgrade their homes to enjoy or they may want to put in energy-efficient features. Just be
aware that only a few home renovations pay themselves back if you are planning to sell.
According to Remodeling magazine’s 2005 Cost vs Value Survey these include new siding
($10,000), bathroom ($10,000) and kitchen renovations ($15,000) which may pay back 75% to
100% of the value—and only if your home is not above the average value in your neighborhood.
If you are planning to sell, don’t spend too much on remodeling. Extra fancy or customized
remodeling rarely pays back as new owners may not have the same taste as you do. Other
renovations recoup only a portion of their cost. So, as with any other time that you assume debt,
evaluate very carefully before you spend.

Some people may use a home equity loan to consolidate loans which are not tax-deductible.
Interest payments on a home equity loan and other mortgages totaling up to $1 million are tax-
deductible while other kinds of loans may not be. In comparison to mortgages, home equity loans
typically have a higher interest rate, so if you are thinking of a substantial home equity loan, you
may want to evaluate the finance charges and fees against refinancing your mortgage.

With a home equity line, you will be approved for a specific amount of credit you may borrow at
any one time under the plan. Many lenders set the credit limit on a home equity line by taking a
percentage (say, 75 percent) of the home's appraised value and subtracting from that the balance
owed on the existing mortgage. For example:



                             Appraised Value           $ 200,000.00
                                                75%    $ 150,000.00

                             Mortgage owed             $ 125,000.00
                             Potential credit          $ 25,000.00


In determining your actual credit limit, the lender will also consider your ability to repay, by looking
at your income, debts, and other financial obligations as well as your credit history.

Many home equity plans set a fixed period during which you can borrow money, such as 10
years. At the end of this "draw period," you may be allowed to renew the credit line. If your plan
does not allow renewals, you will not be able to borrow additional money once the period has
ended. Some plans may call for payment in full of any outstanding balance at the end of the
period. Others may allow repayment over a fixed period (the "repayment period"), for example, 10
years.

Once approved for a home equity line of credit, you will most likely be able to borrow up to your
credit limit whenever you want. Typically, you will use special checks to draw on your line. Under
some plans, borrowers can use a credit card or other means to draw on the line. There may be
limitations on how you use the line. Some plans may require you to borrow a minimum amount
each time you draw on the line (for example, $300) and to keep a minimum amount outstanding.
Some plans may also require that you take an initial advance when the line is set up.




                                                                                        2009 Page 69
If you decide to apply for a home equity line of credit, look for the plan that best meets your
particular needs. Read the credit agreement carefully, and examine the terms and conditions of
various plans, including the annual percentage rate (APR) and the costs of establishing the plan.
The APR for a home equity line is based on the interest rate alone and will not reflect the closing
costs and other fees and charges, so you'll need to compare these costs, as well as the APRs,
among lenders.

Rates
Home equity lines of credit typically involve variable rather than fixed interest rates. The variable
rate must be based on a publicly available index (such as a business lending rate such as the
prime rate published in some major daily newspapers or a U.S. Treasury rate) plus a ―margin‖
such as 2%. So if the prime rate is 5%, you would pay 7% interest. Interest rates change
frequently and this means your rate will change. It is important to find out which index is used,
how often it changes, and how high and low it goes.




Lenders sometimes offer a low or ―teaser‖ rate for home equity lines--a rate that is much lower
than the market and may last for only an introductory period, such as 6 months. These can be
dangerous as you are lulled into thinking that you will always have a low rate. When the loan
resets at market rates, your payments can go up substantially.

Variable-rate loans secured by a dwelling must, by law, have a ceiling (or cap) on how much your
interest rate may increase over the life of the loan. Some variable-rate loans limit how high and
how low your interest rate will go. Some lenders allow you to convert from a variable interest rate




                                                                                      2009 Page 70
to a fixed rate during the life of the plan. It may be good to have this option so you can lock in on
low rates.

Plans generally permit the lender to freeze or reduce your credit line under certain circumstances.
For example, some variable-rate plans may not allow you to draw additional funds during a period
in which the interest rate reaches the cap.

Costs
Many of the costs of setting up a home equity line of credit are similar to those you pay when you
buy a home. It could include a property appraisal, an application fee, which may not be refunded
if you are turned down for credit, up-front charges, such as one or more points (one point equals
1 percent of the credit limit), and closing costs including fees for attorneys, title search, and
mortgage preparation and filing; property and title insurance; and taxes. You may have to pay
other fees such as annual membership or maintenance fees and a transaction fee every time you
draw on the credit line.

You could be paying hundreds of dollars to draw only a small amount against your credit line, so
really evaluate before you borrow. On the other hand, home equity lines have generally lower
than rates for other types of credit. Some folks may consolidate their other consumer credit and
take out a home equity loan to pay for it. Additionally, this interest is tax deductible.

Repayment
Before entering into a plan, work out how you will pay back the money you borrow. Some plans
set minimum payments that cover a portion of the principal (the amount you borrow) plus accrued
interest. But (unlike with the typical installment loan) the portion that goes toward principal may
not be enough to repay the principal by the end of the term. Other plans may require the payment
of interest alone so you will owe the whole principal at the end of the loan. You must be prepared
to make this "balloon payment" by refinancing it with the lender or you might have to come up
with the money from somewhere else. If you are unable to make the balloon payment, you could
lose your home. Ask to see the entire payment schedule broken out by principal and interest
charges so you understand how it works.

If you sell your home, you will probably be required to pay off your home equity line in full
immediately. If you are likely to sell your home in the near future, consider whether it makes
sense to pay the up-front costs of setting up a line of credit. Also keep in mind that renting your
home may be prohibited under the terms of your agreement.

Disclosures From Lenders
The federal Truth in Lending Act requires lenders to disclose the important terms and costs of
their home equity plans, including the APR, miscellaneous charges, the payment terms, and
information about any variable-rate feature. The lender can’t charge a fee until after you have
received this information. You usually get these disclosures when you receive an application
form. If any term (other than a variable-rate feature) changes before the plan is opened, the
lender must return all fees if you decide not to enter into the plan because of the change.

When you open a home equity line, the transaction puts your home at risk. If the home involved is
your principal dwelling, the Truth in Lending Act gives you 3 days from the day the account was
opened to cancel the credit line. This right allows you to change your mind for any reason. You
simply inform the lender in writing within the 3-day period. The lender must then cancel its




                                                                                      2009 Page 71
security interest in your home and return all fees--including any application and appraisal fees--
paid to open the account.

The Consumer Credit Protection Act of 1968 requires that creditors state the cost of borrowing in
a common language so that you can figure out what the charges are, compare costs, and shop
for the best deal. It also requires that consumers be told why credit is denied, let borrowers find
out about their credit records, and set up a way for consumers to settle billing disputes. Let the
buyer beware! It is important to know your rights and how to use them.

Question

When obtaining a home equity line of credit, are the costs included in the APRs?


Answer

When obtaining a home equity line of credit, are the costs included in the APRs?

No. The APR does not always include all costs when dealing with home equity lines of credit.

Question

You have a home equity loan for $50,000 that resets every year based on the prime rate and a
15-year term. It is calculated by adding 3% to the rate. Using the calculator on
www.bankrate.com, find your monthly payment on the following years:

Year                     Prime rate                 Home equity loan rate     Monthly Payment
2004
2001
2006




                                                                                     2009 Page 72
Answer

 Year          Prime rate   Home         Monthly
                            equity       Payment
                            loan rate

        2004        0.04          0.07    $449.41
        2001        0.09          0.12    $600.08
        2006      0.0726       0.1026     $545.28


Monthly payments can vary substantially.


Reverse Mortgages

Reverse mortgages are typically used by people over 62 to finance a home improvement, pay off
a current mortgage, supplement their retirement income, or pay for healthcare expenses. But you
don’t have to pay it back for as long as you live in your home. Instead, the loan must be repaid
when you die, sell your home, or no longer live there as your principal residence.

To qualify for most reverse mortgages, you must be at least 62 and live in your home. The
proceeds of a reverse mortgage (without other features, like an annuity) are generally tax-free,
and many reverse mortgages have no income restrictions.




                                                                                   2009 Page 73
Some seniors may be tempted to obtain a reverse mortgage to assist them with the payment of
seemingly ever increasing property taxes. Check to see if this is necessary in your area.

Kinds of Reverse Mortgages
Single-purpose reverse mortgages: There are offered by some state and local government
agencies and nonprofit organizations and usually have very low costs. But they are not available
everywhere, and they only can be used for one purpose specified by the government or nonprofit
lender, for example, to pay for home repairs, improvements, or property taxes. In most cases, you
can qualify for these loans only if your income is low or moderate.

Federally-insured reverse mortgages: These Home Equity Conversion Mortgages (HECMs) are
backed by the U. S. Department of Housing and Urban Development (HUD). Proprietary reverse
mortgages: These are private loans that are backed by the companies that develop them.
HECMs and proprietary reverse mortgages tend to be more costly than other home loans. The
up-front costs can be high, so they are generally most expensive if you stay in your home for just
a short time. They are widely available, have no income or medical requirements, and can be
used for any purpose.

Before applying for a HECM, you must meet with a counselor from an independent government-
approved housing counseling agency. The counselor must explain the loan’s costs, financial
implications, and alternatives. For example, counselors should tell you about government or
nonprofit programs for which you may qualify, and any single-purpose or proprietary reverse
mortgages available in your area.

The amount of money you can borrow with a HECM or proprietary reverse mortgage depends on
several factors, including your age, the type of reverse mortgage you select, the appraised value
of your home, current interest rates, and where you live. In general, the older you are, the more
valuable your home, and the less you owe on it, the more money you can get.

The HECM gives you choices in how the loan is paid to you. You can select fixed monthly cash
advances for a specific period or for as long as you live in your home. Or you can opt for a line of
credit, which allows you to draw on the loan proceeds at any time in amounts that you choose.
You also can get a combination of monthly payments plus a line of credit.

HECMs generally provide larger loan advances at a lower total cost compared with proprietary
loans. But owners of higher-valued homes may get bigger loan advances from a proprietary
reverse mortgage. That is, if you have a higher appraised value without a large mortgage, then
you may likely qualify for greater funds.

Loan Features
Reverse mortgage loan advances are not taxable, and generally do not affect Social Security or
Medicare benefits. You retain the title to your home and do not have to make monthly
repayments. The loan must be repaid when the last surviving borrower dies, sells the home, or no
longer lives in the home as a principal residence. In the HECM program, a borrower can live in a
nursing home or other medical facility for up to 12 months before the loan becomes due and
payable.

As you consider a reverse mortgage, be aware that:




                                                                                     2009 Page 74
       Lenders generally charge origination fees and other closing costs for a reverse mortgage.
        Lenders also may charge servicing fees during the term of the mortgage. The lender
        generally sets these fees and costs.
       The amount you owe on a reverse mortgage generally grows over time. Interest is
        charged on the outstanding balance and added to the amount you owe each month. That
        means your total debt increases over time as loan funds are advanced to you and
        interest accrues on the loan.
       Reverse mortgages may have fixed or variable rates. Most have variable rates that are
        tied to a financial index and will likely change according to market conditions.
       Reverse mortgages can use up all or some of the equity in your home, leaving fewer
        assets for you and your heirs. A ―nonrecourse‖ clause, found in most reverse mortgages,
        prevents either you or your estate from owing more than the value of your home when
        the loan is repaid.
       Because you retain title to your home, you remain responsible for property taxes,
        insurance, utilities, fuel, maintenance, and other expenses. So, for example, if you don’t
        pay property taxes or maintain homeowner’s insurance, you risk the loan becoming due
        and payable.
       Interest on reverse mortgages is not deductible on income tax returns until the loan is
        paid off in part or whole.

Getting a Good Deal
If you are considering a reverse mortgage, shop around to compare your options and the offered
terms. Learn as much as you can about reverse mortgages before you talk to a counselor or
lender. It will help you ask more informed questions, which could lead to a better deal.

       If you want to make a home repair or improvement or need help paying your property
        taxes, you may want to find out if you qualify for any low-cost single-purpose loans that
        may be available in your area. Area Agencies on Aging (AAAs) generally know about
        these programs. To find the nearest agency, visit www.eldercare.gov or call toll-free, 1-
        800-677-1116. Ask the AAA for information about available ―loan programs for home
        repairs or improvements,‖ or ―property tax deferral‖ or ―property tax postponement‖
        programs.
       If you are interested in a federally-insured HECM, know that all HECM lenders must
        follow HUD rules, and that many of the loan costs including the interest rate will be the
        same no matter which lender you select. Still, some costs including the origination fee,
        other closing costs, and servicing fees may vary among lenders.
       If you live in a higher-valued home, you may be able to borrow more from a proprietary
        reverse mortgage. But it generally will cost more. The best way to see key differences
        between a HECM and a proprietary loan is with a detailed side-by-side comparison of
        future costs and benefits. Many HECM counselors and lenders can provide you with this
        important information.
       No matter which type of reverse mortgage you are considering, be certain you
        understand all the conditions that could make the loan due and payable. Ask a counselor
        or lender to explain the Total Annual Loan Cost (TALC) rates, which show the projected
        annual average cost of a reverse mortgage, including all itemized costs.


Be cautious if anyone tries to sell you something, like an annuity, and suggests that a reverse
mortgage would be an easy way to pay for it. If you don’t fully understand what they’re selling, or




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you’re not sure you need what they’re selling, be even more skeptical. Get a second opinion from
an objective person such as an accountant or another advisor.

You have at least three business days after signing the loan documents to cancel it for any
reason without penalty. Remember that you must cancel in writing. The lender must return any
money you have paid so far for the financing.


Question

Explain the differences between the HECM and private reverse mortgage.

        Federal insurance ________
        Size of loan _________
        Costs ________

Answer

Explain the differences between the HECM and private reverse mortgage.

        Federal insurance: HECMs are federally insured by HUD, private reverse mortgages are
         not.
        Size of loan: If you have a highly appraised house, the private reverse mortgage may let
         you take out more money.
        Costs: HECMs generally allow you to take out larger loans at lower cost.




                        Unit 5: Protecting Yourself
Predatory Lending
Lending and mortgage origination practices become "predatory" when the borrower is led into a
transaction that is not what they expected. Predatory lending practices may involve lenders,
mortgage brokers, real estate brokers, attorneys, and home improvement contractors. Their
schemes often target people who have small incomes but substantial equities in their homes.

Make sure that you read all disclosures on your mortgages. These disclosures are required to be
provided at two major points in the mortgage transaction. Disclosures made at the very start, or
point of origination, are designed to give the borrower advance notice of the loan program and the
costs associated with the program. Disclosures made at the end, or loan closing, are designed to
confirm for the borrower that they are receiving what they expected. If disclosures are not
provided, do not do business with this lender or broker.

Common predatory lending practices are:




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       Equity Stripping: The lender makes a loan based upon the equity in your home,
        whether or not you can make the payments. If you cannot make payments, you could
        lose your home through foreclosure.
       Bait-and-switch schemes: The lender may promise one type of loan or interest rate but
        without good reason, give you a different one. Sometimes a higher (and unaffordable)
        interest rate doesn't kick in until months after you have begun to pay on your loan.
       Loan Flipping: A lender refinances your loan with a new long-term, high cost loan. Each
        time the lender "flips" the existing loan, you must pay points and assorted fees.
       Packing: You receive a loan that contains charges for services you did not request or
        need. "Packing" most often involves making the borrower believe that credit insurance
        must be purchased and financed into the loan in order to qualify.
       Hidden Balloon Payments: You believe that you have applied for a low rate loan
        requiring low monthly payments only to learn at closing that it is a short-term loan that
        you will have to refinance within a few years.

The Center for Responsible Lending has other tips to avoid predatory lending. Check out their
website: http://www.responsiblelending.org/.

Your Rights
According to the Real Estate Settlement Procedures Act, you have the following rights:

       To shop for the best loan for you and compare the charges of different mortgage brokers
        and lenders.
       To be informed about the total cost of your loan including the interest rate, points and
        other fees.
       To ask for a Good Faith Estimate of all loan and settlement charges before you agree to
        the loan and pay any fees.
       To know what fees are not refundable if you decide to cancel the loan agreement.
       To ask your mortgage broker to explain exactly what he or she will do for you.
       To know how much the mortgage broker is getting paid by you and the lender for your
        loan.
       To ask questions about charges and loan terms that you do not understand.
       To a credit decision that is not based on your race, color, religion, national origin, sex,
        marital status, age, or whether any income is from public assistance.
       To know the reason if your loan was turned down.

The Fair Housing Act prohibits discrimination by direct providers of housing, such as landlords
and real estate companies as well as other entities, such as municipalities, banks or other lending
institutions and homeowners insurance companies whose discriminatory practices make housing
unavailable to persons because of race, religion, sex, national origin, family status, or disability.
The Department of Housing and Urban Development states the following regarding the Fair
Housing Act:

In the Sale and Rental of Housing: No one may take any of the following actions based on race,
color, national origin, religion, sex, familial status or handicap:

       Refuse to rent or sell housing
       Refuse to negotiate for housing




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        Make housing unavailable
        Deny a dwelling
        Set different terms, conditions or privileges for sale or rental of a dwelling
        Provide different housing services or facilities
        Falsely deny that housing is available for inspection, sale, or rental
        For profit, persuade owners to sell or rent (blockbusting) or
        Deny anyone access to or membership in a facility or service (such as a multiple listing
         service) related to the sale or rental of housing.

In Mortgage Lending: No one may take any of the following actions based on race, color, national
origin, religion, sex, familial status or handicap (disability):

        Refuse to make a mortgage loan
        Refuse to provide information regarding loans
        Impose different terms or conditions on a loan, such as different interest rates, points, or
         fees
        Discriminate in appraising property
        Refuse to purchase a loan or
        Set different terms or conditions for purchasing a loan.

It is illegal for anyone to:

        Threaten, coerce, intimidate or interfere with anyone exercising a fair housing right or
         assisting others who exercise that right
        Advertise or make any statement that indicates a limitation or preference based on race,
         color, national origin, religion, sex, familial status, or handicap. This prohibition against
         discriminatory advertising applies to single-family and owner-occupied housing that is
         otherwise exempt from the Fair Housing Act.

If you think that you have been discriminated against you can file a complaint through
http://www.hud.gov/complaints/index.cfm.


                     Unit 6: Investing in Real Estate
As an investment, real estate can be divided into residential (places where people live) and
commercial buildings (office buildings, shopping centers, hotels, warehouses, manufacturing
facilities, and such). How many residential buildings are there in America? According to the U.S.
Census there were about 132 million housing units in America in 2005. (A housing unit can be a
house, apartment, condo, coop, or mobile home.) In 2003, there were about 4.86 million
commercial buildings with a total of 71.6 billion square feet of space according to the Energy
Information Administration 2003 Commercial Buildings Energy Consumption Survey.

Investors can buy into real estate by buying the property itself, buying into companies that are
based on real estate, or buying into trusts that buy and manage these properties. A mortgage is a
large expense associated with real estate investments.




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2009 Page 79
Why Invest in Real Estate?
According to the 1995 Property Owners and Managers Survey conducted by the Department of
Commerce, property owners invest mainly for income. How does that work? Most investors buy
property for the rent it generates. Usually property investors can’t afford to pay cash up front for
the house so they’ll get a mortgage, or borrow money from a bank. A mortgage involves monthly
payments that pay interest and principal. Then there are property taxes and maintenance
expenses. Income earned by good rental properties will cover these expenses and still give some
cash to the owner after that. If the investor was astute in selecting the property, his income could
give a nice return on the investment.

Income is not the only reason that investors like real estate. Properties held over a period of time
can appreciate or grow in value. Inflation has a part in the price increase as do supply (such as
the number of properties being built) and demand (such as growth of prime house-buying age
population—people in their mid 30s). The economy can also affect real estate buying. If the
economy is humming, businesses are more likely to need space and people are more likely to
buy homes.




How Has Real Estate Done?
In the past 25 years, the typical homeowner has enjoyed an average return of 5.6% on his real
estate investments. As with any other investment, income gains will fluctuate from year to year
following a cycle influenced by the nation’s economy and the inflation rate. According to the




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National Association of Real Estate Investment Trusts (NAREIT), direct investment in commercial
properties averaged about 8.4% annual return in the past 20 years.


Residential Real Estate




For folks who want to actually buy and hold property, the most common form of investing in real
estate is buying and renting out a single family (housing suitable for one family to live in) property.
According to the 1995 Property Owners and Managers Survey conducted by the Department of
Commerce, close to 9 million single family properties are rented out by their owners. These
include stand alone houses, housing that are attached to other housing, condominiums,
cooperatives and mobile homes. The great majority of these (about 84%) are owned by individual
investors. About 29% of these owners lived in the houses before they decided to use them as
investment properties. Almost 60% owned the property for over ten years. What were the goals of
these investors when they bought the property? A third wanted to get income from the property,
another 17% were looking for long term capital gains, and another third wanted to provide
retirement for family security.

Owning and renting a house may involve giving your investment a lot more tender loving care
than stocks or bonds. Real estate investors are involved in managing themselves or finding
people to manage their properties. They find tenants or people to rent the property. They maintain
the properties by painting, replacing heating systems, kitchens or bathrooms. (Picture a phone
call in the middle of the night from a tenant whose water pipes have burst!) Even with all this,
most single family property owners spend less than 25% of their time taking care of their
properties. Were these properties good investments? Only 36% of these owners reported making
a profit on their properties. About the same proportion (39%) would buy the property again.

According to the Property Owners and Managers Survey, there are 2.2 million multifamily
properties with less than five units, about half a million with five to 49 units, and about 60,000 with
50 or more units owned by investors. Now as the size of the property increases, the property is
more likely to be owned by a partnership rather than an individual. For properties with 50 units or




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more, only 30% is owned by individuals while 38% is owned by partnerships. Real estate
corporations and trusts own 14% of these types of properties. Of multifamily property investors,
40% continue to hold the property for income while 20% look for capital gains.


Evaluating the Economy
Investors conduct their evaluation of real estate pretty much the same way they start with stocks
or bonds. They look closely at the economic environment to predict what will happen in the next
few years. If businesses are humming they are likely to need more space for their stores or
operations. Vacancy or space that isn’t rented will come down in price. But along with looking at
the general economy, it’s important to look at new construction, inflation, and interest rates. New
construction permits gives you a heads-up on how the supply of real estate is going to change. If
a lot of construction is happening but the economy doesn’t look good, there may be a glut of
office space. Vacancies will be high and rents will fall. A moderate amount of inflation is actually
good for real estate. It means that both property values and rents will go up. It’s important thing to
know that real estate goes through cycles just like the economy. Although real estate does seem
to follow the economy—this is not true all the time.




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Valuing Real Estate

Let’s say you found a great house that you love. You rush to the bank and apply for a mortgage.
Now before the bank hands over the big wad of cash to pay for the place, it’ll want a clear idea of
what that house is worth in the marketplace. The bank hires an independent appraiser to do the
job. Appraisers typically used three methods to determine the value. The first involves research
on sales of similar properties or the comparable sales. They will search real estate records and
find sales of properties of the same size, location, age, and use. Not all properties are exactly
alike so the appraiser will make adjustments based on the condition of your house compared to
the others. So if your house is in better shape, the value will be increased. If it’s worse, the price
will decrease.

For commercial properties, the appraisal makes an assessment of the income the property
generates. It’ll do this from reviewing the rents the property receives and the expenses it incurs.
It’ll also check to see that both rents and expenses are in line with similar properties in the area. A
rent rate is calculated on a per foot basis. Say a store or retail property is being appraised. The
current rent is $15,000 a year and the store is 1500 square feet. Dividing $15,000 by 1500 square
feet gives a rent rate of $10 a square foot.

Rents are totaled and expenses (such as property taxes, advertising, insurance, repairs, supplies,
utilities and property management) are subtracted for the net operating income. Note that
depreciation is not included in this net operating income. Take the net operating income and
divide by the price of the property and you get the capitalization rate or cap rate. Appraisers
compare the property’s cap rate to the going cap rate for other properties. The higher the cap rate
the better the return. Now if you know the going cap rate for the area then you can divide the net
operating income for the property to determine the value of the property. Say the cap rate in your
town is 10%. You find a commercial property with $20,000 in net operating income. Divide the
$20,000 by 10% and you get a value of $200,000 for the property. If the going cap rate is 12%,
the value goes down to $166,666.

Appraisers will also consider the replacement cost of the property. This will include land cost, site
preparation, building materials, labor costs, engineering and architectural costs, etc.

Now even with all this information, appraisal is just an educated guess. There may not have been
very many sales of that particular type of property lately. Economic conditions may be changing.
Demand may be driven up or down by any number of factors that don’t relate to history.

The key measure in evaluating real estate is the vacancy rate. Vacancy rates are really important
when it comes to how much rent will be charged. When vacancy is low then rents go up as does
earnings and cash flow of a property. When vacancy is high, then rents come down. Vacancy is
driven by both the amount of property available or supply and the number of businesses or
people who want to rent or demand. New construction contributes to supply. So if there’s a lot of
building going on but demand stays about the same, then you can pretty much predict that rents
will come down. On the other hand, if the economy is strong, businesses are expanding, jobs are
plentiful, and population grows, then you can predict that vacancy rates will drop and real estate
in the area looks pretty good.

It’s a combination of both supply and demand factors that drive vacancy rates. So to keep a good
pulse on it, you have to monitor a number of economic indicators. Construction is a good indicator
to watch. It can take a few years to put up some types of buildings, so construction permits give a
glimpse about what supply is going to be like in the next two years. On the demand side,




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unemployment claims, inflation rates, and interest rates all help with predicting what will happen
to the economy. Now don’t forget that different regions of the U.S. behave different economies.
Looking at regional data is especially important in real estate. Just as important is pinpointing
industries because they also behave differently. Retail sales may flag while other industries are
doing fine. This may put a damper on retail real estate while other types of commercial real estate
do fine.




Activity


The following are exchange-traded funds that invest in real estate based on various indices:


Fund                                              Ticker
Cohen and Steers                                  ICF
Dow Jones                                         IYR
Wilshire                                          RWR
Vanguard                                          VNQ


Go to www.morningstar.com and compare these real estate funds to other types of investments.




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                                         Glossary
Adjustable Rate Mortgage (ARM): a mortgage loan that changes in interest rates. When rates
change, monthly payments increase or decrease at intervals determined by the lender.
Agent — A person acting on behalf of another, called the principal.
Amortization: A term used to describe the process of paying off a loan over a predetermined
period of time at a specific interest rate. The amortization of a loan includes payment of interest
and a portion of the outstanding principal balance during each payment cycle.
Amortization Schedule: Provided by mortgage lenders, the schedule shows how over the term
of your mortgage the principal portion of the mortgage payment increases and the interest portion
of the mortgage payment decreases.
Annual Percentage Rate (APR). A term used in the Truth-in-Lending Act to represent the full
cost of a loan. Stated as a yearly rate, APR includes base interest rate, loan origination fee
(points), commitment fees, prepaid interest and other credit costs that may be paid by buyer.
Application Fee: The fee that a mortgage lender charges to apply for a mortgage to cover
processing costs.
Appraisal: A professional analysis, including references to sales of comparable properties, used
to estimate the value of the property.
Appraiser: A professional who conducts an analysis of the property, including references to sales
of comparable properties in order to develop an estimate of the value of the property. The
appraiser's report is called an "appraisal."
Appreciation: An increase in the property's value due to changes in market conditions, the
opposite of depreciation.
Assessed Value: The value that a public taxing authority places upon personal property for the
purposes of taxation.

Assumable Mortgage: A mortgage that can be taken over "assumed" by the buyer when a
property is sold.

Balloon Mortgage: A mortgage that typically offers low rates for an initial period of time (usually
5, 7, or 10) years; after that time period elapses, the balance is due or is refinanced by the
borrower.
Bankruptcy: Legally declared unable to pay your debts as they become due. Bankruptcy can
severely impact your ability to borrow money. Talk to a credit counselor as soon as you realize
you are having problems paying your bills on time to try to prevent bankruptcy.
Bill of Sale — An instrument which transfers title to personal property (chattels); a "Deed"
transfers real property.
CC&R's - Covenants, conditions and restrictions — A document that controls the use,
requirements and restrictions of a property.
Closing (Closing Date): When the real estate transaction between buyer and seller is
completed. The buyer signs the mortgage documents and the closing costs are paid. The sale of
the property is finalized by delivery of deed and the disbursement of funds necessary to the sale
or loan transaction. Also known as the settlement date. In Washington, Sellers and Buyers sign
documents one to two days prior to Close.




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Closing Costs (Settlement Costs): Costs payable by both seller and buyer at the time of
settlement, when the purchase of a property is finalized. These costs can be up to ten percent of
the mortgage amount and usually include but are not limited to the following:


        Fees Paid to the Lender Fees Paid in Advance            Other Charges
        Origination fee             Interest from the closing   Title search and title
        Discount points             date to the beginning of    insurance
        Credit report fee           the 1st payment             Sales commissions
        Appraisal fee               Hazard insurance            Legal and recording fees
        Assumption fee if loan is   premium                     Inspection and survey fees
        assumed                     Mortgage insurance          Property taxes and other
                                    premium                     adjustments
                                                                Processing and document
                                                                preparation fees


Commission — Payment to a real estate broker for services performed.
Condominium: A unit in a multiunit building. The owner of a condominium unit owns the unit
itself and has the right, along with other owners, to use the common areas but does not own the
common elements such as the exterior walls, floors and ceilings or the structural systems outside
of the unit; these are owned by the condominium association. There are usually condominium
association fees for maintenance for building and property upkeep, taxes and insurance on the
common areas and reserves for improvements.
Counter-offer: An offer made in return by the person who rejects the previous offer.
Credit Bureau: A company that gathers information on consumers who use credit and sells that
information in the form of a credit report to credit lenders.
Credit History: A credit history is the record of your usage of credit. It is a list of individual
consumer debts and an indication as to whether or not these debts were paid back in a timely
fashion or "as agreed." Credit institutions have developed a complex recording system of
documenting your credit history. This is called a credit report.
Credit Report: A document used by the credit industry to examine an individual's use of credit. It
provides information on money that individuals have borrowed from credit institutions and a
history of payments.
Credit Score (FICO): A computer-generated number that summarizes an individual's credit
profile and predicts the likelihood that a borrower will repay future obligations.
Debt-to-income ratio: a comparison of gross income to housing and non-housing expenses;
With the FHA, the-monthly mortgage payment should be no more than 29% of monthly gross
income (before taxes) and the mortgage payment combined with non-housing debts should not
exceed 41% of income.
Deed: The legal document that transfers the ownership of real property from one party to another.
Deed of Trust: A document, used in many states in place of a mortgage, held by a trustee
pending repayment of the loan. The advantage of a deed of trust is that the trustee does not have
to go to court to proceed with foreclosure should the borrower default on the loan.
Default: the inability to pay monthly mortgage payments in a timely manner or to otherwise meet
the mortgage terms.
Deposit: See Earnest money




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Delinquency: failure of a borrower to make timely mortgage payments under a loan agreement.
Discount point: normally paid at closing and generally calculated to be equivalent to 1% of the
total loan amount, discount points are paid to reduce the interest rate on a loan.
Down payment: the portion of a home's purchase price that is paid in cash and is not part of the
mortgage loan.
Earnest Money Deposit: The deposit you make to show that you are committed to buying the
home. The deposit will not be refunded to you after the seller accepts your offer, unless one of
the sales contract contingencies is not satisfied. This usually becomes part of the down payment
if the offer is accepted.
Earnest money: money put down by a potential buyer to show that he or she is serious about
purchasing the home; it becomes part of the down payment if the offer is accepted, is returned if
the offer is rejected, or is forfeited if the buyer pulls out of the deal.
Escrow account: a separate account into which the lender puts a portion of each monthly
mortgage payment; an escrow account provides the funds needed for such expenses as property
taxes, homeowners insurance, mortgage insurance, etc.
Fair Housing Act: a law that prohibits discrimination in all facets of the homebuying process on
the basis of race, color, national origin, religion, sex, familial status, or disability.
Fair market value: the hypothetical price that a willing buyer and seller will agree upon when
they are acting freely, carefully, and with complete knowledge of the situation.
Fannie Mae: Federal National Mortgage Association (FNMA); a federally-chartered enterprise
owned by private stockholders that purchases residential mortgages and converts them into
securities for sale to investors; by purchasing mortgages, Fannie Mae supplies funds that lenders
may loan to potential homebuyers.
Federal Housing Administration (FHA) An agency within the Department of Housing and Urban
Development that sets underwriting standards and insures residential mortgage loans made by
private lenders. One of FHA's objectives is to help make affordable mortgages available to
homeowners with low or moderate income. FHA loans may be high loan-to-value, and they are
limited by loan amount. FHA mortgage insurance requires a fee of 1.5 percent of the loan amount
to be paid at closing, as well as an annual fee of 0.5 percent of the loan amount added to each
monthly payment.
Fixed-rate mortgage: a mortgage with payments that remain the same throughout the life of the
loan because the interest rate and other terms are fixed and do not change.
Flood insurance: insurance that protects homeowners against losses from a flood; if a home is
located in a flood plain, the lender will require flood insurance before approving a loan.
Foreclosure: a legal process in which mortgaged property is sold to pay the loan of the
defaulting borrower.
Freddie Mac: Federal Home Loan Mortgage Corporation (FHLM); a federally-chartered
corporation that purchases residential mortgages, securitizes them, and sells them to investors;
this provides lenders with funds for new homebuyers.
Ginnie Mae: Government National Mortgage Association (GNMA); a government-owned
corporation overseen by the U.S. Department of Housing and Urban Development, Ginnie Mae
pools FHA-insured and VA-guaranteed loans to back securities for private investment; as with
Fannie Mae and Freddie Mac, the investment income provides funding that may then be lent to
eligible borrowers by lenders.
Good faith estimate: an estimate of all closing fees including pre-paid and escrow items as well
as lender charges; must be given to the borrower within three days after submission of a loan
application.




                                                                                   2009 Page 87
Homeowner's Insurance: A policy that protects you and the lender from fire or flood, which
damages the structure of the house; a liability, such as an injury to a visitor to your home; or
damage to your personal property, such as your furniture, clothes or appliances. Homeowner's
insurance: an insurance policy that combines protection against damage to a dwelling and Is
contents with protection against claims of negligence )r inappropriate action that result in
someone's injury or )property damage.
Housing Expense Ratio: The percentage of your gross monthly income that goes toward paying
for your housing expenses.
Home Inspection: A professional inspection of a home to review the condition of the property.
The inspection should include an evaluation of the plumbing, heating and cooling systems, roof,
wiring, foundation and pest infestation.
Home warranty: offers protection for mechanical systems and attached appliances against
unexpected repairs not covered by homeowner's insurance.
Housing affordability index: An index that indicates what proportion of homebuyers can afford
to buy an average-priced home in specified areas. The most well-known housing affordability
index is published by the National Association of Realtors.
Housing counseling agency- provides counseling and assistance to individuals on a variety of
issues, including loan default, fair housing, and homebuying.
HUD: the U.S. Department of Housing and Urban Development; established in 1965, HUD works
to create a decent home and suitable living environment for all Americans; it does this by
addressing housing needs, improving and developing American communities, and enforcing fair
housing laws.
HUD-1 settlement statement: A final listing of the costs of the mortgage transaction. It provides
the sales price, and down payment, as well as the total settlement costs required from the buyer
and seller.
Index: a measurement used by lenders to determine changes to the Interest rate charged on an
adjustable rate mortgage.
Inflation: the number of dollars in circulation exceeds the amount of goods and services available
for purchase; inflation results in a decrease in the dollar's value.
Interest: The cost you pay to borrow money. It is the payment you make to a lender for the
money it has lent to you. Interest is usually expressed as a percentage of the amount borrowed.
Interest rate: the amount of interest charged on a monthly loan payment; usually expressed as a
percentage.
Insurance: protection against a specific loss over a period of time that is secured by the payment
of a regularly scheduled premium.
Judgment: a legal decision; when requiring debt repayment, a judgment may include a property
lien that secures the creditor's claim by providing a collateral source.
jumbo loan A nonconforming loan that is larger than the limits set by the Federal National
Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines.
Lien: A claim or charge on property for payment of some debt. With respect to a mortgage, it is
the right of the lender to take the title to your property if you do not make the payments due on
the mortgage.
Loan: money borrowed that is usually repaid with interest.
Loan fraud: purposely giving incorrect information on a loan application in order to better qualify
for a loan; may result in civil liability or criminal penalties.




                                                                                    2009 Page 88
Loan-to-value (LTV) ratio: a percentage calculated by dividing the amount borrowed by the price
or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is
required to pay as down payment.
Lock-in: since interest rates can change frequently, many lenders offer an interest rate lock-in
that guarantees a specific interest rate if the loan is closed within a specific time.
Loss mitigation: a process to avoid foreclosure; the lender tries to help a borrower who has
been unable to make loan payments and is in danger of defaulting on his or her loan
Loan Origination Fees: The fee paid to your mortgage lender for processing the mortgage
application. This fee is usually in the form of points. One point equals 1% of the mortgage
amount.
Low Down Payment Feature: A feature of a mortgage, usually a fixed-rate mortgage that helps
you buy a home with as little as a 3% down payment.
Market Value: The current value of your home based on what a willing purchaser would pay. The
value determined by an appraisal is sometimes used to determine market value.
Mortgage: A loan secured by a lien on your home. In some states the term mortgage is also used
to describe the document you sign to show that you have granted the lender a lien on your home;
other states use a deed of trust document instead of a mortgage. It may also be used to indicate
the amount of money you borrow, with interest, to purchase your house. The amount of your
mortgage is usually the purchase price of the home minus your down payment.
Mortgage Broker: An independent finance professional that specializes in bringing together
borrowers and lender to facilitate real estate mortgages.
Mortgage insurance (MI or PMI): a policy that protects lenders against some or most of the
losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is
required primarily for borrowers with a down payment of less than 20% of the home's purchase
price.
Mortgage Lender: The lender providing funds for a mortgage. Lenders also manage the credit
and financial information review, the property and the loan application process through closing.
Mortgage Rate: The cost or the interest rate you pay to borrow the money to buy your house.
Mortgage: a lien on the property that secures the Promise to repay a loan.
Mortgage banker: a company that originates loans and resells them to secondary mortgage
lenders like Fannie Mae or Freddie Mac.
Offer: A formal bid from the homebuyer to the home seller to purchase a home, generally put
forth in writing.
Origination: the process of preparing, submitting, and evaluating a loan pplication; generally
includes a credit check, verification of employment, and a property appraisal.
Origination fee: the charge for originating a loan; is usually calculated in the form of points and
paid at closing
Open House: When the seller's real estate agent opens the seller's house to the public. You do
not need a real estate agent to attend an open house.
PITI: Principal, Interest, Taxes, and Insurance - the four elements of a monthly mortgage
payment; payments of principal and interest go directly towards repaying the loan while the
portion that covers taxes and insurance (homeowner's and mortgage, if applicable) goes into an
escrow account to cover the fees when they are due.
Pre-approve: lender commits to lend to a potential borrower; commitment remains as long as the
borrower still meets the qualification requirements at the time of purchase.




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Pre-approval letter: A letter from a mortgage lender indicating that you qualify for a mortgage of
a specific amount. It also shows a home seller that you are a serious buyer.
Pre-qualify: a lender informally determines the maximum amount an individual is eligible to
borrow.
Pre-qualification letter: A letter from a mortgage lender that states that you are pre-qualified to
buy a home but does not commit the lender to a particular mortgage amount.
Pre-foreclosure sale: allows a defaulting borrower to sell the mortgaged property to satisfy the
loan and avoid foreclosure.
Premium: an amount paid on a regular schedule by a policyholder that maintains insurance
coverage.
Prepayment: payment of the mortgage loan before the scheduled due date; may be Subject to a
prepayment penalty.
Principal: The amount of money borrowed to buy your house or the amount of the loan that has
not yet been paid back to the lender. This does not include the interest you will pay to borrow that
money. The principal balance (sometimes called the outstanding or unpaid principal balance) is
the amount owed on the loan at any given time. It is the original loan amount minus the total
repayments of principal you have made to date.
Private Mortgage Insurance (PMI): Insurance written by a private company protecting the
lender against loss if the borrower defaults on the mortgage. It is typically required when the
down payment is less than 20% of the value of the property.
Points: 1% of the amount of the mortgage loan. For example, if a loan is made for $50,000, one
point equals $500.
Predatory Lending: Abusive lending practices that include making a mortgage loan to an
individual who does not have the income to repay it or repeatedly refinancing a loan, charging
high points and fees each time and "packing" credit insurance on to a loan.
Radon: A toxic gas found in the soil beneath a house that can contribute to cancer and other
illnesses.
Right of Rescission: The right to back out of a transaction, given automatically by law to the
borrower in a real estate purchase transaction. When a borrower's principal dwelling is going to
secure a loan, the borrower has three business days following signing of the loan documents to
rescind or cancel the transaction. Any and all money paid by the borrower must be refunded upon
rescission. The right to rescind does not apply to loans to purchase real estate or to refinance a
loan under the same terms and conditions where no additional funds will be added to the existing
loan.
Replacement Cost: The cost to replace damaged personal property without a deduction for
depreciation.
Rate Cap: The limit on the amount that the interest rate on an ARM can increase or decrease
during any one adjustment period.
Ratified Sales Contract: A contract that shows both you and the seller of the house have agreed
to your offer. This offer may include sales contingencies, such as obtaining a mortgage of a
certain type and rate, getting an acceptable inspections, making repairs, closing by a certain date,
and the like.
Real Estate Professional: An individual who provides services in buying and selling homes. The
real estate professional is paid a percentage of the home sale price by the seller. Unless you
have specifically contracted with a buyer's agent, the real estate professional represents the
interest of the property seller. Real estate professionals may be able to refer you to local lenders
or mortgage brokers, but are generally not involved in the lending process.




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Refinancing: paying off one loan by obtaining another; refinancing is generally done to secure
better loan terms (like a lower interest rate).
REALTOR: a real estate agent or broker who is a member of the NATIONAL ASSOCIATION OF
REALTORS, and its local and state associations.
RESPA: Real Estate Settlement Procedures Act; a law protecting consumers from abuses during
the residential real estate purchase and loan process by requiring lenders to disclose all
settlement costs, practices, and relationships
Securities: A financial form that shows the holder owns a share or shares of a company (stock)
or has loaned money to a company or government organization (bond).
Settlement: another name for closing.
Subordinate: to place in a rank of lesser importance or to make one claim secondary to another.
Survey: a property diagram that indicates legal boundaries, easements, encroachments, rights of
way, improvement locations, etc.
Sweat equity: using labor to build or improve a property as part of the down payment
Tenancy
       Joint tenancy - equal ownership of property by two or more parties, each with the right
        of survivorship.
       Tenancy by the entireties - ownership of property only between husband and wife in
        which neither can sell without the consent of the other and the property is owned by the
        survivor in the event of death of either party.
       Tenancy in common - equal ownership of property by two or more parties without the
        right of survivorship.
       Tenancy in severalty - ownership of property by one legal entity or a sole party.
       Tenancy at will - a license to use or occupy a property at the will of the owner.

Title: The right to, and the ownership of, land by the owner. Title is sometimes used to mean the
evidence or proof of ownership of land; although another term used for that is "deed."
Title Insurance: Insurance that protects lenders and homeowners against loss of their interest in
the property because of legal problems with the title.
Truth in Lending Act (TILA): Federal law which requires disclosure of a truth in lending
statement for consumer loans. The statement includes a summary of the total cost of credit such
as the APR and other specifics of the loan.
Underwriting: The process a lender uses to determine loan approval. It involves evaluating the
property and the borrower's credit and ability to pay the mortgage.
Uniform Residential Loan Application: A standard mortgage application that your lender will
ask you to complete. The form request your income, assets, liabilities and a description of the
property you plan to buy, among other things.
Veterans Administration (VA) The federal agency responsible for the VA loan guaranty program
as well as other services for eligible veterans. In general, qualified veterans can apply for home
loans with no down payment and a funding fee of 1 percent of the loan amount.
Warranties: Written guarantees of the quality of a product and the promise to repair or replace
defective parts free of charge.




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                                         Sources
A good primer on buying real estate.
http://tms.ecol.net/realestate/homesrch.htm

Washington Housing on how to buy a house
http://www.homeownership-wa.org/faq.htm#howcanifindout

Freddie Mac’s primer on how to buy a home
http://www.freddiemac.com/corporate/buyown/english/purchasing/hunting/

Helpful calculators for you to do ―what if‖ calculations when you decide to buy a house.
http://www.freddiemac.com/corporate/buyown/english/calcs_tools/

Department of Housing and Urban Development’s website on buying a home.
http://www.hud.gov/buying/index.cfm

American Housing Survey http://www.census.gov/hhes/www/housing/ahs/ahs05/ahs05.html


Affordability index http://www.realtor.org/Research.nsf/Pages/HousingInx

http://www.demographia.com/db-nahb0001.htm

Home buying resources in Washington state:
http://www.hud.gov/local/wa/homeownership/buyingprgms.cfm

Interest only loans: http://www.fdic.gov/consumers/consumer/interest-only/index.html

Typical real estate legal agreements are available at:
http://www.buyincomeproperties.com/FreeRealEstateForms.htm#purchaseagree

Center for Responsible lending has many statistics on subprime mortgages and predatory
lending. http://www.responsiblelending.org/index.html

The Canadian government has an excellent explanation of credit reports. http://www.fcac-
acfc.gc.ca/eng/publications/CreditReportScore/CreditReportScoreTOC-eng.asp. Review the two
sample credit reports provided.

The San Francisco Federal Reserve has information on credit reports.
http://www.frbsf.org/publications/consumer/creditreport.html




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