Directions: As you listen to the presentation or do the reading (Student Resource 17.2) on “The Role of Housing in a Financial Plan,” use the following chart to take notes and organize your thoughts.
Key words: Reasons to buy a home: Reasons to rent:
Hidden costs to be aware of when buying a home:
People who help homebuyers: Things I knew already:
When you look for a place to live, you have the option of renting or buying or investing in a multiunit building, living in one unit, and renting out the others—in other words, you could become a landlord yourself. Buying and investing aren’t for everyone; they bring responsibilities with them, both financial and in terms of time and energy, especially if you become a landlord.
Still, many people want to own their own home, whether it’s an apartment, a condo or co-op, a townhouse, or a freestanding home. In the United States, 62% of households live in properties they own. Whether renting or owning, there are always benefits and drawbacks to consider.
Before you look for a rental, figure out what you can afford to pay for rent after all your other expenses are paid. You should also consider the following:
• Location: Is it near a bus line, a grocery store, laundromat, or work?
• Value: For the size and location you want, what is the usual range of rents asked?
• Safety: If you’ll be out late, will you feel safe coming home from the bus stop at night?
• Size: Can you live in a studio (one room and possibly a kitchen); do you want roommates? Will you share a bedroom?
• Condition of the property: When you look at a place, flush the toilets, run the faucets, and turn on the heat (then turn it off) to make sure things work. Is the paint peeling? Do the elevators work? Is there an onsite manager?
• Lease vs. month to month: Is a lease required? If so, how long are you willing to commit for? (Also, make sure all roommates sign it so you’re not stuck for their portion of the rent.)
Owning a home isn’t the right decision for everyone. While most people begin adulthood as renters, some chose to remain as renters for the long term. Sometimes renting is your only financial option. You may be saving to buy, or you simply don’t make enough money to purchase a home. Some of the reasons are:
• Having a very mobile lifestyle
• Not wanting the hassle of maintaining a home and yard
• Choosing to invest in other wealth-building assets instead of a home
Owning real estate is a way to invest your money. Like most other investments, it has risks. While home prices have historically gone up in the long term, there have been times when property has dropped in value. Also, natural disasters and economic slumps can depress the value of real estate.
In addition to being a long-term investment, building equity (the down payment plus the portion of the mortgage you’ve paid off) and value, home ownership provides some tax benefits—property taxes and mortgage interest (which is most of what you pay in the early years of a mortgage) are deductible expenses on your income tax return (until they, and other deductions, are more than the standard deduction). In other words, they can reduce the tax you pay.
Homes are the largest financial investment most of us will ever make. It takes planning and willpower to save the money for a down payment, and the process of buying a house can be complex and time consuming; it takes perseverance. Also think carefully about location, whether the property is really worth the asking price, and whether the schools will satisfy your goals for your children (or future children).
When you make an offer on a house, you are expected to have a certain amount of money in “cash” (that is, in liquid assets, such as savings) as a down payment to the seller when the transaction is completed (at closing). The ideal down payment is 10% or 20% of the purchase price; this will usually get you a better interest rate on your mortgage loan because you are seen as a good financial manager.
Closing costs cover fees to most of the people who help you find and buy the house (except the realtor), including fees to the lender, the purchase of title insurance (to make sure the previous owners didn’t have any hidden debts on the property), and homeowners insurance.
The online calculators at the US Housing and Urban Development website, http://www.hud.gov/buying/, can help you figure out what you can afford. One of the calculators shows you how much you would spend renting vs. buying over a specified number of years.
In order to obtain preapproval on a loan, you need to choose a lender. Like buying any high-priced item, you should comparison shop interest rates and terms first. This is something your realtor can help you with; you can also look on the Internet and check with your own bank or credit union. Pre-approval will keep you from wasting time looking at properties that are too expensive for your income level.
Even for those who don’t think they can qualify for a loan, or borrow enough to buy a house, there are special loan programs available from many sources. The US Department of Housing and Urban Development lists some special loan programs on its website; there are also FHA-guaranteed loans, backed by the Federal Housing Administration, which have lower interest rates. Your city or state may offer others, which your realtor can help you find. Check the conditions for getting these special loans.
Your FICO score is a credit rating score, calculated from such factors as your payment history, money you owe, length of credit history, and types of credit you have used. There’s more information at the FICO website, http://www.myfico.com/. The site will tell you what components of the score you can improve to raise your score.
Home ownership carries many costs that you don’t have as a renter, among them property taxes, insurance, repairs and maintenance, and homeowners association fees. If you live in a cold-winter climate, heating can be a hefty expense. The seller or the local utility company may be willing to tell you how big the heating bills have been for a property you are interested in.
One rule of thumb is that a homeowner should try to spend no more than 25% of monthly income on housing costs.
All this may seem intimidating, but there is a whole industry full of professionals waiting to help with each step of the process.
The realtor (or real estate agent) you choose will probably be the most important. He or she will see you through the entire process, including writing up the contract “contingent on inspection and securing financing,” meaning that the deal will go through only if you say you are satisfied with the inspection results AND you get a mortgage loan. The realtor also will be able to make recommendations for the other professionals you’ll need or help you find them. They include:
• Mortgage broker, who submits your financial information to several likely lenders to get you the best rate
• Title company, which researches the title to the property to make sure there are no hidden encumbrances—liens or money owed against the property
• Home inspector (In some states, the seller must disclose any known defects of the house—things that are wrong with it; however, a home inspector may turn up other problems as well. This also gives you the only out you have if you change your mind about buying.)
• Insurance broker, who finds insurance coverage for the property
In most markets, you can also look at home listings online. Realtors subscribe to the Multiple Listing Service, where most properties are listed, and can give you the link to do some prescreening from your home computer. This is also a good way to find out the price range of the kind of home you want.
For many people, their home is their largest investment and the one they depend on when they retire, either as a form of cash when they sell it, by borrowing on the equity of the home, or simply by being able to live in a home with very low expenses because the mortgage is paid off. Some tips to keep in mind:
• Begin planning early if you want to own your own home.
• A home is both a place to live and a major long-term investment.
• Take your time. It’s easy to start feeling desperate in a competitive market. Find a home that meets your goals and that you can afford comfortably.
• Work with professionals in the field. They can make the process work more smoothly.
Guide: Explaining the Financial Impact of Housing Decisions
Directions: Draw on the responses from your interviews, the presentation, the note-taking guide, and your own knowledge about housing to write between one and three paragraphs about one of the four topics listed below. The paragraph(s) should be written for someone new to housing finances.
Buying a home as a good financial strategy (example: a home is a wealth-building asset that usually grows in value in the long term)
Things to consider when buying a home (example: location is important)
Ways to prepare financially to buy a home (example: find out how much you can afford to pay in housing costs each month)
The financial pros and cons of renting a home (example: when renting a home, you usually don’t have to pay for repairs and maintenance)
Use this space to take notes about what you will include in your paragraph(s):
Topic choice:
Why it is important:
Examples I can share about this topic:
Data I know about this topic:
Make sure your paragraph(s) meet or exceed the following assessment criteria: The paragraph(s) are written in such a way that they can be easily understood by someone new to
finances in housing.
They clearly and thoroughly explain the topic and why it is important.
They include relevant, accurate data and examples.
The work is neat and legible, and uses proper spelling, grammar, and punctuation.
