HDF 322 1st Edition Lecture 6 Outline of Last Lecture I Leasing and Tenant Laws Guest Lecture Outline of Current Lecture II Housing Alternatives III Opportunity Costs of Housing Choices IV Renting Residence a Advantages Disadvantages V Home Ownership VI Home Equity Wealth VII Frank Dodd Law VIII Steps of Home Buying IX Home Ownership Costs X Front End Costs XI Discount Points XII Break Even Current Lecture I Housing Alternatives a Buying a home is emotional and personal decision most important decision you will ever make b Landlord Tenant Laws These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute c d Kitt does not think of housing as investment but housing as SHELTER e it does take a significant amount of money even when renting f generally traditional guideline this is pretty low but guideline to try and fit in other things meet goals II Opportunity Costs of Housing Choices a OPPORTUNITY COSTS Theres always something to give up for something you want b when you buy a house when going to job how much is commuting c renters don t get tax advantages or equity growth that s a negative but still positives with renting d renters don t have repairs III Renting Residence a If you are going to rent your residence you need to select an area and an understanding of the cost and what you can afford comparing costs is good b talking to current and past tenants for where you are considering what kind of lifestyle do you want from the apartment that you will be renting c Ex website for crime organized by zipcode can also look up by apartment d Advantages Disadvantages i Advantages of renting not always negative also positive allows you more mobility easier still costs if you break lease but not as difficult as if you were a homeowner not a lot of costs as costly as being a homeowner ii Disadvantages tax benefits go to landlord you have limitations as to what you can do to the actual apartment painting rooms may have to pay extra for pets not a lot of freedom legal contracts security deposit and utilities fees IV Home Ownership a most people do strive for this goal 62 63 of all are owned households about 30 are renters usually around 1 3 or 2 3 but it is the American dream so there is pride in owning your home b c Financial benefits tax benefits also on your mortgage the interest you pay is tax deductable deduct it as scheduled pay item then you get prop taxes deducted too also the appreciation on your home can also be a value sometimes that s how people look at it as an investment in the long run housing appreciates and you get a value there in home equity d this is significant in OUR country not in others e more flexibility in lifestyle you can paint rooms knock out walls redecorate etc f homeowners hell the repairs you are responsible for they are not insignificant you have to come up with several thousand to put a down payment on a home getting the financing g maybe difficult to sell your home when you want to move more money at stake h higher costs you want to make home improvements in first 2 years you spend 3 4 thousand in home improvements i having a skill set for home repairs can be very helpful V Home Equity Wealth a b Home Equity Wealth c for most family appreciation equity is the major net worth component he had investments in retirement d Home ownership rates have gone down e home price outlook use median price Everything should be median not average bc goes from top to bottom medium is more realisitc proce f Home Price Outlook for Austin is above US median bc its prime location VI Frank Dodd Law a New Rule from 2010 Dodd Frank this law was financially overhaul for insurance investment housing banks trying to prevent what happened in 07 08 09 now have defined the mortgage standards that banks and lenders need to follow b they are looking at risky features in mortgage before this they were letting anyone get a mortgage c 30 years is the max d don t allow interest only payments at one time you could get a mortgage and all you did was interest never principle down and it was lower so more people qualified and people got into this bc they expected appreciation to go up in 5 10 years and when they sold they would make more and pay off original debt e Negative Amortization when you use an adjustable rate mortgage ARM you had a payment cap that said you will never pay more than 1200 a month an ARM adjusts every year if interest goes up mortgage rate goes up and when that goes up general and mortgage payments go up if cap says you only have to pay 1200 they take the extra amt you should pay and add to debt so they added debt to your mortgage instead of paying off debt amortized to pay off you were adding to debt payments were inadequate and adding to debt f Limited points and fees to 3 good for people cannot be more than 3 and if they are you pay 3 and someone else has to soak it up points are what you pay up from to buy down the interest rate give some money to lender now so they will lower the interest rate lower monthly payment g debt payments cant be more than 43 of income they limited how much your debt payment can be VII Steps of Home Buying a get finances in order cash flow income sheet balance statement at least 3 years of tax returns to make sure income is coming in b can prequalify but don t have to c Always negotiate a purchase price but in tight markets can negotiate higher than what they ask d Sign your name on closing day VIII Home Ownership Costs a When looking at homeowner costs see above for where they come from b down payments are several thousands balance bc look at investment and assets c points and costs 3 5 thousand investments and assets savings d mortgage insurance taxes maintenance want to see income coming in and if its stable and other expenses going out e this tells you if you can afford it IX Front End Costs a Down payment right now we are right at 20 if you borrow 206 000 20 of that is 41 200 b closing costs will be about fees and points cant be over 3 closing costs can be around 6 000 c discount points are determined by 1 of the loan they are paid to the lendergiving you the Loan and paid to Lender notice the L X Discount Points a Biggest mistake is not taking the LOAN VALUE on exam b discount rates taken on LOAN and paid to LENDER and they …