THE FIRST STEPS TO HOME OWNERSHIPUNIT 6, LESSON 1

ORCUTT ACADEMY HIGH SCHOOL

FINANCE & ACCOUNTING

Renting vs. Owning

Are You Ready to Buy?

How Much Can You Borrow?

The Down Payment & Closing Costs

PREVIEW

RENTING VS. OWNING

ADVANTAGES OF RENTING• Possibly lower cost

• If you can save 10% or more of your earnings, you are on your way to meeting your financial goals.

• No maintenance costs

• Flexibility

• Financial freedom: spend without obligation• Psychological freedom: move more easily

• Liquidity

• Wealth not tied up in home

COSTS OF RENTING• Monthly rent is subject to inflation

• Consider your costs in the long-term

Cost of owning versus renting over 30 years

Year Ownership cost per month

Rental cost per month

1 $920 $800

5 $980 $940

10 $1,080 $1,140

20 $1,360 $1,690

30 $1,800 $2,500

Comparing the costs of owning a home that costs $160,000 to renting that same home for $800/month.

COSTS OF RENTING• Owning becomes less expensive in the long run

• As a homeowner, you build equity

ARE YOU READY TO BUY

ASSESSING YOUR TIMELINEWait to buy a home until you plan on being there for at least 3 years (preferably five or more)

PROPERTY MUST APPRECIATE 15% TO COVER EXPENSES

This will take at least 3 years

BEFORE BUYING, ASK YOURSELF…Are you saving enough money monthly to reach your retirement goals?

BEFORE BUYING, ASK YOURSELF…How much do you spend (and want to continue spending) on fun things such as travel and entertainment?

BEFORE BUYING, ASK YOURSELF…How willing are you to budget your expenses in order to meet your monthly mortgage payments and other housing expenses?

BEFORE BUYING, ASK YOURSELF…How much of your children’s expected college educational expenses do you want to be able to pay for?

HOW MUCH CAN YOU BORROW

THE EFFECT OF DEBTExisting debt will lower the amount you are eligible to borrow.

Monthly Debt Payments + Housing Expenses < 38% of monthly gross income

CALCULATING HOW MUCH LENDERS WILL ALLOW YOU TO BORROWGeneral Rule: You can borrow up to three times (or two and a half times) your annual income when buying a home.

BUT… HOW MUCH YOU CAN BORROW DEPENDS ON INTEREST RATESSet by the secondary market

EXPENSES• Mortgage costs• Inspection expenses• Moving costs• Commissions• Title insurance

WHAT’S THE APPROXIMATE MAXIMUM YOU CAN BORROW?

When mortgage rates are Multiply your gross income by this figure

4% 4.6

5% 4.2

6% 3.8

7% 3.5

8% 3.2

9% 2.9

10% 2.7

11% 2.5

MULTIPLIER

The number you multiply by your gross income to determine how much money you can borrow for a home mortgage; determined by interest rates.

OR

The number you multiply by your mortgage expressed in thousands of dollars (divided by 1000) to determine your monthly mortgage payment

As rates fall, the monthly mortgage payment drops

Lower interest rates make buying real estate more affordable

CALCULATE

What is the maximum amount you can borrow?

1. Annual income $45,870

a) Interest rate 5%

b) Interest rate 11%

2. Annual income $68,900

a) Interest rate 4%

b) Interest rate 8%

3. Annual income $159,650

a) Interest rate 9%

b) Interest rate 6%

DOWN PAYMENT & CLOSING COSTS

THE DOWN PAYMENT

If you put down 20% of the purchase price of the home

• Most favorable terms, including interest rate and closing costs

• Don’t have to pay mortgage insurance

For a $100,000 home, the down payment would be $20,000

• (100,000)(.2) = $20,000

PMI: PRIVATE MORTGAGE INSURANCE• If you put less than 20% down

• Protects lenders if you default on your loan

• Several hundred $ per year

• Varies depending on the percent of the purchase price you put down

• The higher the down payment, the lower the PMI

• Visit http://www.goodmortgage.com/Calculators/PMI.html

PURCHASE PRICE

Purchase Price = Mortgage Loan + Down Payment

CLOSING COSTS• In addition to a down payment, you must have cash saved

for closing costs

• Includes escrow fees, inspection fees, title insurance, and other miscellaneous fees

• On average from 2-3 percent of the price of the home

• Could be anywhere from 1-8% of the price of the home

• Your lender will give you a “Good Faith Estimate”

HELP WITH CLOSING COSTS• You can request

• Your seller pay part of the closing costs• Your lender add part of the closing costs to your mortgage

loan• Interest rate will go up about .25%

1. How can you determine if you are ready to buy a home?

2. How do lenders decide how much money you can borrow to purchase a home?

3. What factors should you consider when determining how much money to save to buy a home?

ESSENTIAL QUESTIONS

WHAT ARE YOU LEARNING? WHY ARE YOU LEARNING IT? HOW WILL YOU USE IT?