9 THE HOUSING DECISION: FACTORS AND FINANCES CHAPTER OVERVIEW This chapter provides a complete discussion of selecting housing based on life situation, needs, and personal values along with the related financial aspects of this major expenditure. First presented is material regarding factors related to renting a residence. This is followed by discussion of buying alternatives and the home buying process including determining housing needs, evaluating potential homes, and pricing the property. The financing section covers types of mortgages and closing costs of a real estate purchase. Finally, suggestions for selling a home are offered. LEARNING OBJECTIVES CHAPTER SUMMARY After studying this chapter, students will be able to: LO 9-1 Evaluate available housing alternatives. Your needs, life situation, and financial resources are the major factors that influence your selection of housing. Assess renting and buying alternatives in terms of their financial and opportunity costs. LO 9-2 Analyze the costs and benefits associated with renting. The main advantages of renting are mobility, fewer responsibilities, and lower initial costs. The main disadvantages of renting are few financial benefits, a restricted lifestyle, and legal concerns. LO 9-3 Implement the home- buying process. Home buying involves five major stages: (1) determining home ownership needs, (2) finding and evaluating a property to purchase, (3) pricing the property, (4) financing the purchase, and (5) closing the purchase transaction. LO 9-4 Calculate the costs associated with purchasing a home. The costs associated with purchasing a home include the down payment, mortgage origination costs, and closing costs such as a deed fee, prepaid interest, attorney’s fees, payment for title insurance and a property survey, and an escrow account for homeowner’s insurance and property taxes. LO 9-5 Develop a strategy for selling a home. When selling a home, you must decide whether to make certain repairs and improvements, determine a selling price, and choose between selling it yourself and using the services of a real estate agent. 9-1 INTRODUCTORY ACTIVITIES • Ask students to comment on their responses to the “My Life” chapter opening exercise (pp. 299- 300). • Point out the learning objectives (p. 299) in an effort to highlight the key points in the chapter. • Ask students to discuss the relationship between housing selection and other financial goals. • Point out the opportunity costs associated with various housing decisions (see pp. 300-301). WHAT'S NEW TO THIS EDITION Topics, Features Benefits for the Teaching-Learning Environment Expanded content: Leases Offers suggestions for negotiating the terms of a lease that may be considered unacceptable. Expanded content: Mortgage payment calculation Presents a numeric example for determining a mortgage payment along with contrasting calculation methods using a formula, financial calculator, and spreadsheet software. Expanded content: Interest-only mortgages Offers an overview and warning regarding interest-only mortgages. Updated content: Closing costs Suggests revised amounts that might be encountered for home purchase settlement costs. Updated coverage: Short sales Provides an overview of factors to consider when making a decision about being involved in a short sale. CHAPTER 9 OUTLINE I. Housing Alternatives A. Your Lifestyle and Your Choice of Housing B. Opportunity Costs of Housing Choices C. Renting versus Buying Your Housing D. Housing Information Sources II. Renting Your Residence A. Selecting a Rental Unit B. Advantages of Renting 1. Mobility 2. Fewer Responsibilities 3. Lower Initial Costs C. Disadvantages of Renting 1. Few Financial Benefits 2. Restricted Lifestyle 3. Legal Details D. Costs of Renting 9-2 III. The Home-Buying Process A. Step 1: Determine Home Ownership Needs 1. What Are the Benefits of Homeownership? 2. What Are the Drawbacks of Homeownership? 2. Assess Types of Housing Available 3. Determine How Much Can You Afford B. Step 2: Find and Evaluate a Property to Purchase 1. Selecting a Location 2. Using Real Estate Agents 3. Conducting a Home Inspection C. Step 3: Price the Property 1. Determining the Home Price 2. Negotiating the Purchase Price IV. The Finances of Home Buying A. Step 4: Obtain Financing 1. Determine Down Payment 2. Qualifying for a Mortgage 3. Evaluating Points 4. The Application Process 5. Fixed-Rate, Fixed-Payment Mortgages 6. Adjustable-Rate, Variable-Payment Mortgages 7. Other Financing Methods B. Step 5: Close the Purchase Transaction C. Home Buying: A Summary V. Selling Your Home 1. Preparing Your Home for Selling 2. Determining the Selling Price 3. Sale by Owner 4. Listing with a Real Estate Agent 9-3 CHAPTER 9 LECTURE OUTLINE Instructional Suggestions I. HOUSING ALTERNATIVES (p. 300) • Your needs, lifestyle, and financial resources will determine whether you decide to rent, buy, or have a home built. Your Lifestyle and Your Choice of Housing (p. 300) • Your lifestyle (how you spend your time and money) is reflected in almost all consumer purchases including housing. • While personal preferences and tastes are the foundation of your housing decisions, financial factors may modify your final choice. Opportunity Costs of Housing Choices (p. 300) • Consider what you are giving up when you live in a certain area or in a certain type of residence. • Common housing trade-offs include: savings interest lost on the down payment for a house interest lost for an apartment security deposit time and cost of getting to work living in a distant area loss of tax advantages of buying when renting time and money to repair and improve a lower- priced home time and effort to have a home built to your specifications • Text Highlight: Exhibit 9-1 (p.301) presents suggested housing alternatives for different life situations. • Use PPT slides 9-2 to 9-6. Renting versus Buying Your Housing (p. 301) • Choosing between renting and buying your residence is an essential decision related to housing. • Economic conditions can influence this decision as well as a personal desire for ease of mobility or pride of ownership. • Text Highlight: The “Financial Planning Calculations” feature on page 304 provides a framework for the financial analysis of comparing renting and buying. Housing Information Sources (p. 303) • As with other consumer purchases, much information is available on housing including books, newspaper articles, people with knowledge and experience in this area, the World Wide Web, and government agencies. • Practice Quiz 9-1 (p. 303) 9-4 CHAPTER 9 LECTURE OUTLINE Instructional Suggestions II. RENTING YOUR RESIDENCE (p. 303) • At some point in your life, you are likely to rent your place of residence. You may rent when you are first on your own and cannot afford to buy a home or later in life when you want to avoid the activities required to maintain your own home. Selecting a Rental Unit (p. 304) • An apartment is the most common type of rented housing. • People who need more room should consider renting a house. Advantages of Renting (p. 305) • The main advantages of renting are: ease of mobility fewer responsibilities lower initial costs Disadvantages of Renting (p. 306) • The main drawbacks of renting are: few financial benefits in the form of tax deductions, restricted lifestyle, restrictions on decorating, having pets, and other activities legal details • Use PPT slides 9-7 to 9-10. • Assignment: Have students survey people who rent to determine factors that influenced this housing decision over buying. • Supplementary Resource: Talk to a lawyer about common problems associated with renting and leases. • A lease is the legal document that defines the conditions of a rental agreement. It is designed to protect the rights of both the landlord and tenant. Costs of Renting (p. 307) • A security deposit is usually required when you sign a lease. This money is held by the landlord to cover the cost of any damages that may be done to the rental unit during the lease period. • Text Highlight: Pages 289-290 lists the main conditions of a lease agreement. • Use PPT slides 9-11 and 9-12. • Practice Quiz 9-2 (p. 308) 9-5 CHAPTER 9 LECTURE OUTLINE Instructional Suggestions III. THE HOME BUYING PROCESS (p. 308) • Owning a home is a goal of many people and involves various activities as well as personal and economic trade-offs. Step 1: Determine Homeownership Needs (p. 308) What Are the Benefits of Homeownership? • The main advantages of home ownership are pride of ownership, financial benefits, and flexibility in using the property. What Are the Drawbacks of Homeownership? • Financial risks related to having down payment funds, obtaining a mortgage, and changing property values. • Limited mobility may result if a home is difficult to sell. • Higher living costs due to repairs and maintenance. Assess Types of Housing Available (p. 309) • Single-family dwellings are the most popular type of housing. • Multiunit dwellings include duplexes and town houses. • A condominium is an individually owned housing unit in a building with a number of such units. Individual ownership does not include common areas such as hallways, outside grounds, and recreational facilities. • Cooperative housing is a form of housing in which a building containing a number of units is owned by a nonprofit organization whose members have the right to live in the units by paying rent. • Manufactured homes are housing that is fully or partially assembled in a factory before being moved to the living site. These include prefabricated homes and mobile homes. • Text Highlight: Exhibit 9-5 presents the steps involved with finding, purchasing, and financing a home. • Exercise: Create a list of factors that could encourage or discourage the purchase of a housing unit. • Use PPT slides 9-13 to 9-15. • Supplementary Resource: Obtain information from a condominium sales office about the purchasing and management of this type of housing. • Discussion Questions: What are common perceptions about mobile houses and modular housing units? Are these beliefs as valid as in the past? • Assignment: Have students talk to people who have had their own house built, or to contractors who work with people having a house built. Obtain information on the process and potential difficulties. • Use PPT slides 9-16 to 9-19. • Some people want a home built according to their specifications. Before you begin such a project, be sure you possess the knowledge, the money, and the perseverance that are needed to complete it. Determine How Much You Can Afford (p. 311) • The amount you can afford to spend for a house will be affected by the cash you have available for a down payment, by your regular income, and by your current living expenses and financial obligations. 9-6 CHAPTER 9 LECTURE OUTLINE Instructional Suggestions • You may not get all the features you want in your first home, but financial advisers suggest that you should get into the housing market by purchasing what you can afford. • Studies show that the most desired features in a home are a basement, a large garage, abundant closet and storage space, and a large, modern kitchen. • You may want to buy a handyman’s special—a home that needs work but that you are able to get at a lower price because of its poor condition. • Current Example: The practical aspects of a home most desired by buyers in order of popularity: 1. dishwasher 2. dead-bolt locks 3. walk-in closets 4. trash disposal 5. fireplace 6. bay windows 7. upgraded carpeting 8. microwave oven 9. walk-in pantry 10. ceramic tiles in tub Step 2: Find and Evaluate a Property to Purchase (p. 312) • In selecting a neighborhood, consider the character of the community. Zoning laws are restrictions on how the property in an area can be used. • If you have or plan to have a family, you should assess the school system. Homeowners without children also benefit from strong schools since the educational advantages of a community affect property values. • A real estate agent can help you assess housing needs and determine the amount you can afford to spend. • A real estate agent can be helpful in presenting your offer to the seller, negotiating a settlement price, assisting you in obtaining financing, and representing you at the closing • Before reaching your decision about a specific home, conduct a complete evaluation of the property. This evaluation can help minimize future problems. • Use PPT slides 9-20 to 9-22. • Discussion Question: Why is home location considered more important than any other factor when making a housing purchase? • Current Example: In addition to the location, be sure to: consider the entire community be aware of possible malls or highways consider cost and time of commuting remember that yards, home conditions, and other items in view are an indication of the lifestyles and values of people in the community. Step 3: Price the Property (p. 313) • The main factors you should consider in determining the home prices are recent sales prices in the area, the current demand for housing, the length of time the home has been on the market, the owner’s need to sell, the financing options, and the features and condition of the home. • In times of high demand, negotiating is minimized; this is a seller’s market since sellers are likely to have several offers for the property. In contrast, when home sales are slow, a buyer’s market exists and you will likely obtain a lower price. • Once a price has been agreed upon, the buyer must deposit earnest money—a portion of the purchase price that the buyer deposits as evidence of good faith to show that the purchase offer is serious. • Use PPT slide 9-23. • Text Highlight: Exhibit 9-6 presents a checklist for use when conducting a home inspection. • Supplementary Resource: Use local newspapers and online sources to obtain information on the price range of houses and other housing in your community. • Text Highlight: Exhibit 9-7: (p. 314) shows the components of a home purchase agreement. • Practice Quiz 9-3 (p. 315) 9-7 CHAPTER 9 LECTURE OUTLINE Instructional Suggestions IV. THE FINANCES OF HOME BUYING (p. 315) • Financing a home purchase requires obtaining a mortgage, being aware of the types of mortgages, and settling the real estate transaction. Step 4: Obtain Financing (p. 315) • Personal savings, pension plan funds, sales of investments or other assets, and assistance from relatives are the most common sources of down payment money. • Private mortgage insurance (PMI) is usually required if the down payment is less than 20 percent. • A mortgage is a long-term loan on a specific piece of property, such as a home or other real estate. Payments on mortgages are made over an extended period, for example 15 or 30 years. • To qualify for a mortgage, you must meet criteria similar to those that must be met for other loans. • The major factors that affect the affordability of your mortgage are your income, other debts, the amount available for a down payment, the length of the loan, and current mortgage rates. • The mortgage loan for which a person can qualify is larger when interest rates are low than when they are high. As interest rates rise, fewer people are able to afford the cost of an average-priced home. • Points are prepaid interest charged by the lender. Each discount point is equal to one percent of the loan amount and should be viewed as a premium being paid for obtaining a lower mortgage rate. • Obtaining a mortgage requires the potential borrower to submit an application form containing personal and financial data. Most lenders charge a loan application fee of between $100 and $300. • Other common charges associated with the mortgage application process are loan origination fees, property appraisal fees, and a credit report charge. Types of Mortgages (p. 319) 1. The conventional mortgage has equal payments over 15 or 30 years based on a fixed interest rate. 2. Government-guaranteed financing programs include insured loans by the Federal Housing Authority (FHA) and loans guaranteed by the Veterans Administration (VA). • Exercise: Have students obtain articles and financial data from The Wall Street Journal and online with information on current mortgage rates. • Use PPT slides 9-24 and 9-25. • Assignment: Have students compare mortgage qualification requirements and procedures of several lenders in your area. • Text Highlight: Exhibit 9-8 (p.316) may be used to calculate the amount of mortgage a person can afford. • Assignment: Have students use Exhibit 9-9 (p. 317) or a financial calculator to determine the amount of the monthly payment for different mortgage amounts at different rates with different term lengths. • Text Highlight: A summary of the mortgage application process is on page 319. • Use PPT slides 9-26 to 9-33. • Text Highlight: On page 320, students can see how a portion of each mortgage payment goes toward both interest and principal. As the amount owed declines each month, more of the payment goes to cover principal and less for interest. 9-8 CHAPTER 9 LECTURE OUTLINE Instructional Suggestions 3. A balloon mortgage has fixed monthly payments and a very large final payment, usually after three, five, or seven years. It allows people to buy when rates are high with the hope of refinancing at a lower rate before the balloon payment is due. 4. The adjustable rate mortgage (ARM), also referred to as a flexible rate mortgage or a variable rate mortgage, has an interest rate that increases or decreases during the life of the loan based on changes in market interest rates. A rate cap restricts the amount that the interest rate can increase during the loan term. A payment cap keeps the payments on an adjustable rate mortgage at a given level or limits the amount to which those payments can rise. Convertible ARMs allow the homeowner to change an adjustable rate mortgage to a fixed rate mortgage during a certain period, such as time between the second year and the fifth year of the loan. 5. A buy down is an interest rate subsidy from a home builder or a real estate developer that reduces the mortgage payments during the first few years of the loan. 6. A second mortgage, more commonly called a home equity loan, allows a homeowner to borrow on the paid-up value of the property. 7. Reverse mortgages provide an elderly homeowner with tax-free income in the form of a loan that is paid back (with interest) when the home is sold or the homeowner dies. 8. Refinancing refers to obtaining a new mortgage on your current home at a lower interest rate. • Supplementary Resources: Contact the Federal Trade Commission,(www.ftc.gov) and the Consumer Information Center (www.publications.usa.gov) to obtain current information related to home buying and mortgages. • Text Reference: The “Financial Planning for Life’s Situations” feature on page 324 provides information and warnings on paying off your mortgage early. Step 5: Close the Purchase Transaction (p. 323) • The closing involves a meeting of the buyer, seller, and lender of funds, or representatives of each party, to complete the transaction. • Use PPT slides 9-34 and 9-35. • Closing costs, also called settlement costs, are the fees and charges paid when a real estate transaction is completed. • An escrow account is money, usually deposited with a financial institution, for the payment of property taxes and homeowner’s insurance • Text Highlight: Exhibit 9-12 presents the main elements of home buying as a summary • Practice Quiz 9-4 (p. 325) 9-9 CHAPTER 9 LECTURE OUTLINE Instructional Suggestions V. SELLING YOUR HOME (p. 326) Preparing Your Home for Selling (p. 326) • The effective presentation of your home can result in a fast, financially favorable sale. Real estate salespeople recommend that you make needed home repairs and paint the exterior and interior areas. Determining the Selling Price (p. 326) • Putting a price on your home can be a difficult decision. You face the risk of not selling it immediately if the price is too high, and you may not get a fair settlement if the price is too low. • An appraisal, which is an estimate of the current value of the property, can provide a good indication of the price you should set for it. Sale by Owner (p. 326) • If you decide to sell your home without the use of a real estate professional, price the home and then advertise it through local newspapers and through a flier describing it in detail. • Use the services of a lawyer or title company to assist you with the contract, the closing, and other legal matters. Listing with a Real Estate Agent (p. 327) • If you decide to sell your home with the assistance of a real estate agent, you can probably choose among real estate businesses in your area. • Use PPT slides 9-36 and 9-37. • Current Example: Real estate professionals suggest that your home be made as appealing as possible so potential buyers can imagine themselves living there. The smell of fresh-baked bread or cookies can add to the appeal. • Discussion Question: What types of improvements would add to the sale value of homes in this area? • Assignment: Have students talk to people who have sold their houses on their own. • Supplementary Resource: Talk to a real estate agent and use newspaper housing ads and websites to determine the factors that influence the selling price of homes. • Your real estate agent will provide you with various services. These services include suggesting a selling price, making potential buyers and other agents aware of your home, providing advice on features to highlight, conducting showings of your home, and handling the financial aspects of the sale. • Practice Quiz 9-5 (p. 327) 9-10 CONCLUDING ACTIVITIES • Point out the chapter summary (p. 329) and key terms in the text margin. • Use the “My Life Stage” feature (p. 328) to highlight the main financial planning activities from the chapter for various ages and life situations. • Discuss selected end-of-chapter Financial Planning Problems, Financial Planning Activities, and Life Situation Case. • Use Chapter Quiz in the Instructor’s Manual. WORKSHEETS FROM PERSONAL FINANCIAL PLANNER FOR USE WITH CHAPTER 9 Use the “Personal Financial Planner in Action” (pp. 331-332) activities to encourage students to plan and implement various personal financial decisions. Sheet 40 Current and Future Housing Needs Sheet 41 Renting vs. Buying of Housing Sheet 42 Apartment Rental Comparison Sheet 43 Housing Affordability and Mortgage Qualification Amounts Sheet 44 Mortgage Company Comparison Sheet 45 Mortgage Refinance Analysis CHAPTER 9 QUIZ ANSWERS True-False Multiple Choice 1. F (p. 306) 6. A (p. 308) 2. F (pp. 306-307) 7. C (p. 312) 3. F (p. 310) 8. B (p. 316) 4. T (p. 309) 9. B (p. 316) 5. F (pp. 319-320) 10. C (p. 321) 9-11 Name ________________________________________ Date____________________________ CHAPTER 9 QUIZ TRUE-FALSE _____1. Several financial benefits are associated with renting your place of residence. _____2. A lease is mainly designed to protect the rights of the landlord. _____3. Cooperative housing involves the purchase of an individual living unit in a multiunit complex or building. _____4. Financial risks are associated with the purchase of a home. _____5. Most mortgage rates are established by government agencies. MULTIPLE CHOICE _____6. A common advantage associated with home ownership is a. financial benefits. b. ease of mobility. c. limited financial risks. d. low initial costs. _____7. Most real estate professionals believe that the most important factor in selecting a home is a. price. b. style. c. location. d. desired features. _____8. The major factor that affects a person’s qualification for a mortgage is a. current interest rates. b. the applicant’s credit rating. c. the value of the property being purchased. d. the source of the down payment funds. _____9. Most lending institutions believe that a person can afford a monthly payment of about __________ percent of gross income less any long-term debts. a. 25 b. 35 c. 45 d. 55 _____10. A __________ mortgage allows a person to borrow on the paid-up value of a home. a. conventional b. buy-down c. second d. VA 9-12 SUPPLEMENTARY ACTIVITY For each of the following types of mortgages, describe life situations and economic conditions that could make this type of home loan an appropriate choice. Type of mortgage Description of life situation Description of economic conditions Conventional, fixed-rate, fixed-payment FHA or VA Adjustable rate mortgage Buy-down mortgage Second mortgage Reverse mortgage (Note: This activity may be done as a discussion in a large group, as a small group exercise, or as an out- of-class assignment.) 9-13 ANSWERS TO PRACTICE QUIZZES, FINANCIAL PLANNING PROBLEMS, FINANCIAL PLANNING ACTIVITIES, FINANCIAL PLANNING CASE, AND CONTINUING CASE PRACTICE QUIZZES Practice Quiz 9-1 (p. 303) 1. How does a person’s employment and household situation influence the selection of housing? A person who works at home would, for example, require home facilities different from a single person or a household with several small children. (pp. 300) 2. What are some common opportunity costs associated with the selection of housing? Opportunity costs include lost interest on a down payment or security deposit and travel time to work when living in the country. (p. 300-301) Practice Quiz 9-2 (p. 308) 1. What are the main benefits and drawbacks of renting a place of residence? Advantages of renting are mobility, fewer responsibilities, and lower initial costs. Disadvantages are few financial benefits, restricted lifestyle, and legal concerns. (pp. 305-306) 2. Which components of a lease are likely to be most negotiable? Some people will tell you that just about everything in a lease is negotiable; however, certain things are likely to be more flexible than others. Most negotiable items include rent, amount of security deposit, starting date of lease, and decorating. (pp. 306-307) Practice Quiz 9-3 (p. 315) 1. What are the advantages and disadvantages of owning a home? The advantages of owning a home are pride of ownership, financial benefits, and lifestyle flexibility. Disadvantages are financial uncertainty, limited mobility, and higher living costs. (pp. 308-309) 2. What guidelines could be used to determine the amount that individuals should spend for a home purchase? In general, a person should make payments on the purchase of a home that involve about 25 to 30 percent of his or her income. This is a guideline and could be influenced by other factors such as the amount available for a down payment and other household expenses. 3. How can the quality of a school system benefit even homeowners in a community who do not have school-age children? The quality of a school system is an important factor affecting home prices in a community. By maintaining quality schools, all homeowners in an area benefit from stable and increasing property values. (p. 312) 4. What services are available to home buyers from real estate agents? 9-14 A real estate agent can help assess housing needs and determine the amount a person can afford to spend. Agents also have information on available homes and obtaining a mortgage. (pp. 312-313) 5. How does a seller’s market differ from a buyer’s market? A seller’s market occurs when demand for homes is high with few available for sale. A buyer’s market is when many homes are available for sale with relatively low demand. (p. 314) Practice Quiz 9-4 (p. 325) 1. What are the main sources of money for a down payment? The main sources of a down payment are personal savings, pension plan funds, investments, and assistance from relatives. (p. 315) 2. What factors affect a person’s ability to qualify for a mortgage? The major factors that affect mortgage affordability are income, other debts, the amount available for a down payment, the length of the loan, and current mortgage rates. (pp. 316-317) 3. How do changing interest rates affect the amount of mortgage a person can afford? As interest rates decline, home buyers can afford to take on a larger mortgage. (p. 317) 4. How do discount points affect the cost of a mortgage? Discount points increase the initial cost of a mortgage; however, paying points results in obtaining a lower mortgage rate. (p. 318) 5. Under what conditions might an adjustable rate mortgage be appropriate? An adjustable rate mortgage may be appropriate when interest rates are relatively high and they are expected to decline. This situation would benefit the borrower as rates decline, or the homeowner may refinance when rates drop at a lower-rate, fixed-rate mortgage. (pp. 320-321) 6. When might refinancing a mortgage be advisable? Refinancing might be appropriate when interest rates decline and a homeowner plans to stay in the same house long enough for the savings from lower mortgage payments to recover the cost of refinancing. (p. 322) 7. How do closing costs affect a person’s ability to afford a home purchase? Closing costs can add several thousand dollars to the expense of buying a home. These are funds that the homebuyer must have available to complete the real estate transaction. (pp. 323-324) Practice Quiz 9-5 (p. 327) 1. What actions are recommended when planning to sell your home? When planning to sell your home, make needed repairs, consider new paint, clear out living and storage areas, and remove unnecessary furniture and other items. (p. 326) 2. What factors affect the selling price of your home? Home prices are affected by location, size, condition, features, and current market demand. (p. 326) 3. What should you consider when deciding whether to sell your home on your own or to use the services of a real estate agent? 9-15 If you decide to sell by owner, you will need to price, advertise, and show the house. Some people would like to save money by taking on these tasks and not use a real estate agent. If you would like someone else to handle these and other duties, you may decide to use the services of a real estate agent. (pp. 326-327) FINANCIAL PLANNING PROBLEMS (p. 330) 1. Comparing Renting and Buying. Based on the following data, would you recommend buying or renting? Rental Costs Buying Costs Annual rent, $7,380 Annual mortgage payments, $9,800 ($9,575 is interest) Insurance, $145 Property taxes, $1,780 Security deposit, $650 Insurance/maintenance, $1,050 Down payment/closing costs, $4,500 Growth in equity, $225 Estimated annual appreciation, $1,700 Assume an after-tax savings interest rate of 6 percent and a tax rate of 28 percent. Solution: Rental Costs Buying Costs $7,380 Rent $9,800 Mortgage payments 145 Insurance 2,830 Taxes, insurance, maintenance 39 Interest lost on security deposit 270 Interest lost on down payment, closing costs $7,564 Total rental costs 225 Growth in equity 1,700 Annual appreciation 2,681 Tax savings for mortgage interest 498 Tax savings for property taxes $7,796 Total buying costs LO: 9-2 Topic: Comparing Renting and Buying LOD: Medium Bloom’s tag: Application 2. Estimating a Monthly Mortgage Payment. Estimate the affordable monthly mortgage payment, the affordable mortgage amount, and the affordable home purchase price for the following situation (see Exhibit 9-8). Monthly gross income, $2,950 Down payment to be made, 15 percent of purchase price Other debt (monthly payment), $160 Monthly estimate for property taxes and insurance, $210 30-year loan at 8 percent 9-16 Solution: Based on example A (with other debts), Exhibit 9-8 (p. 316) Affordable monthly mortgage payment, $751 Affordable mortgage amount, $102,316 Affordable home purchase, $120,372 LO: 9-4 Topic: Estimating a Monthly Mortgage Payment LOD: Medium Bloom’s tag: Application 3. Calculating Monthly Mortgage Payments. Based on Exhibit 9-9, what would be the monthly mortgage payments for each of the following situations? a. $40,000, 15-year loan at 4.5 percent b. $76,000, 30-year loan at 5 percent c. $65,000, 20-year loan at 6 percent What relationship exists between the length of the loan and the monthly payment? How does the mortgage rate affect the monthly payment? Solution: a. $7.65 40 = $306 b. $5.37 76 = $408.12 c. $7.16 65 = $465.40 Longer mortgage terms mean a lower monthly payment. As rates increase, a higher monthly payment is required. LO: 9-4 Topic: Calculating Monthly Mortgage Payments. LOD: Medium Bloom’s tag: Application, analysis 4. Comparing Total Mortgage Payments. Which mortgage would result in higher total payments? Mortgage A: $970 a month for 30 years Mortgage B: $760 a month for 5 years and $1005 for 25 years Solution: A: $970 360 months = $349,200 B: ($760 60 months) + ($1,055 300 months) = $45,600 + $316,500 = $362,100 LO: 9-4 Topic: Comparing Total Mortgage Payments. LOD: Medium Bloom’s tag: Application 5. Evaluating a Refinance Decision. Kelly and Tim Browne plan to refinance their mortgage to obtain a lower interest rate. They will reduce their mortgage payments by $83 a month. Their closing costs for refinancing will be $1,670. How long will it take them to recover the cost of refinancing? Solution: $1,670 / $83 = 20.12 (about 21 months) LO: 9-4 9-17 Topic: Evaluating a Refinance Decision LOD: Medium Bloom’s tag: Application 6. Saving for a Down Payment. In an attempt to have funds for a down payment, Jan Carlson plans to save $3,500 a year for the next five years. With an interest rate of 3 percent, what amount will Jan have available for a down payment after the five years? Solution: $3,500 × 5.309 = $18,581.50 LO: 9-4 Topic: Saving for a Down Payment LOD: Easy Bloom’s tag: Application 7. Calculating the Monthly Housing Payment. Ben and Carla Manchester plan to buy a condominium. They will obtain a $150,000, 30-year mortgage at 6 percent. Their annual property taxes are expected to be $1,800. Property insurance is $480 a year, and the condo association fee is $220 a month. Based on these items, determine the total monthly housing payment for the Manchesters. Solution: Monthly mortgage payment: $6.00 x 150 = $900 Monthly property taxes: $1,800 ÷ 12 = $150 Monthly property insurance: $480 ÷ 12 = $40 Monthly association fee: $220 Total monthly housing payment: $1,310 LO: 9-4 Topic: Calculating the Monthly Housing Payment. LOD: Medium Bloom’s tag: Application 8. Future Value of an Amount Saved. You estimate that you can save $3,800 by selling your home yourself rather than using a real estate agent. What would be the future value of that amount if invested for five years at 9 percent? Solution: $3,800 1.539 = $5,848.20 LO: 9-5 Topic: Future Value of an Amount Saved LOD: Easy Bloom’s tag: Application FINANCIAL PLANNING ACTIVITIES (p. 330) 1. Comparing Housing Alternatives. Interview several people about the factors that influenced the select of their current residence. 9-18 This assignment can provide students with expanded awareness of factors that motivate housing decisions. Encourage students to talk with people who live in various types of housing. 2. Determining Appropriate Housing. What type of housing would you suggest for people in the following life situations? (a) A single parent with two school-age children; (b) A two-income couple without children; (c) A person with both dependent children and a dependent parent; (d) A couple near retirement with grown children. While answers may vary, suggested responses may be found in Exhibit 9-1 (p. 301). 3. Researching Rental Situations. Using Sheet 42 in the Personal Financial Planner, compare the costs, facilities, and features of apartments and other rental housing in your area. You may obtain this information through newspaper advertisements, rental offices, or online searches. This activity will be especially useful to students who plan to live on their own for the first time in the near future, and those who may have recently moved to a new area. 4. Analyzing the Buy-versus-Rent Decision. Use the buy-versus-rent analysis on page 304 to compare two residences you might consider. This activity can help students understand renting vs. buying in a practical situation. 5. Contrasting Rental Perspectives. Talk to a tenant and a landlord to obtain their views about potential problems associated with renting. How do their views on tenant–landlord relations differ? This activity can help students appreciate various perspectives with regard to renting housing. 6. Assessing Home-Buying Alternatives. Talk with a real estate agent about the process involved in selecting and buying a home. Obtain information about housing prices in your area and the services the agent provides. This activity can assist students in better understanding of the services provided by a real estate agent. The housing prices in a community are affected by many factors; a real estate agent as well as other information sources (online search, news articles, government officials, insurance agents) can provide information on current and expected home prices. 7. Comparing Mortgage Sources. Using Sheet 44 in the Personal Financial Planner, contact several mortgage companies and other financial institutions to obtain information about current mortgage rates, application fees, and the process for obtaining a mortgage. This activity will help students better understand the mortgage application process. 8. Researching Home for Sale. Conduct online research of homes for sale in your area. What features do you believe would appeal to potential buyers? What efforts were made to attract potential buyers to these properties? This experience will give students the opportunity to become aware of the advantages and disadvantages of various housing units on the market. 9-19 FINANCIAL PLANNING CASE Housing Decisions (p. 331) 1. How could the Bowmans have benefited from buying a home that needed improvements? Buying a home that needs improvement can make sense for two reasons. First, it may be the only affordable choice, and the buyer may be willing to fix up the residence. Second, the location or style may be exactly what is desired and improvements a tradeoff that must be made. 2. How might Beth Young have found out when mortgage rates were at a level that would make refinancing her condominium more affordable? By regularly reading online business and economic news, it is possible to keep up to date on changing mortgage interest rates. Regularly talking to a real estate agent or a loan officer at a financial institution will also help in keeping informed on mortgage rates. 3. Although the Zorans had good reasons for continuing to rent, what factors might make it desirable for an individual or a family to buy a home? Renting is desired by those who may need to move frequently or who do not want the responsibilities associated with the home ownership. But people who buy their place of residence wish to take advantage of the financial benefits of home ownership along with the stability of residence and flexibility in decorating their home. CONTINUING CASE Home Buying Decisions (p. 332) Questions 1. Let’s assume the Lawrences will qualify for a 6%, 30-year loan and will make a down payment of 10%. They are currently paying $300 on a used car auto loan for Shelby and will pay $220 per month for property taxes and homeowners insurance. Using the “Housing affordability and mortgage qualification amounts” exhibit within the chapter, calculate the following: a. the amount of their affordable monthly mortgage payment $848 b. the amount of their affordable mortgage loan amount and $141,333 c. the amount they can afford to pay for a home. $157,037 2. What are the tax advantages for the Lawrences of owning a home rather than renting? They will likely be able to reduce the actual cost of owning a home by taking advantage of the tax deductions for mortgage interest and property taxes. 3. Explain how Shelby and Cameron might use the following Personal Financial Planner sheets when deciding to purchase a home. Although student responses may vary, some possible answers to this question are: a. Renting versus Buying Housing will allow them to compare the financial aspects of renting and buying their housing. 9-20 b. Housing Affordability and Mortgage Qualification will help them determine the amount they can afford for buying a home and obtaining a mortgage. DAILY SPENDING DIARY (p. 333) Maintaining a record of daily spending will help students prepare for the purchase of a home or will help them better manage their financial resources is they are currently purchasing their own home. 9-21 Name ______________________________________ Cha pt er 9: The H ousing D ecision: F a ct or s a nd F ina nces 2. Prepaid interest charged by a lending institution for the mortgage; each discount point is equal to 1 percent of the loan amount. 4. The process of obtaining a new mortgage on a home to get a lower interest rate. 6. A home loan agreement in which the borrower agrees to share the increased value of the home with the lender when the home is sold (abbreviation). 7. A loan based on the equity in a home, that provides elderly homeowners with tax-free income and is paid back with interest when the home is sold or the homeowner dies. 10. The reduction of a loan balance through payments made over a period of time. 12. A document that transfers ownership of property from one party to another. 13. An interest rate subsidy from a home builder or real estate developer that reduces a home buyer's mortgage payments during the first few years of the loan. 14. A fixed-rate, fixed-payment home loan with equal payments over 15, 20, or 30 years. 17. A limit on the increases and decreases in the interest rate charged on an adjustable-rate mortgage. 21. An estimate of the current value of a property. 22. Money, usually deposited with the lending financial institution, for the payment of property taxes and homeowner's insurance. 23. A portion of the price of a home that the buyer deposits as evidence of good faith to indicate a serious purchase offer. 24. Fees and charges paid when a real estate transaction is completed; also called "settlement costs." 25. A home loan with fixed monthly payments and a large final payment, usually after three, five, or seven years. 1. A home financing agreement in which payments rise to different levels every 5 or 10 years during the loan term. 3. Insurance that, during the mortgage term, protects the owner or the lender against financial loss resulting from future defects in the title and from other unforeseen property claims not excluded by the policy. 5. A home loan agreement that provides for payment increases to allow the amount owed to be paid off more quickly. 6. A cash advance based on the paid-up value of a home; also called a home equity loan. 8. A long-term loan on a specific piece of property such as a home or other real estate. 9. An individually owned housing unit in a building with several such units. 11. A form of housing in which a building containing a number of housing units is owned by a nonprofit organization whose members rent the units. 15. A housing unit that is fully or partially assembled in a factory before being moved to the living site. 16. A limit on the payment increases for an adjustable-rate mortgage. 18. A home loan with an interest rate that can change during the mortgage term due to changes in market interest rates; also called a "flexible-rate mortgage" or a "variable-rate mortgage" (abbreviation). 19. Restrictions on how the property in an area can be used. 20. A legal document that defines the conditions of a rental agreement. Across Down C O N V E N T I O N A L M O R T G A G E G R O W I N G E Q U I T Y M O R T G A G E G R A D U A T E D P A Y M E N T M O R T G A G E C O O P E R A T I V E H O U S I N G M A N U F A C T U R E D H O M E R E V E R S E M O R T G A G E B A L L O O N M O R T G A G E T I T L E I N S U R A N C E S E C O N D M O R T G A G E E S C R O W A C C O U N T E A R N E S T M O N E Y C L O S I N G C O S T S A M O R T I Z A T I O N R E F I N A N C I N G C O N D O M I N I U M Z O N I N G L A W S P A Y M E N T C A P A P P R A I S A L M O R T G A G E R A T E C A P B U Y D O W N P O I N T S L E A S E D E E D S A M A R M 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Instructor Manual for Personal Finance Jack R. Kapoor, Les R. Dlabay , Robert J. Hughes, Melissa M. Hart 9780077861643, 9781260013993
Download
Close
Close
