the cost of owning

THE COST OF OWNINGUNIT 5, LESSON 1ORCUTT ACADEMY HIGH SCHOOLFINANCE & ACCOUNTING

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

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

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?

CALCULATING HOW MUCH LENDERS WILL ALLOW YOU TO BORROWExisting 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

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

MULTIPLIERThe number you multiply by your gross income to determine how much money you can borrow for a home mortgage; determined by interest rates.ORThe 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 dropsLower interest rates make buying real estate more affordable

CALCULATEWhat is the maximum amount you can borrow?1. Annual income $45,870

a) Interest rate 5%b) Interest rate 11%

2. Annual income $68,900a) Interest rate 4%b) Interest rate 8%

3. Annual income $159,650a) Interest rate 9%b) Interest rate 6%

TOTAL HOUSING COSTS

MORTGAGE, TAXES, INSURANCE AND MAINTENANCE

CALCULATE MORTGAGE USING MULTIPLIER

Interest Rate 15-year mortgageMultipliers

30-year mortgage

4% 7.4 4.774.5% 7.65 5.075% 7.91 5.375.5% 8.17 5.686% 8.44 6.006.5% 8.71 6.327% 8.99 6.658% 9.56 7.349% 10.14 8.0510% 10.75 8.78

Multiply the multiplier by your mortgage expressed in thousands of dollars (divided by 1000)

EXAMPLESkye is taking out a $100,000 30-year mortgage at 6.5%. What will be her monthly mortgage payment?The multiplier is 6.32, so Monthly mortgage payment = 6.32 x 100,000/1,000

= 6.32 x 100= $632

CALCULATE MORTGAGE USING FORMULAM = P [ i(1 + i)n ] / [ (1 + i)n - 1] M = The monthly payment P = The principal, or the amount of money being borrowed i = The interest for each compounding period, or the interest per month for a standard mortgage n = The number of compounding periods, or the number of months for a standard mortgage

EXAMPLEGo to Mortgage Math Workbook

TOTAL HOUSING COSTS

1. Mortgage Payment 2. Taxes

• The Cost and the Benefit3. Insurance4. Maintenance

TAXES: THE COST• Homeowners pay property tax, which helps support local

governments.• Property taxes vary according to the rate set by the

county. Ex: Santa Barbara County• Usually about 1-2%• Based on the value of your home

CALCULATING TAX COSTSThe value of a home in Greenwood County is $285,000. Property taxes in Greenwood are 1.25%. What is the monthly property tax bill for the home?Annual property tax bill: (285,000)(.0125) = $3562.50Monthly property tax bill: (3562.50)/12 = $296.88

TAXES: THE BENEFIT• Interest paid on mortgages is tax deductible• You can deduct

• Interest paid to buy, build, or improve your home• Interest paid on a home equity loan• Property taxes

• You can deduct a second home • Learn more about Tax Deductions on Mortgage Interest

CALCULATING THE TAX BENEFIT OF OWNINGTAX BENEFIT =(Mortgage Payment + Property Taxes) (Tax Bracket)

EXAMPLETyler’s gross annual income is $83,000. His mortgage payment is $1,200/month and he pays $260/month in property taxes. What is his tax benefit from owning.(1200+260)(.25) = $365

Tax Brackets 2012 (Estimated) Single (Est) Married Filing Jointly (Est) Head of Household 10% Bracket $0 – $8,700 $0 – $17,400 $0 – $12,400 15% Bracket $8,700 – $35,350 $17,400 – $70,700 $12,400 – $47,350 25% Bracket $35,350 – $85,650 $70,700 – $142,700 $47,350 – $122,300 28% Bracket $85,650 – $178,650 $142,700 – $217,450 $122,300 – $198,050 33% Bracket $178,650 – $388,350 $217,450 – $388,350 $198,050 – $388,350 35% Bracket $388,350+ $388,350+ $388,350+

MAINTENANCEAbout %1 of the home’s value on averageExample:A home with a value of $475,000Annual maintenance = (475,000)(.01) = $4,750Monthly maintenance = 4,750/12 = $395.83

HOMEOWNER’S INSURANCE• On average, between $45 and $75/month• Varies depending on

• home’s value and location • type and amount of insurance

TOTAL HOUSING COSTPUTTING THE PIECES TOGETHER!Total Housing Cost =(Mortgage Payment + Property Taxes + Insurance + Maintenance) – (Tax Benefit)

EXAMPLE 1Taylor is an actor living in Los Angeles, California where the property tax is 1.25%. Her gross annual income is $71,500 and the value of her property is $367,000. Her monthly mortgage payment is $1,200 and she pays $40/month for insurance. Estimate her total housing costs.Total Housing Cost =(Mortgage Payment + Property Taxes + Insurance + Maintenance) – (Tax Benefit)

Mortgage Payment = $1,200Property Taxes = (367,000)(.0125)/12 = $382.29Insurance = $40Maintenance = (367,000)(.01)/12 = $305.83Tax Benefit = (Mortgage Payment + Property Taxes)(Tax Bracket)

(1200 + 382.29)(.25) = 395. 57Total Cost = 1200 + 382.29 + 40 + 305.83 - 395.57 = $1532.55