the cost of owning
TRANSCRIPT
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THE COST OF OWNINGUNIT 5, LESSON 1
ORCUTT ACADEMY HIGH SCHOOL
FINANCE & ACCOUNTING
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ASSESSING YOUR TIMELINEWait to buy a home until you plan on being there for at least 3 years (preferably five or more)
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PROPERTY MUST APPRECIATE 15% TO COVER EXPENSES
This will take at least 3 years
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EXPENSES• Mortgage costs• Inspection expenses• Moving costs• Commissions• Title insurance
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BEFORE BUYING, ASK YOURSELF…Are you saving enough money monthly to reach your retirement goals?
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BEFORE BUYING, ASK YOURSELF…How much do you spend (and want to continue spending) on fun things such as travel and entertainment?
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BEFORE BUYING, ASK YOURSELF…How willing are you to budget your expenses in order to meet your monthly mortgage payments and other housing expenses?
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BEFORE BUYING, ASK YOURSELF…How much of your children’s expected college educational expenses do you want to be able to pay for?
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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
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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.
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BUT… HOW MUCH YOU CAN BORROW DEPENDS ON INTEREST RATESSet by the secondary market
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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
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MULTIPLIER
The number you multiply by your gross income to determine how much money you can borrow for a home mortgage; determined by interest rates.
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As rates fall, the monthly mortgage payment drops
Lower interest rates make buying real estate more affordable
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CALCULATE
What is the maximum amount you can borrow?
1. Annual income $45,870
a) Interest rate 5%
b) Interest rate 11%
2. Annual income $68,900
a) Interest rate 4%
b) Interest rate 8%
3. Annual income $159,650
a) Interest rate 9%
b) Interest rate 6%
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TOTAL HOUSING COSTS
MORTGAGE, TAXES, INSURANCE AND MAINTENANCE
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CALCULATE MORTGAGE USING MULTIPLIER
Interest Rate 15-year mortgageMultipliers
30-year mortgage
4% 7.4 4.77
4.5% 7.65 5.07
5% 7.91 5.37
5.5% 8.17 5.68
6% 8.44 6.00
6.5% 8.71 6.32
7% 8.99 6.65
8% 9.56 7.34
9% 10.14 8.05
10% 10.75 8.78
Multiply the multiplier by your mortgage expressed in thousands of dollars (divided by 1000)
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EXAMPLE
Skye 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
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CALCULATE MORTGAGE USING FORMULA
M = 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
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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%
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TAXES: THE BENEFIT
Interest paid on mortgages is tax deductible