COA 4131 Dr Goldsmith Exam 2 Chapters 6 10 Chapter 6 Housing and Transportation housing a typical family s budget housing 32 transportation 18 utilities 5 a home is the single most expensive purchase made by most people renting a home o rent cost or payment for using property o o main cost prior to moving in besides first month s rent security deposit payment required in advance by the landlord to cover wear and tear of the unit beyond what is normally expected lease legal document between the renter and landlord defining the rights and obligations of both sublease property can be leased to another whether or not this can be done is an important part of the lease o most tenant rights center on the idea of fair treatment and the landlord s responsibility to provide a habitable property but they vary by state and community o in the short run renting is more economical but in the long run owning is usually more economical because of tax deductions on mortgage interest tax free capital gains and appreciation increase in value steps and finances involved in buying a home o step 1 determining financial readiness mortgages loans to purchase real estate in which the real estate itself serves as collateral PITI principal interest taxes insurance method lenders use in estimating mortgages the buyer must be able to handle the monthly payments of PITI 28 36 qualifying ratio lenders prefer buyers spend no more than 28 to 26 of their monthly gross income on housing o step 2 determining preferences type of housing single family multi units condominiums individually owned units in a building with several other units with monthly fees homeowner s fees for operating the building and common areas cooperative housing units are owned by the co op not directly by the buyer the buyer owns shares in the building as a whole with the right to lease a certain unit monthly operating fees manufactured housing units assembled in a factory and moved to a building site includes mobile homes commuting distance service availability o step 4 getting financing taxes size and quality zoning laws covenants o step 3 finding a home making an offer real estate agent broker offers services to buyers and sellers or property usually the seller pays the real estate broker s commission around 6 of the selling price of the house so the buyer can use the services of the agent without any direct cost involved buyer s agent represents the buyer not the seller may want an upfront retainer fee for services to be rendered home warranty provides additional protection for the buyer home inspector assesses the condition of the home by checking out mechanical systems interior spaces appliances exterior conditions binder earnest money security deposit by the buyer as evidence of a serious offer escrow earnest money held by the mortgage lender until closing less than 10 of home buyers pay cash for a home the higher the down payment the lower the amount of the loan and subsequently the lower the monthly payment title legal right of ownership of property abstract a detailed written history of the property s ownership deed document that transfers ownership of property from the previous owner to the new owner sources for mortgages banks brokerage firms credit unions mortgage finance companies insurance companies private investors pension plans savings and loan associations amortization process of gradually paying off a loan through a series of payments to the lender types of mortgages fixed rate conventional mortgages fixed rate fixed term fixed payment loans usually carried for 15 or 30 years adjustable rate mortgages ARMs interest rates fluctuate with the movement in the economy more risk and variability than with fixed rate convertible mortgages adjustable loans that can be converted to a fixed rate at certain times during the course of the loan two step loans adjustable loans with a built in rate increase after 5 or 7 years FHA and VA loans offered if the lender determines that a person qualifies for Federal Housing Administration FHA or Veterans Administration VA government backed loans allow for very low no down payment owner financing loans offered by the property owner who were take all or part of the mortgage at a rate higher than average and for 2 or 3 years assumable mortgages allow buyers to assume the original mortgage from the seller of the home no income check no asset check loans rare a choice selected by people with uncertain or poor credit ratings lenders will provide a loan based on tax returns and other proofs of ability to pay high interest rates o o step 5 closing closing settlement meeting in which occurs the transference of real estate from a seller to a buyer o points feels paid to the lender at the closing maintenance and repair costs are estimated to run about 2 of the cost of the home per year fair market value what a willing buyer would pay a willing seller for property assessed value a percentage of fair market value within the utility category the largest expense is usually home heating costs in warm climates yearly air conditioning costs can run as high as heating costs ceiling fans awnings and shade trees can cut them by as much as 50 refinance revising a payment schedule to reduce monthly payments and to modify interest charges works best when there are at least 2 percentage points difference between the old and new loan to offset costs charged by lenders home equity loans are secured by independent appraisal of the property value may be used as a line of credit o 125 loans home equity loans that allow the homeowner up to 125 of the home s value should be avoided because of high interest rates not all the interest is tax deductible house cannot be sold until 125 is repaid and house can be lost if payments are not kept up reverse mortgages home equity conversion mortgages provide tax free income of the form of a loan that is paid back with interest when the home is sold or the homeowner dies preferred choice if the elderly person is house rich and cash poor 62 and older appraisal estimate of a home s current value about 10 of home sales are made by owners each year transportation and vehicles Americans are keeping their cars longer than ever due to the rising cost of new cars leasing a contractual agreement outlining monthly payments security deposit and terms of lease o advantages security deposit may amount to only two monthly payments whereas buying a car might require a large downpayment monthly
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