Making Automobile and Housing Decisions: The Home Purchase Decision

1
Chapter 5
Making Automobile and Housing Decisions The Home
Purchase Decision
2
Advantages of Buying

• Build equity in your home
• Allows for capital appreciation
• Greater personal freedom
• Tax advantages
• Protection from rising rent costs
• Potential source of cash

3
Comparing Needs Versus Wants for Housing

• What features are most important?
• school systems
• space (square footage and/or land)
• proximity to shopping, schools, friends,
  relatives, job, health care
• safety
• cost
• style
• Be prepared for conflict with spouse

4
Selection Process for Housing

• Loan pre-approval
• The search process
• traditional real estate agent
• independent or exclusive buyer-broker
• The inspection process
• structural
• mechanical

5
Purchase Commitment

• Negotiate the price
• Comparables -- cheapest house in area
• Include all contingencies (termites, newly
  identified defects, etc.)
• Consider closing costs
• Offer earnest money

6
Signing the Contract

• Negotiate other factors
• Condition of home and/or what will stay with home
• Availability, walk-through, and closing dates
• Contingent on proper financing
• Divide the utilities, insurance, taxes, and
  interest equitably with the seller
• Number of days contract is good

7
Financing the Purchase

• Shop for the lowest interest rate
• Check the newspaper or Internet for local
  interest rates
• Check the Internet for national rates
• Determine the length of the mortgage
• Choose the type of mortgage

8
Sources of Mortgages

• Mortgage bankers
• Mortgage brokers (Is your mortgage banker located
  elsewhere?)
• Conventional and government-backed mortgages
• Veterans Administration (VA) mortgages
• Federal Housing Administration (FHA) mortgages
• Local bond money mortgages

9
Types of Mortgages

• Fixed-rate mortgage loans
• Assumable
• Prepayment penalty
• Adjustable-rate mortgage (ARM) loans
• Portable Mortgages (see ETrade)

10
Adjustable-Rate Mortgage (ARM) Loans

• Initial rate
• Interest rate index
• Margin above index
• Adjustment interval
• Rate cap
• Payment cap (negative amortization)

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Adjustable-Rate Versus Fixed-Rate Mortgages

• Fixed-rate advantages
• fixed payments
• lower interest rate risk
• no risk of negative amortization
• Adjustable-rate advantages
• lower initial interest rate
• may help you qualify for a larger loan due to
  lower monthly payments
• plan to move before rate adjusts

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New Types of ARMs

• Adjust monthly
• Fixed for 5 to 10 years then adjusts annually
• Interest only

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The wrong mortgage?

• WSJ reports that 30 of mortgages were ARMs big
  increase
• Risky
• Good if you plan to move in 2 to 5 years

June 2003
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Interest Only Mortgage

• Aggressive marketing
• Invest the difference in payment, pay down high
  interest debt, or buy a more expensive house

• Low, low rates 3.5 v. 5.5 ARM v. 6.6 fixed
• Pay interest only for the 1st 10 years of 25 year
  mortgage
• Risk of no equity!

15
Questions