Ch 9 The Housing Decision: Factors & Finances
4/6/26 11:50 AM
Housing Alternatives
Your Choice of Housing
- Opportunity Costs of Housing Choices, what are the trade offs:
○ Lost interest earned from the down payment of a home or the security deposit of an
apartment
○ Time & cost of commuting to work when living in an area w/ less expensive house
and/or living space
○ Loss of buying a home-tax advantages & equity growth when you rent
Different Housing Life Situations
- Young Single Person
○ Rental housing has limited maintenance & offers mobility
- Young Couple no kids
○ Rental housing offers convenience & flexibility of lifestyle
○ Purchase housing for financial benefits & long term security
- Couple w/ young kids
○ Rental housing can provide facilities for kids in a family orientated area
○ Purchase a home that meets financial & family needs
- Single Parent
○ Rental housing suitable for kids & a degree of home security
○ Low maintence to meet both family & financial needs
- Couple, kids no longer home
○ Rental housing is convenient, flexible for changing as needs change & financial
situation
○ Purchase housing that requires minimal maintenance & meets lifestyle needs
○ Retired Person
§ Rental meets financial, social & physical needs
§ Requires minimal maintenance, is convenient & has personal services
Renting vs Buying Housing
- People who are financially able to buy a home may also choose to rent instead choosing to
save and invest to buy a home in the future
○ Renting is less costly in the long run but, home ownership has financial advantages in
the long run
Renting Your Residence
- Selecting a rental unit
○ Apartments are the most common forms of rentals, others can include a condo or a
home
Advantages of Renting
- Mobility
○ Renting offers a location change as needed
§ A new job, rent increase, the need for more space, or to live in a diff community
- Fewer responsibilities
○ Less financial, maintence & repair responsibilities compared to home owners
- Lower Initial costs
○ A security deposit is usually thousands of dollars cheaper than a down payment
Disadvantage of Renting
- Can’t make tax deductions for mortgages interest & increased property value
- Must pay the rent every time it increases
- Restricted lifestyle
○ Noise complaints and/or set quiet hours
○ Restrictions can be placed regarding pets, decorations, entertainment systems etc
- Legal Details
○ When you sign the apartment lease you are agreeing to a rental agreement that may
include:
§ A description of the unit & address
§ Name & address of owner/landlord (The lessor)
§ Name of tenant (lessee)
§ Effective date of lease & length
§ Amount of security & pet deposit
§ Rent amount & due date
§ Where payment will be sent
§ Late fee repayment
§ A list of utilities, appliances, furniture & facilities included
§ Restrictions (No pets, remodeling etc) & subletting
□ Subletting - Allows you to have another person take over rent & live in the
unit
§ Charges for damages done, moving out later/earlier than agreed to
§ Agreements of when/how the landlord may enter the property/apartment
○ A lease for renting should be in writing, it protects both you & the landlord
Cost of Renting
- A security deposit
○ Money held by the landlord to cover the costs of any damages done to the rental unit
during the lease
- Having first & last months rent ready before you move in
- In some cases if you need to leave because of eviction/moving you must do so in 30 days &
your safety deposit will be returned
○ Most states require that your safety deposit be returned in 30 days
- Living expenses that will also incur while renting
○ Utilities, heat, water (in some cases), WiFi
The Home Buying Process
Step 1: Determine Home Ownership needs
- Evaluate owning your place of residence
- Asses types of housing units
- Calculate what you can afford
- Know the Pro’s & Cons
- What are the benefits of ownership?
○ Financial benefits & flexibility
- What are the possible drawbacks?
○ Financial uncertainty
§ Qualifying for a mortgage, financing & investments
○ Limited Mobility
§ Unlike renting this cant be done in a spam on of months
○ Higher Living Costs
§ Owning can be expensive, you are solely responsible for maintenance, repairs &
improvements
- Assess the type of Housing
1. Singe family home
○ AKA detached housing and the most common type of home
2. Multi unit
○ Duplex
§ A duplex is a building that contain two units owned by separate parties
○ Town Houses
§ Homes that have single family unit setup but are owned by separate parties
○ Planned Unit Developments
§ Communities w/ various types of housing, other use of the land, recreational
space, for some commercial use, shopping and/or parks
3. Condominiums
○ Individually owned housing units w/ several units in the building, have a monthly fee
for maintenance, repairs, maintaining the building & common areas
4. Cooperative Housing
○ When units in a building are owned by a nonprofit organization, shareholders pay for
the space, occupants do not own but have the legal right to stay as long as they have
stock in the non profit
- Housing Construction
○ AKA Factory-Built housing that are living units that are either fully or partially
assembled in a factory and then moved to a living site
- Building a home
○ Before beginning your project be sure to have the necessary knowledge & funding.
Before choosing a contractor find out:
§ Does the contractor have the experience for the project?
§ Do they have a good working relationship w/ architects, contractors & others in
their field?
§ What assurance do you have about the quality of their materials?
§ What arrangements were made for payment before construction?
§ What delays will be considered legitimate?
§ Does your contractor have his licensing & insurance?
§ Do they offer contact info such as names, address, phone numbers & email?
- Determine how much you can afford
○ Price & down payment
§ What you can afford based on your income & current living expenses?
§ Other factors to keep in mind are:
□ Current mortgage rates
□ Potential future property value
□ Your ability to make the monthly payments
□ Tax & insurance
○ Size & Quality
§ You might not get the size you want immediately but that will come w/ time
§ You want a home in good condition
□ If it needs work it might lower the property value if not looked at
Step 2: Find & evaluate a property to purchase
- Select a location
○ 3 to keep in mind - rural, urban & suburban
○ Zoning Laws
§ Restrictions on how a property can be used
□ Will this area be used for business, residential or commercial use
- Consider using a real estate agent
○ There main services include:
1. Showing you homes in your area based on a pre-approved mortgage
2. Presenting an offer based on current market analysis
3. Negotiating a purchase price
4. Assisting you in obtaining financing
5. Representing you at the closing of the purchase
- Be sure you have already been pre approved for a loan
- Conduct a home/pest/rodent test
Step 3: Price the Property
- Determine an appropriate market price
○ Factors to consider
1. Recent selling prices
2. Current housing demand
3. How long the house has been on the market
4. The owners need to sell
5. Financing options
6. Features & conditions of the home
- Negotiate an agreement price
○ A purchase of agreement
§ A legal document offering the home in the form of a sale, your first offer to
purchase will not always be accepted
○ A Counter Offer
§ When the seller indicates willingness to negotiate price
○ A Sellers Market
§ When a home owner who is selling has several offers for the property
○ A Buyers Market
§ When sales are low and so is the price of the property
○ Earnest Money
§ A portion of the purchase is deposited as good faith to show the purchase offer is
serious
○ A Contingency Clause
§ A contract that states the agreement is binding only if certain actions occur
Step 4: Obtain Financing
- Determine the amount of down payment
○ 20% of the down payment is required & later makes it easier to acquire a mortgage
○ Private Mortgage Insurance (PMI) is required if the down payment is less than 20%
- Qualifying & Applying for a mortgage
○ A mortgage is a long term loan on a specific piece property or estate
○ Payments on a mortgage are usually made over the course of 10-30 years
§ Mortgage Brokers - Help home buyers obtain financing
- Applying for a Mortgage
1. Pre-qualifications
• The application, proof of employment, proof of income, assets ownership &
existing debt amounts
2. The lender must obtain a credit report & verify the borrowers financial status, a max
amount is requested, pending approval you will be given a loan estimate
• The form can be found at www.consumerfinance.gov & is required by the
Consumer Financial Protection Bureau
3. Lenders will likely charge a fee that can be as high as $500, this is pledged to purchase
a home which leads to a legally binding contract
• The borrower can decide if they want to stay at this set interest rate for 30-90
days or meet an expected deadline
• If rates are expected to decline the borrower may float & lock in the rate at a later
date
*Float - To leave the transaction pending
- (ATR) Ability to Repay & (QM) Qualified Mortgage
○ This rule requires lenders to carefully consider a borrowers financials
• ATR expects a borrowers repayment abilities based on their DTI, liabilities & credit
history
- Based on your personal financing there are 3 things to keep in mind
○ The monthly mortgage payment you can afford
○ The mortgage amount you can afford
○ The home purchase within you price range
- How to calculate your DTI when purchasing a home
1. Your income ➗ 12 months (i.e 48,000 ➗ 12 = 4,000)
2. A down payment of 5% but lenders recommend 38% for PTI
• Principle, Taxes & Insurance
3. Subtract any debts you have like property taxes or homeowners insurance
Evaluating Points
- Points
○ Prepaid interest that is charged by the lender, each discounted point is equal to 1% of
your loan amount & a premium is then paid for obtaining a lower mortgage rate
- Consider the following guidelines:
○ If you plan to live in a home for 5+ yrs a lower mortgage rate is highly recommended
○ If you plan to sell in a few years, a higher mortgage is recommended
Fixed Rate, Fixed Payment Mortgages
- The three main types of mortgage lenders
○ Banks
○ Independent Banks aka correspondence lenders
• i.e. SoFi & Loan Depot
○ Mortgage wholesalers & Brokers
- Conventional Mortgages
○ Has equal payments of over 15, 20 or 30 yrs on a fixed interest rate
○ Set levels or Amortization
• The balance that is owed is reduced w/ each payment
- Govt Financing Problems
○ Government financed programs include:
• (FHA) Federal Housing Authority for loans
• (VA) Veterans Administrations also have loans
□ This loan can be obtained w/o a down payment
○ Neither of these programs provide money for a mortgage
○ How to qualify:
• You must be considered either lower or middle income
• Minimum percent for down payment is 3.5%
○ Both FHA & VA loans can be good alternatives when also deciding to sell a home
• Approval requires inspection & appraisal to sell the home
- United States Dept of Agriculture (USDA)
○ This program finances housing & community facilities in rural areas
○ USDA loans & grants are available to both single & multi family housing to buy and/or
improve land
Adjustable-Rate Mortgage & Variable Payment Mortgages
- Adjustable-rate mortgage (ARM)
○ AKA Flexible rate mortgage, variable rate mortgage
• Have an interest rate that can increase or decrease during the time of the loan,
but the borrower risks the changes of interest rates in the future
- A rate cap
○ Restricts the amount an interest rate can go up or down during the term
- A payment cap
○ Keeps the payments on adjustable rate mortgage set w/ limits so your payments can
rise
- Negative Amortization
○ A decreasing loan balance meaning the amount of the home equity
- Some ARM’s last about 40 years, there are some factors:
1. Determine how often & the restrictions for interest rates
2. Consider the frequency & restrictions for payments
3. Investigate if the loan will be extended due to negative Amoritization
4. Know what the lending institutions use to set the mortgage
- (LIBOR) The London Interbank Offered Rate
○ The most common base index for setting rates of adjustable rate mortgages
Interest-Only Mortgage
- Allow home buyers to have a lower payment for the first few years of the loan
○ These first payments don’t go to the loan
○ After initial payment periods end the mortgage adjusts
○ Payments will be based on the amount of the original loan when no principal has been
paid
Other Financing Approaches
- Buy Downs
○ An interest rate subsidy from a home builder or real estate developer that reduces the
rate in the first few years & is intended to encourage sales for those who wouldn’t
normally be able to afford a home
○ However sales price & down payments maybe higher than normal
- Second Mortgages
○ AKA a home equity loan, allows the homeowner to borrow on the already paid (equity)
of the property
- (HELOC) Home Equity Line Of Credit
○ A line of equity from a lender that gives borrowers additional funds as needed at a
variable interest rate
- Reverse Mortgages
○ Provide elderly home owners w/ tax free income in the form of a loan that is paid back
w/ interest when the when the home is sold or in the event of the homeowners death
○ You must be 62 yrs old to qualify
- Home Equity Conversion Mortgages
○ Allow someone to access their funds in various ways
• A lump sum, a monthly payment, a line of credit or in a combination of credit w/
regular payments
- Refinancing
○ Obtaining a new mortgage at a lower rate & payment
• Sometimes a lower rate is possible, divide the cost of refinancing by the amount
saved each month to determine how many months can cover your costs
Step 5: Close the Purchase Transaction
- Do a walk through before finalizing your purchase
○ A walk through is to inspect the condition of the home you plan to buy, take pictures of
any last minute things you might dispute
- The Closing
○ A meeting between the buyer, seller, the lender of funds and/or representatives of
each party
- The Closing Costs
○ AKA the settlement costs, are fees & charges paid when a real estate transaction is
complete
- Title Insurance
○ A closing cost that covers two items:
• The boundaries of the property being purchased & conduct a search to see if the
property is available for claim like unpaid real estate taxes
• During the mortgage term, the title company protects both owner & lender
against possible financial losses from defects in title and/or other unpredictable
claims against the title
- The Deed
○ A document transferring ownership of property from on person to the next
• A Warranty Deed - when the seller assures you the title is good, their documents
certify they are the true owner & seller of property w/ no claims against them
- (RESPA) The Real Estate Settlement Procedures Act
○ Helps buyers understand the process of closing & the costs
• This law requires loan applicants be given all info necessary regarding costs 3 days
prior to closing known as the “Know before you owe” rule
- Escrow
○ Money deposited w/ a lending institution for property payments on taxes & insurance
of a home
• This protects lender from a loss due to unpaid taxes in real estate
Preparing a home for selling
- The house must be show ready when in the process of selling
○ Repairs done, clean windows, painting the interior & exterior
- The address visible
- The garage must be neat, clean & all repairs taken care of
- Avoid odors from trash, pets & neglected pipping issues
- Dispose of any unneeded/used items so that the home appears clean & larger for sale
- Open drapes & have the lighting on for a better showcase
○ Also keep in mind in any appliances & tech use in the house should be eco friendly
décor & an appealing presentation of your home
Determining the selling price
- An Appraisal
○ An estimate of the current value on a property, this can help show what the price of
the property should be set to
○ An appraisal can cost between $300-$400
○ Home improvements before sale can improve the value of the home & possibly raise
the sales price
• Most desired improvements include a remodeled kitchen, an additional bed
and/or bathroom, additional storage space, a separate office, basement, fireplace
and/or a outdoor patio/deck space
Sale by Owner
- Every year 10% of homes are sold directly from the home owner
○ It’s done w/o a real estate agents
○ Ads are done in newspapers, detailed info sheets and/or online ads
• Online listing may include better detailed info of the homes details like:
□ Prof photos
□ 3D visuals for a virtual tour
□ Drone videos for larger properties
○ Be sure to have info readily available regarding financing & financing requirements,
this info will help a buyer determine if a sale is possible:
• Use the services of a lawyer and/or contractor
• Have the buyers names, addresses, phone number & background info
• Show the home by appointment only w/ more than one person present for safety
reasons
Listing w/ a Real Estate Agent
- Be sure to consider the persons knowledge of the community & efforts to sell your home
○ The real estate agent will:
• Suggest a listing price
• Provide advice on which features of the home to highlight
• Hosting an open house
• Setting up a showing for potential buyers
• Have promotional items
□ Brochures, flyers, for sale sign, digital ads, social media etc
○ Discount agents sell homes at a lower rate
• They charge a 1-2% flat fee instead of the usual 6%
• You will likely pay the agents fee of 2-3%
4/6/26 11:50 AM
Housing Alternatives
Your Choice of Housing
- Opportunity Costs of Housing Choices, what are the trade offs:
○ Lost interest earned from the down payment of a home or the security deposit of an
apartment
○ Time & cost of commuting to work when living in an area w/ less expensive house
and/or living space
○ Loss of buying a home-tax advantages & equity growth when you rent
Different Housing Life Situations
- Young Single Person
○ Rental housing has limited maintenance & offers mobility
- Young Couple no kids
○ Rental housing offers convenience & flexibility of lifestyle
○ Purchase housing for financial benefits & long term security
- Couple w/ young kids
○ Rental housing can provide facilities for kids in a family orientated area
○ Purchase a home that meets financial & family needs
- Single Parent
○ Rental housing suitable for kids & a degree of home security
○ Low maintence to meet both family & financial needs
- Couple, kids no longer home
○ Rental housing is convenient, flexible for changing as needs change & financial
situation
○ Purchase housing that requires minimal maintenance & meets lifestyle needs
○ Retired Person
§ Rental meets financial, social & physical needs
§ Requires minimal maintenance, is convenient & has personal services
Renting vs Buying Housing
- People who are financially able to buy a home may also choose to rent instead choosing to
save and invest to buy a home in the future
○ Renting is less costly in the long run but, home ownership has financial advantages in
the long run
Renting Your Residence
- Selecting a rental unit
○ Apartments are the most common forms of rentals, others can include a condo or a
home
Advantages of Renting
- Mobility
○ Renting offers a location change as needed
§ A new job, rent increase, the need for more space, or to live in a diff community
- Fewer responsibilities
○ Less financial, maintence & repair responsibilities compared to home owners
- Lower Initial costs
○ A security deposit is usually thousands of dollars cheaper than a down payment
Disadvantage of Renting
- Can’t make tax deductions for mortgages interest & increased property value
- Must pay the rent every time it increases
- Restricted lifestyle
○ Noise complaints and/or set quiet hours
○ Restrictions can be placed regarding pets, decorations, entertainment systems etc
- Legal Details
○ When you sign the apartment lease you are agreeing to a rental agreement that may
include:
§ A description of the unit & address
§ Name & address of owner/landlord (The lessor)
§ Name of tenant (lessee)
§ Effective date of lease & length
§ Amount of security & pet deposit
§ Rent amount & due date
§ Where payment will be sent
§ Late fee repayment
§ A list of utilities, appliances, furniture & facilities included
§ Restrictions (No pets, remodeling etc) & subletting
□ Subletting - Allows you to have another person take over rent & live in the
unit
§ Charges for damages done, moving out later/earlier than agreed to
§ Agreements of when/how the landlord may enter the property/apartment
○ A lease for renting should be in writing, it protects both you & the landlord
Cost of Renting
- A security deposit
○ Money held by the landlord to cover the costs of any damages done to the rental unit
during the lease
- Having first & last months rent ready before you move in
- In some cases if you need to leave because of eviction/moving you must do so in 30 days &
your safety deposit will be returned
○ Most states require that your safety deposit be returned in 30 days
- Living expenses that will also incur while renting
○ Utilities, heat, water (in some cases), WiFi
The Home Buying Process
Step 1: Determine Home Ownership needs
- Evaluate owning your place of residence
- Asses types of housing units
- Calculate what you can afford
- Know the Pro’s & Cons
- What are the benefits of ownership?
○ Financial benefits & flexibility
- What are the possible drawbacks?
○ Financial uncertainty
§ Qualifying for a mortgage, financing & investments
○ Limited Mobility
§ Unlike renting this cant be done in a spam on of months
○ Higher Living Costs
§ Owning can be expensive, you are solely responsible for maintenance, repairs &
improvements
- Assess the type of Housing
1. Singe family home
○ AKA detached housing and the most common type of home
2. Multi unit
○ Duplex
§ A duplex is a building that contain two units owned by separate parties
○ Town Houses
§ Homes that have single family unit setup but are owned by separate parties
○ Planned Unit Developments
§ Communities w/ various types of housing, other use of the land, recreational
space, for some commercial use, shopping and/or parks
3. Condominiums
○ Individually owned housing units w/ several units in the building, have a monthly fee
for maintenance, repairs, maintaining the building & common areas
4. Cooperative Housing
○ When units in a building are owned by a nonprofit organization, shareholders pay for
the space, occupants do not own but have the legal right to stay as long as they have
stock in the non profit
- Housing Construction
○ AKA Factory-Built housing that are living units that are either fully or partially
assembled in a factory and then moved to a living site
- Building a home
○ Before beginning your project be sure to have the necessary knowledge & funding.
Before choosing a contractor find out:
§ Does the contractor have the experience for the project?
§ Do they have a good working relationship w/ architects, contractors & others in
their field?
§ What assurance do you have about the quality of their materials?
§ What arrangements were made for payment before construction?
§ What delays will be considered legitimate?
§ Does your contractor have his licensing & insurance?
§ Do they offer contact info such as names, address, phone numbers & email?
- Determine how much you can afford
○ Price & down payment
§ What you can afford based on your income & current living expenses?
§ Other factors to keep in mind are:
□ Current mortgage rates
□ Potential future property value
□ Your ability to make the monthly payments
□ Tax & insurance
○ Size & Quality
§ You might not get the size you want immediately but that will come w/ time
§ You want a home in good condition
□ If it needs work it might lower the property value if not looked at
Step 2: Find & evaluate a property to purchase
- Select a location
○ 3 to keep in mind - rural, urban & suburban
○ Zoning Laws
§ Restrictions on how a property can be used
□ Will this area be used for business, residential or commercial use
- Consider using a real estate agent
○ There main services include:
1. Showing you homes in your area based on a pre-approved mortgage
2. Presenting an offer based on current market analysis
3. Negotiating a purchase price
4. Assisting you in obtaining financing
5. Representing you at the closing of the purchase
- Be sure you have already been pre approved for a loan
- Conduct a home/pest/rodent test
Step 3: Price the Property
- Determine an appropriate market price
○ Factors to consider
1. Recent selling prices
2. Current housing demand
3. How long the house has been on the market
4. The owners need to sell
5. Financing options
6. Features & conditions of the home
- Negotiate an agreement price
○ A purchase of agreement
§ A legal document offering the home in the form of a sale, your first offer to
purchase will not always be accepted
○ A Counter Offer
§ When the seller indicates willingness to negotiate price
○ A Sellers Market
§ When a home owner who is selling has several offers for the property
○ A Buyers Market
§ When sales are low and so is the price of the property
○ Earnest Money
§ A portion of the purchase is deposited as good faith to show the purchase offer is
serious
○ A Contingency Clause
§ A contract that states the agreement is binding only if certain actions occur
Step 4: Obtain Financing
- Determine the amount of down payment
○ 20% of the down payment is required & later makes it easier to acquire a mortgage
○ Private Mortgage Insurance (PMI) is required if the down payment is less than 20%
- Qualifying & Applying for a mortgage
○ A mortgage is a long term loan on a specific piece property or estate
○ Payments on a mortgage are usually made over the course of 10-30 years
§ Mortgage Brokers - Help home buyers obtain financing
- Applying for a Mortgage
1. Pre-qualifications
• The application, proof of employment, proof of income, assets ownership &
existing debt amounts
2. The lender must obtain a credit report & verify the borrowers financial status, a max
amount is requested, pending approval you will be given a loan estimate
• The form can be found at www.consumerfinance.gov & is required by the
Consumer Financial Protection Bureau
3. Lenders will likely charge a fee that can be as high as $500, this is pledged to purchase
a home which leads to a legally binding contract
• The borrower can decide if they want to stay at this set interest rate for 30-90
days or meet an expected deadline
• If rates are expected to decline the borrower may float & lock in the rate at a later
date
*Float - To leave the transaction pending
- (ATR) Ability to Repay & (QM) Qualified Mortgage
○ This rule requires lenders to carefully consider a borrowers financials
• ATR expects a borrowers repayment abilities based on their DTI, liabilities & credit
history
- Based on your personal financing there are 3 things to keep in mind
○ The monthly mortgage payment you can afford
○ The mortgage amount you can afford
○ The home purchase within you price range
- How to calculate your DTI when purchasing a home
1. Your income ➗ 12 months (i.e 48,000 ➗ 12 = 4,000)
2. A down payment of 5% but lenders recommend 38% for PTI
• Principle, Taxes & Insurance
3. Subtract any debts you have like property taxes or homeowners insurance
Evaluating Points
- Points
○ Prepaid interest that is charged by the lender, each discounted point is equal to 1% of
your loan amount & a premium is then paid for obtaining a lower mortgage rate
- Consider the following guidelines:
○ If you plan to live in a home for 5+ yrs a lower mortgage rate is highly recommended
○ If you plan to sell in a few years, a higher mortgage is recommended
Fixed Rate, Fixed Payment Mortgages
- The three main types of mortgage lenders
○ Banks
○ Independent Banks aka correspondence lenders
• i.e. SoFi & Loan Depot
○ Mortgage wholesalers & Brokers
- Conventional Mortgages
○ Has equal payments of over 15, 20 or 30 yrs on a fixed interest rate
○ Set levels or Amortization
• The balance that is owed is reduced w/ each payment
- Govt Financing Problems
○ Government financed programs include:
• (FHA) Federal Housing Authority for loans
• (VA) Veterans Administrations also have loans
□ This loan can be obtained w/o a down payment
○ Neither of these programs provide money for a mortgage
○ How to qualify:
• You must be considered either lower or middle income
• Minimum percent for down payment is 3.5%
○ Both FHA & VA loans can be good alternatives when also deciding to sell a home
• Approval requires inspection & appraisal to sell the home
- United States Dept of Agriculture (USDA)
○ This program finances housing & community facilities in rural areas
○ USDA loans & grants are available to both single & multi family housing to buy and/or
improve land
Adjustable-Rate Mortgage & Variable Payment Mortgages
- Adjustable-rate mortgage (ARM)
○ AKA Flexible rate mortgage, variable rate mortgage
• Have an interest rate that can increase or decrease during the time of the loan,
but the borrower risks the changes of interest rates in the future
- A rate cap
○ Restricts the amount an interest rate can go up or down during the term
- A payment cap
○ Keeps the payments on adjustable rate mortgage set w/ limits so your payments can
rise
- Negative Amortization
○ A decreasing loan balance meaning the amount of the home equity
- Some ARM’s last about 40 years, there are some factors:
1. Determine how often & the restrictions for interest rates
2. Consider the frequency & restrictions for payments
3. Investigate if the loan will be extended due to negative Amoritization
4. Know what the lending institutions use to set the mortgage
- (LIBOR) The London Interbank Offered Rate
○ The most common base index for setting rates of adjustable rate mortgages
Interest-Only Mortgage
- Allow home buyers to have a lower payment for the first few years of the loan
○ These first payments don’t go to the loan
○ After initial payment periods end the mortgage adjusts
○ Payments will be based on the amount of the original loan when no principal has been
paid
Other Financing Approaches
- Buy Downs
○ An interest rate subsidy from a home builder or real estate developer that reduces the
rate in the first few years & is intended to encourage sales for those who wouldn’t
normally be able to afford a home
○ However sales price & down payments maybe higher than normal
- Second Mortgages
○ AKA a home equity loan, allows the homeowner to borrow on the already paid (equity)
of the property
- (HELOC) Home Equity Line Of Credit
○ A line of equity from a lender that gives borrowers additional funds as needed at a
variable interest rate
- Reverse Mortgages
○ Provide elderly home owners w/ tax free income in the form of a loan that is paid back
w/ interest when the when the home is sold or in the event of the homeowners death
○ You must be 62 yrs old to qualify
- Home Equity Conversion Mortgages
○ Allow someone to access their funds in various ways
• A lump sum, a monthly payment, a line of credit or in a combination of credit w/
regular payments
- Refinancing
○ Obtaining a new mortgage at a lower rate & payment
• Sometimes a lower rate is possible, divide the cost of refinancing by the amount
saved each month to determine how many months can cover your costs
Step 5: Close the Purchase Transaction
- Do a walk through before finalizing your purchase
○ A walk through is to inspect the condition of the home you plan to buy, take pictures of
any last minute things you might dispute
- The Closing
○ A meeting between the buyer, seller, the lender of funds and/or representatives of
each party
- The Closing Costs
○ AKA the settlement costs, are fees & charges paid when a real estate transaction is
complete
- Title Insurance
○ A closing cost that covers two items:
• The boundaries of the property being purchased & conduct a search to see if the
property is available for claim like unpaid real estate taxes
• During the mortgage term, the title company protects both owner & lender
against possible financial losses from defects in title and/or other unpredictable
claims against the title
- The Deed
○ A document transferring ownership of property from on person to the next
• A Warranty Deed - when the seller assures you the title is good, their documents
certify they are the true owner & seller of property w/ no claims against them
- (RESPA) The Real Estate Settlement Procedures Act
○ Helps buyers understand the process of closing & the costs
• This law requires loan applicants be given all info necessary regarding costs 3 days
prior to closing known as the “Know before you owe” rule
- Escrow
○ Money deposited w/ a lending institution for property payments on taxes & insurance
of a home
• This protects lender from a loss due to unpaid taxes in real estate
Preparing a home for selling
- The house must be show ready when in the process of selling
○ Repairs done, clean windows, painting the interior & exterior
- The address visible
- The garage must be neat, clean & all repairs taken care of
- Avoid odors from trash, pets & neglected pipping issues
- Dispose of any unneeded/used items so that the home appears clean & larger for sale
- Open drapes & have the lighting on for a better showcase
○ Also keep in mind in any appliances & tech use in the house should be eco friendly
décor & an appealing presentation of your home
Determining the selling price
- An Appraisal
○ An estimate of the current value on a property, this can help show what the price of
the property should be set to
○ An appraisal can cost between $300-$400
○ Home improvements before sale can improve the value of the home & possibly raise
the sales price
• Most desired improvements include a remodeled kitchen, an additional bed
and/or bathroom, additional storage space, a separate office, basement, fireplace
and/or a outdoor patio/deck space
Sale by Owner
- Every year 10% of homes are sold directly from the home owner
○ It’s done w/o a real estate agents
○ Ads are done in newspapers, detailed info sheets and/or online ads
• Online listing may include better detailed info of the homes details like:
□ Prof photos
□ 3D visuals for a virtual tour
□ Drone videos for larger properties
○ Be sure to have info readily available regarding financing & financing requirements,
this info will help a buyer determine if a sale is possible:
• Use the services of a lawyer and/or contractor
• Have the buyers names, addresses, phone number & background info
• Show the home by appointment only w/ more than one person present for safety
reasons
Listing w/ a Real Estate Agent
- Be sure to consider the persons knowledge of the community & efforts to sell your home
○ The real estate agent will:
• Suggest a listing price
• Provide advice on which features of the home to highlight
• Hosting an open house
• Setting up a showing for potential buyers
• Have promotional items
□ Brochures, flyers, for sale sign, digital ads, social media etc
○ Discount agents sell homes at a lower rate
• They charge a 1-2% flat fee instead of the usual 6%
• You will likely pay the agents fee of 2-3%
