Making Automobile and Housing Decisions: The Home Purchase Decision - PowerPoint PPT Presentation

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Making Automobile and Housing Decisions: The Home Purchase Decision

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lower interest rate risk. no risk of negative ... lower initial interest rate. may help you qualify for a larger loan due to lower monthly payments ... – PowerPoint PPT presentation

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Title: 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)

11
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

12
New Types of ARMs
  • Adjust monthly
  • Fixed for 5 to 10 years then adjusts annually
  • Interest only

13
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
14
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
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