MoneyCounts:
A Financial Literacy Series
Mortgages
The Financial Process of Owning a Home
Dr. Daad Rizk
301 Outreach Building
University Park PA 16802
dar39@psu.edu
814-863-0214
Home Sweet Home !
MoneyCounts: A Financial Literacy Series
Learning Objectives
Ways to improve your chances of getting a mortgage - first
time home buyers
Create a budget (Housing < than 28%-30% of net income)
Types of rate-mortgages /fixed/variable
Components of a mortgage (PITI) & down payment, closing
cost
Amortization schedule and strategy to meet monthly
payments
Overall summary of the financial process of owning a home
MoneyCounts: A Financial Literacy Series
What is a Mortgage ?
A loan used to purchase a home
A debt instrument that is secured by the collateral of specified real estate
property and that the borrower is obliged to pay back with a predetermined set
of payments.
Mortgages are used by individuals and businesses to make large purchases of
real estate without paying the entire value of the purchase up front.
Mortgages are also known as "liens against property" or "claims on property."
MoneyCounts: A Financial Literacy Series
Ways to improve your chances of getting a mortgage
Prepare a budget (housing is between 25% -30% of net income)
Income
Saving
Housing
Utilities
Car Expense
Credit Cards
Student Loans
Food
Miscellaneous
100%
10%
30%
5%
10%
5%
10%
20%
10%
MoneyCounts: A Financial Literacy Series
Ways to improve your chances of getting a mortgage
Review your goals
Why do you want to buy?
Will you stay in one place for at least 5 years?
How secure/stable is your job?
MoneyCounts: A Financial Literacy Series
Ways to improve your chances of getting a mortgage
How much house can you afford?
Compare to current rent payment
Can you afford maintenance?
Your total mortgage should not exceed 2.5% your total yearly net income
Yearly net income is $60,000
Your mortgage should not exceed $150,000
MoneyCounts: A Financial Literacy Series
Ways to improve your chances of getting a mortgage
•
Improve your credit rating (FICO of 740 + will get you best interest rate)
•
•
Check your credit reports, correct any errors
Pay your balances in full and on time for at least 6-9 months before you
start the process of buying a home
Equifax, Experian and TransUnion
Annual Credit Report.com/
Call 877-322-8228
MoneyCounts: A Financial Literacy Series
Ways to improve your chances of getting a mortgage
Pay off debt, do NOT close accounts, you need the history of your credit
Save for down payment (20-25% down to be comfortable)
Get paperwork in order - employment, taxes, etc.,
Check with your Bank first
Pre-qualification and Pre-approval
MoneyCounts: A Financial Literacy Series
Key Terms
Mortgage
Down payment
Interest
Principal
Interest rate
Credit rating
Fixed interest rate
Equity
Amortization schedule
Foreclosure
Closing Cost
Pre-payment penalties
Escrow
Truth in Lending Act
Refinancing
Delinquent
Variable interest rate
MoneyCounts: A Financial Literacy Series
Components of a Mortgage
P = Principal
I = Interest
T = Taxes
I = Insurance
Private Mortgage Insurance (PMI if < 20%
down payment)
Tip: Some lendersMoneyCounts:
allow you to pay
your own property
and home
A Financial
Literacytaxes
Series
insurance premiums, but they could also raise your interest rate to
Fixed Rate?
•
A fixed-rate mortgage is a loan that charges a set rate of interest that does
not change throughout the life of the loan. It is the traditional loan used to
finance the purchase of a home and is what most people have in mind when
they think about a mortgage.
MoneyCounts: A Financial Literacy Series
Variable Rate?
A variable-rate mortgage, also commonly referred to as an adjustable-rate
mortgage or a floating-rate mortgage, is a loan in which the rate of interest is
subject to change. When such a change occurs, the monthly payment is
"adjusted" to reflect the new interest rate. Over long periods of time, interest
rates generally increase. An increase in interest rates will cause the monthly
payment on a variable-rate mortgage to move higher.
MoneyCounts: A Financial Literacy Series
Amortization Schedule
•
•
•
•
•
•
Loan amount: $165,000
Interest rate: 4.25%
Mortgage term: 30 years
Number of payments: 360
Monthly payment: $811.70
Total interest paid: $127,212.30
•
•
•
•
•
•
•
•
Date
Jul, 2013
Aug, 2013
Sep, 2013
Oct, 2013
Nov, 2013
Dec, 2013
Jan, 2014
Feb, 2014
Interest
$584.38
$583.57
$582.76
$581.95
$581.14
$580.32
$579.50
$578.68
Principal
$227.33
$228.13
$228.94
$229.75
$230.56
$231.38
$232.20
$233.02
Balance
$164,772.67
$164,544.54
$164,315.60
$164,085.85
$163,855.29
$163,623.91
$163,391.71
$163,158.69
MoneyCounts: A Financial Literacy Series
First-time Home Buyer - The Search Process!
Define search parameters
Internet search
In person search
Type of home and neighborhood
How long should it take to buy your first home?
How long do you want to spend searching?
How many homes are you willing to see?
How do you decide this is the home?
MoneyCounts: A Financial Literacy Series
First-time Home Buyer - The Search Process!
Take pictures, take notes, check the surroundings, rate each home on a scale
of 1 to 10 and pick top choices
Visit top choices again to re-evaluate with open eyes and mind
Research the real estate tax and required insurance
Do not allow real estate agents to pressure you
work with a real agent you trust and comfortable with or hire your own agent
Keep searching till you are satisfied with your top choice
Resist falling in love with the house!
Making the offer, negotiating the terms, price, closing cost
Sticking to your budget/price range
MoneyCounts: A Financial Literacy Series
First-time Home Buyer - The Search Process!
Tip: Make a list of what you are looking for including location, type of a home,
features, age, school district, neighborhood, real estate tax, insurance
requirements, etc., and adjust as needed...
Tip: Shop for a loan before you shop for a property! this will guide you to make
sound financial decisions.
MoneyCounts: A Financial Literacy Series
First-time Home Buyer - The Art of Negotiation!
Your offer is presented to the seller who could either accept it, reject it or
counter offer it....
Now it is your turn to do the same... Negotiation can be rough and time
sensitive, so stay calm, remain flexible within your budget, always do the
math...
Consider what you are willing to accept and what a deal breaker is to you
Make a list of terms (pros & cons)
keep your list handy and re-evaluate throughout the process
Once an offer is accepted, an agreement is reached, the contract is signed.
MoneyCounts: A Financial Literacy Series
First-time Home Buyer - Getting your "docs" in a row!
Application Fee ( cost of appraisal and credit report)
Sales contract signed by buyers and sellers
Social Security numbers of all applicants
Complete address for the past 2 years (Landlord info)
Employment information for past 2 years
W-2 for the last 2 years
Most recent year to date pay stub /current pay stub
Banking information, Saving accounts, checking accounts, for the last 3 months
Loans and LOC information
Family help and assistance (letter)
Tax information for the last 2 years
MoneyCounts: A Financial Literacy Series
Things you must do throughout the process
Carefully review the good faith estimate
Get a house inspection
Understand any restrictive covenants or association rules
Do a final walk before you take possession to make sure no damage happened after
closing date
Ask questions and do your own research for every step in the way
MoneyCounts: A Financial Literacy Series
Overview of the Cost
Down payment (20% of purchase price)
if not, expect .05% PMI
Closing cost (3%-5%)
if not, negotiate with seller
Inspection of the house (varies)
Insurance (varies)
Taxes (varies)
Application fee for loan
Moving expense into the new house
Set a budget, avoid using credit cards
Tip: conduct a garage sale before you move into your new home to clean
clutter and make extra money to help with the move
MoneyCounts: A Financial Literacy Series
Budgeting Tips
Increase your emergency fund saving by at least 5% to allow for
unexpected house maintenance cost (15% instead of recommended
10%)
Trim your spending budget to allow for the increase
Live in your home at least 6 month to a year before you start making
any major changes to your house
Do not acquire credit card debt to accommodate additional spending on
the new house
MoneyCounts: A Financial Literacy Series
Budgeting Tips
Instead of making a monthly mortgage payment, send 1/2 of your
mortgage payment every 2 weeks, you end up making 13 payments in
the year instead of 12 payments. you reduce the life of your loan by 5
years
Prepare different scenarios of payment to accommodate your long term
goal, use online mortgage calculators to help you decide the best
payment option for you and your family
Mortgage Calculator [Bankrate]
MoneyCounts: A Financial Literacy Series
Budgeting Tips
Tip: Pursue a 30 year mortgage, but make your own plans to pay it in
15 years (run your own amortization schedule)
This approach guarantees you a lower monthly payment just in case
life throws you a surprise.
This takes discipline and a commitment to meet the goal of owning your
home in less than 30 years.
MoneyCounts: A Financial Literacy Series
Worksheet
MoneyCounts: A Financial Literacy Series
MoneyCounts:
A Financial Literacy Series
Thank You!
Comments and Questions
Dr. Daad Rizk
MoneyCounts: A Financial Literacy Series
301 Outreach Building
University Park PA 16802
dar39@psu.edu
814-863-0214