Garman/Forgue
Personal Finance
Ninth Edition
Chapter 9:
Buying Your Home
PPT slide program prepared by
Amy Forgue and Ray Forgue.
Learning Objectives
1. Decide whether rented or owned
housing is better both financially and
personally.
2. Explain the up-front and monthly
costs of buying a home.
3. Describe the steps in the homebuying process.
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9-2
Learning Objectives
4. Distinguish among the conventional
and alternative ways of financing a
home and list the advantages and
disadvantages of each.
5. Identify the important aspects of
selling a home.
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Introduction
• Mortgage Loan: Loan to purchase real
estate in which the property itself serves
as collateral.
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Rented Housing
• Rent, deposit, and related expenses
– Rent: Cost charged for using an apartment
or other housing space.
– Security Deposit: Ensures that you do not
move without paying your rent.
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9-5
Rented Housing
• Lease agreement and restrictions
– Lease: Contract specifying both tenant and
landlord legal responsibilities.
– Periodic Tenancy: Lease agreement can
be terminated by either party if they give
proper notice in advance.
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Rented Housing
• Lease agreement and restrictions
– Tenancy for a Specific Time
– Subleasing
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Owned Housing
• Single-Family Dwelling: Housing unit
that is detached from other units.
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Owned Housing
• Condominiums and cooperatives
– Condominium (or Condo)
– Homeowner’s Association
– Homeowner’s fee
• Manufactured housing and mobile
homes
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9-9
Renting vs. Buying
• Who pays more: Renters or Owners?
• What does it cost to buy a home?
• Consider the tax consequences of
buying your home.
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Up-Front Costs
• Most up-front costs are due at the
closing.
– Closing costs
• Down Payment: Portion of the
purchase price that is not borrowed.
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Up-Front Costs
• Point (or Interest Point): Fee equal to 1
percent of the total mortgage loan amount.
• Attorney fees
• Title search and insurance
• Miscellaneous fees: Home inspection,
appraisal fee, etc.
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Monthly Costs
• Monthly costs include both principal and
interest.
• Mortgage principal and interest.
– PITI
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Monthly Costs
• Loan-to-Value (or LTV) Ratio
• Mortgage Insurance
– Private mortgage insurance (or PMI)
– Federal Housing Administration (FHA)
• Department of Veterans Affairs (VA)
• Home warranty insurance
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Misc. Fees
• Some fees are paid both up-front and
then monthly
– Taxes (T) and Insurance (I)
– Escrow account
• Real estate property taxes
• Homeowner’s insurance
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The Steps of Home Buying
• Get your finances in order.
• Prequalify for a mortgage.
– Front-end ratio
– Back-end ratio
– Mortgage broker: Individual or company
that acts as an intermediary between
borrowers and lenders.
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The Steps of Home Buying
• Search for a home online and in person.
• Agree to terms with the seller.
• Make an offer to buy.
– Purchase offer (or offer to purchase):
Written offer to purchase real estate.
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The Steps of Home Buying
• Respond to a counteroffer.
• Negotiate and sign a purchase
contract (or sales contract).
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The Steps of Home Buying
• Apply for a mortgage loan.
– Good-faith estimate
– Mortgage lock-in
– Loan commitment (or loan preapproval)
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The Steps of Home Buying
• Prepare for the closing.
• Hire your own inspector.
• Hire an attorney.
• Sign your name on closing day.
– Uniform Settlement Statement: Lists all of the
costs and fees to be paid at the closing.
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Financing a Home
• Items to consider:
– The mathematics of mortgage loans
• Lien
• Foreclosure
• Principal
– Amortization schedule
• The amount borrowed
• The interest rate
• Length and maturity of the loan
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Financing a Home
• The conventional mortgage loan
• The adjustable-rate mortgage loan
– Teaser Rate
– Payment Caps
– Negative Amortization
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Financing a Home
• Alternative mortgage loans
– Interest-only mortgage
– Graduated-payment mortgage
– Lender buy-down mortgage
– Rollover (renegotiable-rate) mortgage
– Growing-equity mortgage
– Assumable mortgage
– Land contract (contract for deed)
– Reverse mortgage (or home-equity
conversion loan)
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Selling a Home
• Should you list with a broker or sell a
home yourself?
– Fizbo: For sale by owner (FSBO)
• Selling carries its own costs
– Brokers Commission
– Prepayment Fee
• Be wary of seller financing!
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The Top 3 Financial Missteps When
Buying Housing
People slip up in when they do the
following:
1. Fail to search for and negotiate for the
lowest mortgage interest rate possible.
2. Fail to request that private mortgage
insurance be canceled when their
loan-to-value ratio drops to 80 percent.
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The Top 3 Financial Missteps When
Buying Housing
People slip up in when they do the
following:
3. Pay off a mortgage early when
carrying credit card debt or not saving
regularly through a qualified taxsheltered retirement plan.
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Good Money Habits in Buying Your
Home
•
Read your leases and all other real
estate contracts before signing.
•
Save the funds for a down payment in
a tax-sheltered Roth IRA account.
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Good Money Habits in Buying Your
Home
• Get your finances in order before
shopping for a new home by reducing
debt, budgeting better, and clearing up
anything that keeps you from having a
high credit score.
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Good Money Habits in Buying Your
Home
•
Buy a home as soon as it fits your
budget and lifestyle so you can take
advantage of special income tax
deductions and the likelihood of
substantial price appreciation over
time.
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Good Money Habits in Buying Your
Home
• Thoroughly explore mortgage loan
sources and options to determine which
one best fits your needs.
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Good Money Habits in Buying Your
Home
•
If you make a down payment of less
than 20 percent on a home, cancel
private mortgage insurance as soon
as the equity in your home pushes the
loan-to-value ratio to 80 percent.
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