home buying - quick review

Are you ready to BUY?

Decision to buyIs it time?slump in home marketJob securityFuture plans, MBA, moving to India

Is buying a home worth it?Owning will be less expensive than rentingRent that you pay will increase in future due to inflationCost of purchasing a home increases every year but once purchased, the housing cost is not exposed to inflation

Are you ready to BUY?Decision to buyPersonal Preference – Avoiding landlords, etc“Nailing” not allowedSlow in fixing problemsChoice of paint – home décorNOTE: In the process of decorating your house, do not make it unpleasant for majority of people. You will have to re-sell at some point of time and you would want majority of people to like your houseExerciseHome buyers –

List four points that you do not like about renting a houseCan those be improved by buying a home?

Home owners – List four points that you do not like about home owning?Is it worth it?

Exercise

How rent increases with inflation? See excel

Your Current Monthly Rent

Annual Inflation Rate

Projected Rent

Annual Inflation rate

$700.00 1.48 $1,036.17 in 10 years 4.00

$700.00 2.19 $1,533.79 in 20 years 4.00

$700.00 3.24 $2,270.38 in 30 years 4.00

$700.00 4.80 $3,360.71 in 40 years 4.00

$700.00 7.11 $4,974.68 in 50 years 4.00

$700.00 10.52 $7,363.74 in 60 years 4.00

Home Buying - TipsRenting because it seems cheaper nowIn the longer run, owning a house will turn out to be cheaper

Job SecurityBeing insecure about job is normalGive example

Buying when you expect to move soonGoing back to IndiaIdeally stay put for 3-5 years if you are planning to buy a house

Pushed by SalespersonBuy a home that you can afford and not what the salesperson thinks you can affordYou are the one who can determine what you can affordTake your time in buying the home. There is no rush

Home Buying - TipsDo not ignore the logistics – things to considerLocation, location, locationPersonal preference (time to travel to office, etc)Neighborhood

Over-buying/Under-buyingHouse Investment – Adult thing to do?Statistics says – Average growth of house from 1965 = 6 %Stocks = 10 – 11 %

Tax breaks – Home ownerGet property tax and interest on your mortgage deductedWhen you sell the house, you get to exclude up to $ 500,000 in capital gains if you are married and up to $ 250,000 if you are single

Home Buying – Best Advantage

Coming back to home after a long day of work,

PRICELESS !!!????

- You get to live and enjoy, while it grows.

Home Buying – Calculations

Loan Amount = $ 225 000

15 year Mortgage 30 year Mortgage

5.44% 5.68%

$ 1831.28 per month $ 1303.05 per month

$ 329630.4 total payment $ 469098 total payment

$ 104630.40 extra amount over 15 years

$ 244098 extra amount over 30 years

Calculations – That’s Not AllProperty Taxes

If you make a small down payment (less than 20 %), lenders insist upon paying the property tax and insurance with your monthly paymentsUsually about 1.5 % the purchase price of the house per yearMake sure community contributions are not included in your taxPrevious owner – check with Tax Collector in your city

InsuranceNeed to have before you purchase the homeIf down payment less than 20 %, required to take PMI (Private Mortgage Insurance)Make sure you bargain and get the best insurance possible (important step)

Maintenance and other costsEssential Maintenance Cost = 1 % of purchase price per year

Closing CostTypically about 2-5% of Loan Amount

Calculations – That’s Not AllLoan Amount $ 225000

Mortgage Payment $1,303.05

Property Tax (if applicable) ???

Insurance $281.25

Maintenance Cost $187.50

Total Monthly payments $1,771.80

Tax saving (31 % * yearly mortgage)

-$ 4847.36 p.aBased on Tax

Bracket

One Time Closing Cost $11,250 At max 5 %

Calculations – If you are interested

Monthly Payment = P * (r / 1 – (1/1+r)n)


Total Payment $225,000

Balance Amount Remaining Balance in Percent

Year 0 0 $225,000 100

Year 5 5 $208,527.07 92.6786978

Year 10 10 $186,658.54 82.9593511

Year 15 15 $157,627.13 70.0565022

Year 20 20 $119,086.68 52.9274133

Year 25 25 $67,922.57 30.1878089

Year 30 30 $0 0


0

0.2

0.4

0.6

0.8

1

1.2

0 5 10 15 20 25 30 35

Years

Re

ma

inin

g B

ala

nc

e

Series1


Years Interest Amount Principal Amount

0 0 0

5 11,958.48 3,678.13

10 10,753.74 4,882.87

15 9,154.38 6,482.22

20 7,031.18 8,605.43

25 6,529.46 9,107.15

30 470.65 15,165.96


Interest Amount / Principal Amount

0

2000

4000

6000

8000

10000

12000

14000

16000

0 5 10 15 20 25 30 35

Years

Am

ou

nt

Interest Amount

Principal Amount

Selecting a Mortgage

Fixed Rate MortgageAdjustable Rate Mortgage (ARM)Hybrid

5/1 ARM7/1 ARM

http://www.quoteserv.com/mortgage/mortgage_calculator.php

Selecting a MortgageHow much can you afford to pay each month for the next N number of years?How long are you going to be in the house?

Answer to Question 1 – 15-year Vs 30-year decision

Answer to Question 2 – Fixed VS Adjustable rate decision

Fixed Rate Mortgage Popular time period 30 year/15 year Locks you for same the rate of interest for the number of

years you chooseAdvantage/Disadvantage1) Pay premium, higher interest rate2) If interest rates fall, you will be still fixed at the same rate3) If you sell house before you pay-off your fixed rate mortgage,

buyers probably won’t be able to assume responsibility4) Fixed rate mortgages may have prepayment penalties (if you

try to pay the loan earlier than the 30 years, you will have penalties associated with it). Make sure you chose 30 year mortgage without pre-payment penalties

Adjustable Rate Mortgage (ARM)

Has an interest that varies. Typically adjusts every 6 to 12 months, but it may change as frequently as every month

Advantage/Disadvantage

1) Lower interest rate (may be???)

2) If interest rates fall, it is advantageous. But, if the interest rates increases, you will end up paying more than you intend to.

3) Very difficult to monitor or predict the interest rates

More popular - Hybrid

Start as fixed rate for some pre-planned period of time (say 5, 7, 9 years) and then loan converts to an ARM.

Advantage/Disadvantage

1) Interest rate between ARM and FRM. Higher the FRM period, more the interest rate.

2) If you are planning to move, this might be the option.

3) Make sure at the end of the FRM period you evaluate your finances

Loan Approval

Choose the mortgage option after evaluating your finances

Credit score report Loan points?? Lender fees

Application Processing Fee Appraisal

Avoid ARM with negative amortization You pay some interest but not all of the interest that

you owe Like paying minimum balance in Credit card

Last and least important for us – Balloon loans

Fixed Rate for certain period of time and works similar to Hybrid

HOWEVER, at the end of the period, the whole balance amount is to be paid.

If you are not able to refinance at the end of the period, you are DEAD.

Refinancing is never a sure thing

Other Mortgage options -

Interest-Only loan You pay the interest only Good for people who get regular commission

instead of flat salary Buy-down Mortgage

Please research

Mortgage Refinance

Borrower uses the money from a refinanced loan to pay off an existing home loan

3 types Extend their home loan periods Apply for a lower interest rate Use some money of their equity

Home Equity loans Allows a home owner to receive a cash loan based

on the current value of their property minus the amount of the loan still left to be paid

Escrow – What does it mean?

Documents or something else of value, often money, held by a neutral party in order to be used at a later date to fulfill obligations (settle any arbitration)

Escrow officer Referee between seller and buyer Responsibility

Preparing and reviewing papers related to transfer of title Getting them properly signed, delivered and made a matter of

public record Complying to your lender’s funding instruction Ordering a title search Accounting to buyer and seller for your respective money

While closing in on a deal, be in close touch with the Escrow officer

home buying - quick review

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