Credit Union Financial Education Game Home Quest
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Living in an apartment
- Lower living cost +
- Less expensive short term housing (10-16 years) +
- Freedom to move when lease expires +
- Maintenance-free living +
- Not as much storage room -
- Lifestyle (Singles) +
- Less privacy -
- Usually noisier -
- Not as much upkeep +
- No lawn care +
- No maintenance responsibility +
- Better chance of meeting people +
- May not allow pets -
- Less long term value -
- May come furnished +
- Taxes are built into rent -
- No equity is built up -
- No control over rent increases -
- Possibility of eviction -
Living in a house
- Houses typically appreciate in value +
- Less expensive in long run +
- May build equity +
- Can be difficult to sell -
- Possibility of Foreclosure -
- Sense of community, stability, security +
- Lifestyle (family) +
- More freedom to do what you want +
- Freedom to change landscaping, décor +
- More privacy +
- Usually have to take care of lawn -
- Usually more space +
- More choices in sizes and appearance +
- Need more insurance -
- Pride of ownership +
- more liability if accidents occur on property -
- Mortgage, Taxes and Insurance Costs -
- Tax deductions for interest and taxes -
- Maintenance expenses -
Building a House or Buying an Existing One
- Homes are very expensive and are difficult to purchase, whether you’re building a new home or buying an existing one
- Most of the time people need to borrow money to purchase their home
- Most homes are purchased through a combination of personal savings (which is usually the down payment) and a loan that is usually through a bank.
- Finding a loan with a favorable interest rate is crucial
- The down payment is usually much smaller than the amount of money borrowed (usually the down payment is 10 % - 20% of the price of the house)
- An example: $30,000 “down” on a loan of $120,000 to purchase a home costing $150,000
Financing
- Mortgages are usually obtained through banks or mortgage companies.
- There are many things a bank and its loan officers look at before they decide to give a person a loan; the main things are income, credit history and property value.
- There are many different ways loan payments can be set up; each loan is different based on many factors
- Interest payments is one of the main profit sources for banks
- The interest rate charged on the loan can vary based on several different factors
- Interest rates vary from time to time
- Defaulting on a previous loan can harm your chances of obtaining a mortgage
- The amount of mortgage you take out depends on how much you can afford. It depends on your income and how much debt you already have
- The amount of a mortgage payment made per month should not exceed more than 28 percent of your household income
- It is wise to “shop” around at several lenders to see what terms and rates each is offering
- Borrowers with lower credit scores will have higher interest rates than those with good credit scores
- The interest rate on a home loan is higher than the interest rate you would get on a savings account, CD, or checking account
APPLYING FOR A MORTGAGE
In order to obtain a mortgage one must go through a seven step process:
- Pre-qualification – The lender obtains financial records from the applicant and determines how much they can borrow
- Application – Borrower fills out application and provides information for processing
- Opening the File – Review and verification of borrower information
- Underwriting – Underwriter reviews information by processor and determines if loan is acceptable
- Pre-Closing – title insurance is ordered, approval contingencies are met, and closing date is scheduled
- Closing - Lender funds the money to the seller in exchange for title and the borrower assumes ownership
LOAN FINANCING
- Banks traditionally finance mortgage loans for borrowers looking to purchase a home
- If the down payment is larger, the borrower will either have lower payments or be able to afford a more expensive house
- Down payments are typically 5, 10, or 20% of the sale price
- The maximum monthly payment on a mortgage is 28% of gross income
- Money for down payment is typically from savings, 401k’s, gifts, or by other means as long as it is not obtained through a separate loan.
- Loans can have a number of different configurations and variables
- Constant Payment Mortgages
- Constant Amortization Mortgages
- Adjustable Rate Mortgages
- Graduated Payment Mortgages
- Mortgage loans are typically paid off with a portion of the payment going to interest and another portion going to principle
- The exact specifications of how much goes to interest/principle depends on the loan type and interest rate
FEES
There are a number of fees associated with mortgages
- Loan origination fees and discount points
- Title Insurance
- Underwriting and processing fees
- Appraisal fees
- Closing costs
- Many mortgage loans also impose escalation clauses and prepayment penalties to ensure that they earn their required return on investment
INSURANCE
- Title Insurance is usually ½ -1% and is to protect the lenders money if there is an issue obtaining clear title
- Homeowners insurance will be required by most lenders to ensure that the home, which serves as collateral for the loan, will be safe
- Private Mortgage Insurance (PMI) is extra insurance required when the borrower’s down payment is less than 20% of the sale price
- The price of insurance depends on the location of your property
- The price of insurance also depends on the type of coverage, such as if you buy a older home or a new one, what type of safety devices are included, and what type of perils you would like to cover
The Insurance Services Office (ISO) offers six different types of Homeowners Policies
- These six different types of insurance are HO-1:Basic, HO-2 Broad, HO-3 Special, HO-4 Contents Broad, HO-6 Unit Owners, and HO-8 Modified
- HO-1, HO-2, HO-3 and HO-8 are used to insure an owner’s interest in a home and its contents and provide personal liability coverage
- The range of coverage is broader in HO-3 than HO-2
- HO-1 offers very little coverage it is no longer sold in many locations
- HO-8 insurance covers homes having a replacement cost greater than the market cost
- An example of an HO-8 home would be an older style home that could be rebuild at a cheaper price by using more updated materials
- HO-4 form is used to cover the contents and personal liability of renters
- The HO-6 form covers the property interest, contents are personal liability of people owning a unit in a condominium or a cooperative building
Videos
Questions
1. What percent is a typical down payment when buying a home? A. 0 %-9% B. 10%-20% C. 25%-35% D. 50%-60%
2. What do banks look at in order to determine whether to approve a loan? A. Income B. Credit History C. Property Value D. All of the Above
3. True or False Interest rates vary from year to year. True
4. If you have lower credit scores you will have lower interest rates. False
5. Which one of these will have the highest interest rate? A. Savings Account B. Certificate of Deposit (CD) C. Home Loan D. Checking Account
6. Which one of these is a fee associated with mortgages? A. Appraisal Fees B. Closing Costs C. Underwriting and processing Fees D. All of the Above
7. If you are unsure about how long you will live in an area, it may be wiser to rent (rather than buy) a house. True
8. Which one of these are factors in deciding whether to buy or rent a house A. How much savings you have B. Your credit score C. If you can afford a down payment D. All of the Above
9. Does the number of persons living with you in a home affect the decision to buy or rent? Yes
10. Which of these are places you might apply for a home mortgage? A. Mortgage Company B. Savings and Loan C. Credit Union D. All of the Above
