Chap. 7 Business

common advantage with home ownership

financial benefits

most real estate professionals believe that the most important factor in selecting a home

location

major factor that affects a person's qualification for a mortgage is

applicant's credit rating

most lending institutions believe that a person can afford a monthly payment of about ___ percent of gross income less any long term debts

35%

a _____ mortgage allows a person to borrow on the paid-up value of a home

second

person's employment and household situation influences the selecting of housing bc

a person who works at home would require home facilities different from a single person or a household with kids

common opportunity costs associated with the selection on housing

opportunity costs include lost interest on a down payment or security deposit and travel time to work when living in the country

main benefits and drawbacks of renting a place of residence

advantages of renting are mobility, fewer responsibilities, lower initial costs. disadvantages are few financial benefits, restricted lifestyle, and legal concerns

which components of a lease are likely to be most negotiable

rent, amount of security deposit, starting date of lease, decorating

advantages of owning a home

pride of ownership, financial benefits, lifestyle flexibility

disadvantages of owning a home

financial uncertainty, limited mobility, hight living costs

what guidelines could be used to determine the amount that individuals should spend for a home purchase

person should make payments on the purchase of a home that involve about 25 to 30% of his or her income

seller's market

occurs when demand for homes is high with few available for sale

buyer's market

when many homes are available for sale with relatively low demand

main sources of money for down payment

personal savings, pension plan funds, investments, assistance from relatives

factors that affect a person's ability to qualify for a mortgage

income, other debts, amounts available for a down payment, the length of the loan, current mortgage rates

how do changing interest rates affect the amount of mortgage a person can afford

as interest rates decline, home buyers can afford to take a larger mortgage

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

under what conditions night an adjustable mortgage be appropriate

when interest rates are relatively high and they are expected to decline

when might refinancing a mortgage be advisable

when interest rates decline and a homeowner plans to stay in the same house for long enough for the savings from lower mortgage payments to recover the most of refinancing

closing costs can

add several thousand dollars to the expense of buying a home

closing costs

funds that the homebuyer must have available to complete he real estate transaction

actions recommended when selling your home

make repairs, new paint, clear storage, remove unnecessary items

factors that affect the selling price of home

location, size, condition, features, current market demand

what should you consider when deciding whether to sell your home on your own or use a real estate agent

on your own you will need to price, advertise, and show the house or a real estate agent can do so

renting is less

costly in the shortrun

buying has more

financial advantages

about ____% of US households live in rental units

35%

tenants

pay for the rights to live in a residence owned by someone else

apartment is the most

common type of rental housing

advantages of renting

-mobility
-fewer responsibilities
-lower initial costs

disadvantages of renting

-few financial benefits
-restricted lifestyle
-legal details

the legal details of renting

-tenants sign a lease: legal document that defines the conditions of a rental agreement
some leases give tight to sublet: allows another person to take over rent payments and live in the rental unit

oral lease

one party must give a 30 day written notice to the other party before terminating the leaser or imposing a rent increase

cost of renting: security deposit

usually required to sign a lease; money held by the landlord to cover the costs of any damage done to the rental unit during the lease period (usually one month's rent)
-if $ is deducted from security deposit you have right to itemized list of costs to re

benefits of home ownership

-pride of ownership
-financial benefits
-lifestyle flexibility

financial benefits

-deductibility of mortgage interest and real estate tax payments for federal income taxes
-equity: the home value minus the amount owned on the mortgage (homeowners must be able to borrow against the equity of their homes)

drawbacks on home ownership

-financial uncertainty (obtaining money for downpayment)
-limited mobility (high interest rates can result in weak demand for housing)
-higher living costs

real estate taxes are a major

expense of homeownership
-higher property values/ high taxes = higher real estate taxes

single family dwelling

-most popular form of housing
-include perviously owned houses, new homes, custom-built houses

multiunit dwellings

one or more living unit; includes duplexes/ townhouses

duplex

building that contains two separate homes

townhouse

contains two, four, six single family living units

condominiums

individually owned housing units in a building with several units

cooperative housing

form of housing in which the units in a building are owned by a nonprofit organization
-shareholders purchase stock to obtain the right to live in the building
-residents dont oen the units, but have legal rights to occupy unit for as long as the own stuc

manufactured homes

housing units fully or partially assembled in a factory then moved in the living site

price and down payment is affected by

income and current living expenses

zoning laws

restrictions on how the property in an area can be used

appraisal

mortgage company will determine the fair market value of the property

to price the property

look at
-recent selling prices in the area
-current demand for housing
-purchase agreement: document constitues your legal offer to purchase the home

counter offer

from owner indicates a willingness to negotiating a price settlement

seller's market

in times of high demand for housing, negotiating may be minimized

buyer's market

exists when home sales are low and lower prices are likely

earnest money

a portion of the purchase price deposited as evidence of good faith to show that the purchase offer is serious
-at closing the earnest money is applied toward the down payment

contingency clause

contract condition states that the agreement is binding only if certain events occur (in home purchase agreements)

greater than 20% (a large downpayment) will make it

easier to obtain a mortgage

private mortgage insurance is usually required if down payment is

less than 20%

mortgage

long term loan on a specific piece of property

home you buy serves as

collateral for the mortgage

factors that affect the affordability of your mortgage

-income
-debts
-amount available for down payment
-length of loan
-current mortgage rates

points

prepaid interest charged by the lender
-each discount point is = to 1% of the loan amount and should be viewed as a premium you pay for obtaining a lower mortgage rate

if you plan to live in you house a long time paying the points and taking the lower mortgage is

the best thing to do

conventional mortgages

a fixed rate, fixed payment home loan with equal payments over 15, 20, or 30 years
-offers homeowners certainty about future loan payments

mortgage rates are set at a level that allows

amortization of the loan

amortization

the balance owned is reduced with each payment

balloon mortgages

a home loan with fixes monthly payments and large final payments, usually after three, five, or seven years
-designed for people who want to but a home during periods of high- interest rates but expect to be able to refinance the loan or sell the home bef

adjustable-rate mortgage (ARM)

(flexible rate mortgage or variable- rate mortgage) a home loan with an interest rate that can change during the mortgage term due to changes in market interest rates
-usually have lower initial interest rates than fixed-rate mortgages but the borrower, n

rate cap

restricts the amount the interest rate can increase or decrease during the ARM term
-prevents the borrower from having to pay an interest rate significantly higher then they owe in the original amount

payment cap

keeps the payment on an adjustable0 rate mortgage at a given level or limits the amount to which those payments can rise (a limit on the payment increases for an adjustable-rate mortgage)

negative amortization

the amount of the home equity is decreasing instead of increasing

growing equity mortgage

a home loan agreement that provides for payment increases to allow the amount owed to be paid off more quickly

buy down

an interest rate subsidy from a home builder, real estate developer, or by the buyer that reduces a home buyer's mortgage payments during the first few years of the loan

second mortgage

(home equity loan) a cash advance based on the paid-up value of a home
-allows homeowner to borrow on the paid-up value of the property

reverse mortgages

a loan based on the equity in a home, that provides elderly homeowners with tac-free income and is paid back with interest when the home is sold or homeowner dies
-must be 62 to qualify
-has a set term at the end of which the loan would be due

reverse mortgage annuity

guarantees the homeowner a monthly income for life

refinancing

obtain a new mortgage at a lower rate
(when you can get at least 1% lower rate than your current rate)

closing costs

(settlement costs) fees and charges paid when a real estate transaction is complete
-can range from 2% to 6% of loan amount

title insurance

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

deed

a document that transfers ownership of property from one party to another

warranty deed

the seller guarantees the title is good

escrow account

money, usually, deposited with the lending institution, for the payment of property taxes and homeowner's insurance

implied warranties

created by state laws may create some problem areas for repair costs

appraisal

an estimate of the current value of the property

sale by owner

over 10% of home sales are made by the home's owner