Focus on Personal Finance 5th Edition

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Chapter 07 - Selecting and Financing Housing

CHAPTER 7
SELECTING AND FINANCING HOUSING

CHAPTER OVERVIEW
This chapter provides a complete discussion of selecting housing based on life situation, needs, and
personal values along with the related financial aspects of this major expenditure. First presented is
material regarding factors related to renting a residence. This is followed by discussion of buying
alternatives and the home buying process including determining housing needs, evaluating potential
homes, and pricing the property. The financing section covers types of mortgages and closing costs of a
real estate purchase. Finally, suggestions for selling a home are offered.

LEARNING OBJECTIVES CHAPTER SUMMARY

After studying this chapter, students will be able to:

Obj. 1 Assess costs and Assess renting and buying alternatives in terms of their
benefits of renting. financial and opportunity costs. The main advantages of renting
are mobility, fewer responsibilities, and lower initial costs. The
main disadvantages of renting are few financial benefits, a
restricted lifestyle, and legal concerns.

Obj. 2 Implement the home- Home buying involves five major stages: (1) determining home
buying process. ownership needs, (2) finding and evaluating a property to
purchase, (3) pricing the property, (4) financing the purchase,
and (5) closing the real estate transaction.

Obj. 3 Determine costs The costs associated with purchasing a home include the down
associated with payment; mortgage origination costs; closing costs such as a
purchasing a home. deed fee, prepaid interest, attorney’s fees, payment for title
insurance, and a property survey; and an escrow account for
homeowner’s insurance and property taxes.

Obj. 4 Develop a strategy for When selling a home, you must decide whether to make certain
selling a home. repairs and improvements, determine a selling price, and choose
between selling the home yourself and using the services of a
real estate agent.

INTRODUCTORY ACTIVITIES
 Ask students to comment on the “3 Steps to Financial Literacy" feature at the start of the chapter (p.
218).
 Point out the learning objectives (p. 219) in an effort to highlight the key points in the chapter.
 Provide an overview of the “Your Personal Financial Plan Sheets” for this chapter (p. 219)
 Ask students to discuss the relationship between housing selection and other financial goals.

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Chapter 07 - Selecting and Financing Housing

CHAPTER 7 OUTLINE

I. Evaluating Renting and Buying Alternatives

A. Your Lifestyle and Your Choice of Housing
B. Renting versus Buying Your Housing
C. Rental Activities
1. Selecting a Rental Unit
2. Advantages of Renting
3. Disadvantages of Renting
4. Legal Details
5. Costs of Renting
II. Home-Buying Activities
A. Step 1: Determine Home Ownership Needs
1. Evaluate Home Ownership
2. Types of Housing Available
3. Determine How Much Can You Afford
B. Step 2: Find and Evaluate a Home
1. Select a Location
2. Services of Real Estate Agents
3. The Home Inspection
C. Step 3: Price the Property
1. Determine the Home Price
2. Negotiate the Purchase Price
III. The Finances of Home Buying
A. Step 4: Obtain Financing
1. The Down Payment
2. The Mortgage
3. Fixed Rate, Fixed Payment Mortgages
4. Government-Guaranteed Financing Programs
5. Adjustable-Rate, Variable-Payment Mortgages
6. Interest-Only Mortgage
7. Other Financing Methods
B. Step 5: Close the Purchase Transaction
C. Home Buying: A Summary
IV. A Home-Selling Strategy
1. Preparing Your Home for Selling
2. Determining the Selling Price

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3. Sale by Owner
4. Listing with a Real Estate Agent

CHAPTER 7 LECTURE OUTLINE Instructional Suggestions

I. EVALUATING RENTING AND BUYING  Text Highlight: Exhibit 7-1

ALTERNATIVES (p. 219) (p. 220) compares renting and
buying.
 Your needs, lifestyle, and financial resources will  Use PPT slides 7-1 to 7-5.
determine whether you decide to rent, buy, or have a
home built.
Your Lifestyle and Your Choice of Housing (p. 219)
 Your lifestyle (how you spend your time and money)
is reflected in almost all consumer purchases
including housing.
 While personal preferences and tastes are the
foundation of your housing decisions, financial
factors may modify your final choice.
Renting versus Buying Your Housing (p. 219)
 Choosing between renting and buying your residence  Text Highlight: The “Figure it
is an essential decision related to housing. Out” feature on page 221
 Economic conditions can influence this decision as provides a framework with a
financial analysis to compare
well as a personal desire for ease of mobility or pride renting and buying.
of ownership.
Rental Activities (p. 220)  Assignment: Have students
survey people who rent to
 At some point in your life, you are likely to rent your determine factors that influenced
place of residence. You may rent when you are first this housing decision over
buying.
on your own and cannot afford to buy a home or later
in life when you want to avoid the activities required
to maintain your own home.
Selecting a Rental Unit (p. 221)  Supplementary Resource: Talk
to a lawyer about common
 An apartment is the most common type of rented problems associated with renting
housing. and leases.
 People who need more room should consider renting a  Use PPT slides 7-6 to 7-11.
house.
Advantages of Renting (p. 221)
 The main advantages of renting are:
 ease of mobility
 fewer responsibilities
 lower initial costs

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Chapter 07 - Selecting and Financing Housing

CHAPTER 7 LECTURE OUTLINE Instructional Suggestions

Disadvantages of Renting (p. 222)  Text Highlight: Pages 222 lists

the main conditions of a lease
 The main drawbacks of renting are: agreement.
 few financial benefits in the form of tax
deductions,
 restricted lifestyle, restrictions on decorating,
having pets, and other activities
 legal details

 A lease is the legal document that defines the

conditions of a rental agreement. It is designed to
protect the rights of both the landlord and tenant.
 Text Highlight: “From the
Costs of Renting (p. 223) Pages of Kiplinger’s Personal
Finance” (p. 224).
 A security deposit is usually required when you sign a  Practice Quiz 7-1 (pp. 223).
lease. This money is held by the landlord to cover the
cost of any damages that may be done to the rental  Text Reference: “Apply
Yourself” activity (p. 223).
unit during the lease period.

II. HOME-BUYING ACTIVITIES (p. 225)

 Owning a home is a goal of many people and involves
various activities as well as personal and economic
trade-offs.
Step 1: Determine Homeownership Needs (p. 225)
 Exercise: Create a list of
factors that could encourage or
discourage a person to purchase
a certain type of housing.
 Use PPT slides 7-12 to 7-14.

 The main advantages of home ownership are pride of  Supplementary Resource:

Obtain information from a
ownership, financial benefits, and flexibility in using condominium sales office about
the property. the purchasing and management
 Financial risks related to having down payment funds, of this type of housing.
obtaining a mortgage, and changing property values.  Discussion Questions: What are
 Limited mobility may result if a home is difficult to common perceptions about
sell. mobile houses and modular
 Higher living costs due to repairs and maintenance. housing units? Are these beliefs
as valid as in the past?

Types of Housing Available (p. 225)  Assignment: Have students talk

to people who have had their
 Single-family dwellings are the most popular type of own house built, or to
housing. contractors who work with
 Multiunit dwellings include duplexes and town people having a house built.
Obtain information on the
houses. process and potential
 A condominium is an individually owned housing difficulties.
unit in a building with a number of such units.
 Use PPT slides 7-15 to 7-19.
Individual ownership does not include common areas
such as hallways, outside grounds, and recreational
facilities.

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CHAPTER 7 LECTURE OUTLINE Instructional Suggestions

 Cooperative housing is a form of housing in which a
building containing a number of units is owned by a
nonprofit organization whose members have the right
to live in the units by paying rent.
 Manufactured homes are housing that is fully or
partially assembled in a factory before being moved to
the living site. These include prefabricated homes and
mobile homes.
 Some people want a home built according to their
specifications. Before you begin such a project, be
sure you possess the knowledge, the money, and the
perseverance that are needed to complete it.
Determine What You Can Afford (p. 226)  Use PPT slide 7-20.

 The amount you can afford to spend for a house will  Additional Example: The
practical aspects of a home most
be affected by the cash you have available for a down desired by buyers in order of
payment, by your regular income, and by your current popularity:
living expenses and financial obligations. 1. dishwasher
 You may not get all the features you want in your first 2. dead-bolt locks
3. walk-in closets
home, but financial advisers suggest that you should 4. trash disposal
get into the housing market by purchasing what you 5. fireplace
can afford. 6. bay windows
 Studies show that the most desired features in a home 7. upgraded carpeting
8. microwave oven
are a basement, a large garage, abundant closet and 9. walk-in pantry
storage space, and a large, modern kitchen. 10. ceramic tiles in tub.
 You may want to buy a handyman’s special—a home
that needs work but that you are able to get at a lower
price because of its poor condition.
Step 2: Find and Evaluate a Home (p. 226)  Use PPT slides 7-21, 7-22.

 In selecting a neighborhood, consider the character of  Discussion Question: Why is

home location considered more
the community. important than any other factor
 Zoning laws are restrictions on how the property in when making a housing
an area can be used. purchase?
 If you have or plan to have a family, you should  Additional Example: In
assess the school system. Homeowners without addition to the location, be sure
children also benefit from strong schools since the to:
educational advantages of a community affect  consider the entire
community
property values.
 be aware of possible malls
 A real estate agent can help you assess your housing or highways
needs and determine the amount you can afford to  consider cost and time of
spend on a home. commuting
 A real estate agent can be helpful in presenting your  remember that yards, home
conditions, and other items
offer to the seller, negotiating a settlement price, in view are an indication of
assisting you in obtaining financing, and representing the lifestyles and values of
you at the closing people in the community.

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CHAPTER 7 LECTURE OUTLINE Instructional Suggestions

 Before reaching your decision about a specific home,  PPT slide 7-23_presents a
conduct a complete evaluation of the property. This checklist for use when
home inspection can help minimize future problems. conducting a home inspection.

Step 3: Price the Property (p. 227)  Use PPT slides 7-24, 7-25.

 The main factors you should consider in determining
the home prices are recent sales prices in the area, the
current demand for housing, the length of time the
home has been on the market, the owner’s need to
sell, the financing options, and the features and
condition of the home.
 Supplementary Resource: Use
local newspapers and an online
search to obtain information on
the price range of houses and
other housing in your
community.

 In times of high demand for housing, negotiating is

minimized; this is referred to as a seller’s market
since the current homeowner is likely to have several
offers for the property. In contrast, when home sales
are slow, a buyer’s market exists and a homebuyer is
likely to purchase the property at a lower price.

 Once a price has been agreed upon, the buyer must  Practice Quiz 7-2 (p. 228)
deposit earnest money—a portion of the purchase  Text Reference: “Apply
price that the buyer deposits as evidence of good faith Yourself” activity (p. 228).
to show that the purchase offer is serious.
III. THE FINANCES OF HOME BUYING (p. 229)
 Use PPT slides 7-26 to 7-32.
 Financing a home purchase requires obtaining a
 Assignment: Have students
mortgage, being aware of the types of mortgages, compare mortgage qualifications
and settling the real estate transaction. requirements and procedures of
several lenders in your area.
Step 4: Obtain Financing (p. 229)
 Text Highlight: Exhibit 7-6
 Personal savings, pension plan funds, sales of (p. 230) may be used to
investments or other assets, and assistance from calculate the amount of
relatives are the most common sources of down mortgage a person can afford.
payment money.
 Private mortgage insurance (PMI) is usually  Assignment: Have students use
required if the down payment is less than 20 Exhibit 7-7 (p. 231) to
percent. determine the amount of the
monthly payment for different
mortgage amounts at different
rates with different term lengths.

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Chapter 07 - Selecting and Financing Housing

CHAPTER 7 LECTURE OUTLINE Instructional Suggestions

 A mortgage is a long-term loan on a specific
piece of property, such as a home or other real
estate. Payments on mortgages are made over an
extended period, for example 15 or 30 years.
 To qualify for a mortgage, you must meet criteria
similar to those that must be met for other loans.
 The major factors that affect the affordability of
your mortgage are your income, other debts, the
amount available for a down payment, the length
of the loan, and current mortgage rates.
 The mortgage loan for which a person can qualify
is larger when interest rates are low than when
they are high. As interest rates rise, fewer people
are able to afford the cost of an average-priced
home.
 Points are prepaid interest charged by the lender.
Each discount point is equal to one percent of the
loan amount and should be viewed as a premium
being paid for obtaining a lower mortgage rate.
 Obtaining a mortgage requires the potential
borrower to submit an application form
containing personal and financial data. Most
 Text Highlight: On page 232,
lenders charge a loan application fee of between
students can see how a portion
$100 and $300. of each mortgage payment goes
 Other common charges associated with the toward both interest and
mortgage application process are loan origination principal. As the amount owed
fees, property appraisal fees, and a credit report declines each month, more of
the payment goes to cover
charge. principal and less for interest.

Fixed-Rate, Fixed-Payment Mortgages (p. 231)  Use PPT slides 7-33 to 7-35.

 The conventional mortgage has equal payments

over 15 or 30 years based on a fixed interest rate.

Government-Guaranteed Financing Programs (p.

232)
 Government-guaranteed financing programs
include insured loans by the Federal Housing
Authority (FHA) and loans guaranteed by the
Veterans Administration (VA).

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Adjustable-Rate, Variable-Payment Mortgages (p.

232)
 The adjustable rate mortgage (ARM), also
referred to as a flexible rate mortgage or a
variable rate mortgage, has an interest rate that
increases or decreases during the life of the loan
based on changes in market interest rates.
 A rate cap restricts the amount that the interest
rate can increase during the loan term.
 A payment cap keeps the payments on an
adjustable rate mortgage at a given level or limits
the amount to which those payments can rise.
 Convertible ARMs allow the homeowner to
change an adjustable rate mortgage to a fixed rate
mortgage during a certain period, such as time
between the second year and the fifth year of the
loan.
Interest-Only Mortgage (p. 233)
 An interest-only mortgage allows a homebuyer
to have lower payments for the first few years of  Supplementary Resources: Go
the loan. During that time, none of the mortgage to the websites of the Federal
Trade Commission
payment goes toward the loan amount. Once the (www.ftc.gov), and the
interest-only period ends, the mortgage adjusts to Consumer Information Center,
be interest only at the new payment rate. Or, a (www.pueblo.gsa.gov) to obatin
borrower may obtain a different type of mortgage current information related to
home buying and mortgages.
to start building equity.

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Chapter 07 - Selecting and Financing Housing

CHAPTER 7 LECTURE OUTLINE Instructional Suggestions

Other Financing Methods (p. 233)  Use PPT slides 7-36, 7-37.

 A buy down is an interest rate subsidy from a

home builder or a real estate developer that
reduces the mortgage payments during the first
few years of the loan.
 A second mortgage, more commonly called a
home equity loan, allows a homeowner to
borrow on the paid-up value of the property.
 Reverse mortgages provide an elderly
homeowner with tax-free income in the form of a
loan that is paid back (with interest) when the
home is sold or the homeowner dies.
 Refinancing refers to obtaining a new mortgage
on your current home at a lower interest rate.
 Another financing decision involves making extra
payments on your mortgage. Since this amount
will be applied to the loan principal, you will save
interest and pay off the mortgage in a shorter
time.

Step 5: Close the Purchase Transaction (p. 234)  Use PPT slides 7-38 to 7-40.

 The closing involves a meeting of the buyer,

seller, and lender of funds, or representatives of
each party, to complete the transaction.
 Closing costs, also called settlement costs, are the
fees and charges paid when a real estate
transaction is completed.  Text Reference: The “Personal
Finance in Practice” feature (p.
 An escrow account is money, usually deposited 235) provides a summary of
with a financial institution, for the payment of home buying activities.
property taxes and homeowner’s insurance
 Practice Quiz 7-3 (pp. 236).
 Text Reference: “Apply
Home Buying: A Summary (p. 236) Yourself” activity (p. 236).

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CHAPTER 7 LECTURE OUTLINE Instructional Suggestions

IV. A HOME SELLING STRATEGY (p. 236)  Use PPT slides 7-41 to 7-46.
 Additional Example: Real
Preparing Your Home for Selling (p. 236) estate professionals suggest that
your home be made as appealing
 The effective presentation of your home can result in as possible so potential buyers
a fast, financially favorable sale. Real estate can imagine themselves living
salespeople recommend that you make needed home there.
repairs and paint the exterior and interior areas.  Discussion Question: What
types of improvements would
Determining the Selling Price (p. 237) add to the sale value of homes in
 Putting a price on your home can be a difficult this area?
decision. You face the risk of not selling it  Assignment: Have students talk
immediately if the price is too high, and you may not to people who have sold their
houses on their own.
get a fair settlement if the price is too low.
 An appraisal, which is an estimate of the current  Supplementary Resource: Talk
value of the property, can provide a good indication to a real estate agent, use
newspaper and online housing
of the price you should set for it. ads, and other online research to
determine the factors that
Sale by Owner (p. 238)
influence the selling price of
 If you decide to sell your home without the use of a homes.
real estate professional, price the home and then
advertise it through local newspapers and through a
flier describing it in detail.
 Use the services of a lawyer or title company to assist
you with the contract, the closing, and other legal
matters.
Listing with a Real Estate Agent (p. 238)
 If you decide to sell your home with the assistance of
a real estate agent, you can probably choose among
real estate businesses in your area.
 Your real estate agent will provide you with various
services. These services include suggesting a selling
price, making potential buyers and other agents aware  Practice Quiz 7-4 (p. 238).
of your home, providing advice on features to  Text Reference: “Apply
highlight, conducting showings of your home, and Yourself” activity (p. 238).
handling the financial aspects of the sale.

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Chapter 07 - Selecting and Financing Housing

CONCLUDING ACTIVITIES
 Discuss “Your Personal Finance Dashboard" and possible financial planning actions (p. 239).

 Point out the chapter summary (p. 239) and key terms in the text margin.
 Assign and discuss selected end-of-chapter Problems, Questions, Case in Point, Continuing Case.
 Discuss “Your Personal Financial Plan” worksheets.
 Use the Chapter Quiz in the Instructor’s Manual.

YOUR PERSONAL FINANCIAL PLAN WORKSHEETS FOR USE WITH

CHAPTER 7

Sheet 22 Renting vs. Buying Housing

Sheet 23 Apartment Rental Comparison
Sheet 24 Housing Affordability and Mortgage Qualification
Sheet 25 Mortgage Company Comparison

CHAPTER 7 QUIZ ANSWERS

True-False Multiple Choice

1. F (pp. 222) 6. A (p. 225)
2. F (pp. 222) 7. C (p. 226)
3. F (p. 226) 8. B (p. 229)
4. T (p. 225) 9. B (p. 230)
5. F (p. 229) 10. C (p. 233)

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Chapter 07 - Selecting and Financing Housing

Name Date

CHAPTER 7 QUIZ

TRUE-FALSE
_____1. Several financial benefits are associated with renting your place of residence.
_____2. A lease is mainly designed to protect the rights of the landlord.
_____3. Cooperative housing involves the purchase of an individual living unit in a
multiunit complex or building.
_____4. Financial risks are associated with the purchase of a home.
_____5. Most mortgage rates are established by government agencies.

MULTIPLE CHOICE
_____6. A common advantage associated with home ownership is
a. financial benefits.
b. ease of mobility.
c. limited financial risks.
d. low initial costs.

_____7. Most real estate professionals believe that the most important factor in
selecting a home is
a. price.
b. style.
c. location.
d. desired features.

_____8. The major factor that affects a person’s qualification for a mortgage is
a. current interest rates.
b. the applicant’s credit rating.
c. the value of the property being purchased.
d. the source of the down payment funds.

_____9. Most lending institutions believe that a person can afford a monthly payment
of about __________ percent of gross income less any long-term debts.
a. 25
b. 35
c. 45
d. 55

_____10. A __________ allows a person to borrow on the paid-up value of a home.

a. conventional mortgage
b. VA mortgage
c. home equity loan
d. buy-down

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SUPPLEMENTARY ACTIVITY

For each of the following types of mortgages, describe life situations and economic conditions that could
make this type of home loan an appropriate choice.

Type of mortgage Description of life situation Description of economic conditions

Conventional, fixed-rate,
fixed-payment

FHA or VA

Adjustable rate mortgage

Buy Down

Second mortgage

Reverse mortgage

Interest-only mortgage

Refinance

(Note: This activity may be done as a discussion in a large group, as a small group exercise, or as an out-
of-class assignment.)

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ANSWERS TO PRACTICE QUIZZES, PROBLEMS,

QUESTIONS, AND CASES

PRACTICE QUIZZES

Practice Quiz 7-1 (p. 223)

1. What are the main benefits and drawbacks of renting a place of residence?
Advantages of renting are mobility, fewer responsibilities, and lower initial costs. Disadvantages are
few financial benefits, restricted lifestyle, and legal concerns.

2. Which components of a lease are likely to be most negotiable?

Some people will tell you that just about everything in a lease is negotiable; however, certain things
are likely to be more flexible than others. Most negotiable items include rent, amount of security
deposit, starting date of lease, and decorating

3. For the following situations, would you recommend that the person rent of buy their housing?
(Circle your answer)
A person who desires to reduce income taxes paid rent Buy
A person who expects to be transferred for work soon rent buy
A person with few assets for housing expenses rent buy

Practice Quiz 7-2 (p. 228)

1. What are the advantages and disadvantages of owning a home?

The advantages of owning a home are pride of ownership, financial benefits, and lifestyle flexibility.
Disadvantages are financial uncertainty, limited mobility, and higher living costs.

2. What guidelines can be used to determine the amount to spend for a home purchase?
In general, a person should make payments on the purchase of a home that involve about 25 to 30
percent of his or her income. This is a guideline and could be influenced by other factors such as the
amount available for a down payment and other household expenses.

3. How can the quality of a school system benefit even homeowners in a community who do not have
school-age children?
The quality of a school system is an important factor affecting home prices in a community. By
maintaining quality schools, all homeowners in an area benefit from stable and increasing property
values.

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Chapter 07 - Selecting and Financing Housing

Practice Quiz 7-3 (p. 236)

1. What are the main sources of money for a down payment?

The main sources of a down payment are personal savings, pension plan funds, investments, and
assistance from relatives.

2. What factors affect a person’s ability to qualify for a mortgage?

The major factors that affect mortgage affordability are income, other debts, the amount available for
a down payment, the length of the loan, and current mortgage rates.

3. How do changing interest rates affect the amount of mortgage a person can afford?
As interest rates decline, home buyers can afford to take on a larger mortgage.

4. Under what conditions might an adjustable-rate mortgage be appropriate?

An adjustable rate mortgage may be appropriate when interest rates are relatively high and they are
expected to decline. This situation would benefit the borrower as rates decline, or the homeowner
may refinance when rates drop at a lower-rate, fixed-rate mortgage.

5. For the following situations, select the type of home financing action that would be most appropriate:
a. FIXED-RATE: A mortgage for a person who desires to finance a home purchase at current
interest rates for the entire term of the loan.

b. REFINANCE: A homebuyer wants to reduce the amount of monthly payments since interest
rates have declined over the past year.

c. HOME EQUITY LOAN: A homeowner wants to access funds that could be used to remodel the
home.

d. VA MORTGAGE: A person who served in the military, who does not have money for a down
payment.

e. REVERSE MORTGAGE: A retired person who wants to obtain income from the value of her
home.

Practice Quiz 7-4 (p. 238)

1. What actions are recommended when planning to sell your home?

When planning to sell your home, make needed repairs, consider new paint, clear out living and
storage areas, and remove unnecessary furniture and other items.

2. What factors affect the selling price of a home?

Home prices are affected by location, size, condition, features, and current market demand.

3. What should you consider when deciding whether to sell your home on your own or use the services
of a real estate agent?

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Chapter 07 - Selecting and Financing Housing

If you decide to sell by owner, you will need to price, advertise, and show the house. Some people
would like to save money by taking on these tasks and not use a real estate agent. If you would like
someone else to handle these and other duties, you may decide to use the services of a real estate
agent.

DISCUSSION QUESTIONS (p. 240)

1. What do you believe are the most important factors a person should consider when selecting housing?

Student answers will vary. Encourage students to consider both their financial situation and
personal factors.

2. What are some common mistakes a person might make when renting an apartment or other housing?

Answers may include not comparing rental units and living costs, not reading and understanding
the lease, not having renters’ insurance, and not caring for the rental unit and losing the security
deposit.

3. What actions would you recommend to a person who was considering buying a home that needed
several improvements?

Have a home inspection to make sure the needed repairs are not more severe than they appear.
Obtain estimates for the cost of the repairs. Determine the time and cost involved if you plan to
do the repairs yourself.

4. Describe how knowledge of current interest rates would help you better plan when obtaining a
mortgage.

Knowledge of current interest rates could mean obtaining a better mortgage rate by timing your
home purchase to avoid high rates and to take action when rates are lower.

5. Prepare a list of actions to take when selling a home.

Actions might include presenting the home for sale in an appealing manner. Making necessary
repairs and painting areas. Obtain assistance in setting the selling price. Deciding whether to
sell the home on your own or to use the services of a real estate agent.

PROBLEMS (p. 240)

1. Based on the following data, would you recommend buying or renting? (LO 7.1)
Rental Costs Buying Costs
Annual rent, $7,380 Annual mortgage payments, $9,800 ($9,575 is interest)
Insurance, $145 Property taxes, $1,780
Security deposit, $650 Down payment/closing costs, $4,500
Growth in equity, $225
Estimated annual appreciation, $1,700
Insurance/maintenance, $1,050

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Chapter 07 - Selecting and Financing Housing

Assume an after-tax savings interest rate of 6 percent and a tax rate of 28 percent.

Rental Costs Buying Costs

Rent $7,380 Mortgage payments $9,800
Insurance 145 Taxes, insurance, maintenance 2,830
Interest lost on security 39 Interest lost on down payment, 270
deposit closing costs
Growth in equity -225
Annual appreciation -1,700
Tax savings for mortgage interest -2,681
Tax savings for property taxes -498
Total rental costs $7,564 Total buying costs $7,796

2. When renting, various move-in costs will be encountered. Estimate the following amounts: (LO 7.1)
First month rent $ _______________
Security deposit $ _______________
Security deposit for utilities (if applicable) $ _______________
Moving truck, other moving expenses $ _______________
Household items (dishes, towels, bedding) $ _______________
Furniture and appliances (as required) $ _______________
Renter’s insurance $ _______________
Refreshments for friends who helped you move $ _______________
Other items: ____________________________ $ _______________

Student responses will vary. Encourage students to point out ways for obtaining this information and for
minimizing their rental move-in costs.

3. Many locations require that renters be paid interest on their security deposits. If you have a security
deposit of $1,800, how much would you expect a year at 3 percent? (LO 7.1)

$ 36 = $1,800 × .02

4. Condominiums usually require a monthly fee for various services. At $235 a month, how much would
a homeowner pay over a 10-year period for living in this housing facility? (LO 7.2)

$28,200 = $235 × 12 months × 10 years.

5. Ben and Carla Covington plan to buy a condominium. They will obtain a $220,000, 30-year mortgage,
at 5 percent. Their annual property taxes are expected to be $1,800. Property insurance is $480 a year,
and the condo association fee is $220 a month. Based on these items, determine the total monthly
housing payment for the Covingtons. (LO 7.2)

Monthly mortgage payment: $5.37 × 220 = $1,181.40

Monthly property taxes: $1,800/12 = $150
Monthly property insurance: $480/12 = $40
Monthly association fee: $220
Total monthly housing payment: $1,591.40

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6. Estimate the affordable monthly mortgage payment, the affordable mortgage amount, and the
affordable home purchase price for the following situation (see Exhibit 7–6). (LO 7.3)

Monthly gross income, $2,950 Down payment to be made—15 percent of purchase price
Other debt (monthly payment), $160 Monthly estimate for property taxes and insurance, $210
30-year loan at 6 percent

$2,950 × 0.38 = 1,121 - 160 - 210 = Affordable monthly mortgage payment, $751
$751 ÷ 6.00 × 1,000 = Affordable mortgage amount, $125,167
$125,167 ÷ 0.85 = Affordable home purchase, $147,255

7. Based on Exhibit 7–7, what would be the monthly mortgage payments for each of the following
situations? (LO 7.3)

a. A $160,000,15-year loan at 6.5 percent.

$8.71  160 = $1,393.60

b. A $215,000, 30-year loan at 5 percent.

$5.37  215 = $1,154.55

c. A $190,000, 20-year loan at 6 percent.

$7.16  190 = $1,360.40

8. Which mortgage would result in higher total payments? (LO 7.3)

Mortgage A: $985 a month for 30 years
Mortgage B: $780 a month for 5 years and $1,056 for 25 years

A: $985  360 months = $354,600

B: ($780  60 months) + ($1,065  300 months) = $366,300

9. If an adjustable-rate 30-year mortgage for $120,000 starts at 4.0 percent and increases to 5.5 percent,
what is the amount of increase of the monthly payment? (Use Exhibit 7–7.) (LO 7.3)

120 × $4.77 = $572.40; 120 × $5.68 = $681.60; $681.60 – $572.40 = $109.20

Or, $5.68 – $4.77 × 120 = $109.20

10. Kelly and Tim Jarowski plan to refinance their mortgage to obtain a lower interest rate. They will
reduce their mortgage payments by $56 a month. Their closing costs for refinancing will be $1,670. How
long will it take them to cover the cost of refinancing? (LO 7.3)

$1,670 ÷ $56 = 29.82 (about 30 months; two and a half years)

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11. In an attempt to have funds for a down payment in five years, James Dupont plans to save $3,800 a
year for the next five years. With an interest rate of 4 percent, what amount will James have available for
a down payment after the five years? (LO 7.3)

$3,800 × 5.416 = $20,580.80

12. Based on Exhibit 7–9 , if you were buying a home, what would be the approximate total closing costs
(excluding the down payment)? As an alternative, obtain actual figures for the closing items by
contacting various real estate organizations or by doing online research. (LO 7.3)

Student answers will vary based on estimates using Exhibit 7-9.

13. You estimate that you can save $3,450 by selling your home yourself rather than using a real estate
agent. What would be the future value of that amount if invested for five years at 3 percent? (LO 7.4)

$3,450  1.159 = $3,998.55

CASE IN POINT (p. 241)

1. How could the Bowmans benefit from buying a home that needed improvements?

Buying a home that needs improvement can make sense for two reasons. First, it may be the only
affordable choice, and the buyer may be willing to fix up the residence. Second, the location or style may
be exactly what is desired and improvements a tradeoff that must be made.

2. How might Beth Young have found out when mortgage rates were at a level that would make
refinancing her condominium more affordable?

By regularly reading the business section of the newspaper or monitoring rates online, it is possible to
keep up to date on changing home mortgage interest rates. Regularly talking to a real estate agent or a
loan officer at a financial institution will also help in keeping informed on mortgage rates.

3. Although the Zorans had good reasons for continuing to rent, what factors might make it desirable for
an individual or a family to buy a home?

Renting is desired by those who may need to move frequently or who do not want the responsibilities
associated with the home ownership. But people who buy their place of residence wish to take advantage
of the financial benefits of home ownership along with the stability of residence and flexibility in
decorating their home.

4. What actions might each of these home buyers take to use websites or apps to enhance their home-
buying and financing activities? Based on a web search, what advice would you offer when using
the online sources for various phases of the home-buying process?

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Student responses will vary. Possible actions might include obtaining additional information and
comparing features of various housing alternatives, analyzing mortgage sources and costs. Students
should be reminded to assess the validity of information presented on various websites.

CONTINUING CASE (p. 242)

1. Using Your Personal Financial Plan Sheet 22, compare the advantages and the disadvantages of
renting a home or apartment versus the purchase of a home.

Solution:
Student solutions may vary. The following are suggested responses.

Advantages
Renting a Home/Apartment Purchasing a Home

1. Mobility- you can move easily (subject to lease Permanence- your home is not subject to a
agreement) lease renewal

2. Fewer responsibilities for maintenance or The upgrades you make to the home may
repairs enhance its value in the long run

3. Minimal financial commitment The mortgage payments you make on the

principle of the loan go towards equity in the
home
4. Small up-front payment for rent and security Mortgage interest may be tax deductible

5. A wise choice if moving to an unfamiliar area – Pride of ownership

may want to be sure you want to move there

6. You are only committed to rental for term of Privacy

lease

7. Renter’s insurance is less expensive than Value of the home may increase over a
homeowner’s insurance number of years

8. You may have more disposable income as rent is Equity in the home may be used as collateral
typically less expensive than a mortgage for other loans
payment

9. No major up-front fees, such as closing costs Mortgage payments are the same month to
associated with home purchases month (on a fixed rate mortgage)

Disadvantages
Renting a Home/Apartment Purchasing a Home

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1. No tax advantages Large financial responsibility

2. Limitations on remodeling/ decorating Property taxes are an additional expense and

may fluctuate
3. Restrictions on pets, hobbies, other activities Maintenance and upkeep is your
responsibility

4. Rent payments have no equity value Large down payment required

5. No ownership of dwelling Must have good credit to secure a mortgage

6. Landlord may decide not to renew the lease You may not like the neighbors

7. Landlord may decide to increase the rent when You may have difficulty selling the property
the lease is up for renewal
8. Fellow tenants may be noisy Property value may decline if the economy
takes a turn for the worse

9. Landlord rules must be followed or you risk If you are unable to make the mortgage
losing your security deposit or being evicted payment, you may lose your home to bank
foreclosure

2. Jamie Lee and Ross are estimating that they will be putting $40,000 from their savings as a down
payment on their home purchase.

Using the traditional financial guideline suggestion of “two and a half times your salary plus your down
payment”, calculate approximately how much Jamie Lee and Ross can spend on a house.

Solution:
Salaries combined: $45,000 (Jamie Lee) + $70,000 (Ross) = $115,000

Two and a half times the combined salaries: $115,000 x 2.5 = $287,500

Add the down payment: $287,500 + $40,000 = $327,500

Jamie Lee and Ross can look for homes that are worth approximately $327,500.

3. Using Your Personal Financial Plan Sheet 24, calculate the affordable mortgage amount that would
be suggested by a lending institution and based on Jamie Lee and Ross’ income.

How does this amount compare with the traditional financial guideline found in Question #2?

Use the following amounts for Jamie Lee and Ross’ calculations:

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 10% down payment

 28% for TIPI
 $500.00 per month for estimated combined property taxes and insurance
 5% interest rate for 30 years (found in Exhibit 7-7 table, 4th ed., pg. 230)

Step 1: Monthly gross income: ($45,000 + $70,000)/12 $ 9,583.00

Step 2: Multiply $9,583.00 by 0.28 (for TIPI) $ 2,683.24
Step 3: Subtract debt payments ($289.00)
and property taxes and insurance ($500.00)

Affordable Monthly Mortgage Payment $ 1,894.24

Step 4: Divide by 5.37 (rate of 5% for 30 years) then multiply by $1,000.00

Affordable Monthly Mortgage Amount $352,740.00

Step 5: Divide Affordable Monthly Mortgage Amount by (1 minus fractional proportion
of down payment) Ex: 1 - .10 (or 10% down payment) = .9

Affordable Home Purchase Price $391,933.33

Using the lending institution formula in #3, Jamie Lee and Ross affordable home purchase price is
greater than the traditional formula of using “two and a half times your salary you’re your down
payment” method.

4. Jamie Lee and Ross found a brand new three-bedroom, 2 ½ bath home in a quiet neighborhood for
sale. The listing price is $275,000. They would like to place a bid of $260,000 on the home. The
seller’s counteroffer was $273,000. What should Jamie Lee and Ross do next to demonstrate to the
owner that they are serious buyers?

Solution:
The owner of the property is signaling that he would like the offer from Jamie Lee and Ross to be closer
to the listing price of $275,000.
Jamie Lee and Ross have several options to demonstrate that they are serious buyers (responses may
vary):
 Jamie Lee and Ross could meet the owner’s counteroffer and pay $273,000 for the home.
 They could come in with a lower offer, such as $269,000, meeting the owner half-way, but
include a fast closing date. The owner may accept this if he needs to vacate the property sooner
than later.
 Jamie Lee and Ross may meet the counteroffer of $273,000, but ask that some of their closing
costs be covered by the owner as a compromise.
 As it is a new home, Jamie Lee and Ross may meet the counteroffer of $273,000, but ask that
some extras be included from the builder such as closing costs, carpet upgrades, an alarm system,
landscaping, remote controlled garage doors, prepaid points toward their mortgage, etc.

5. Jamie Lee and Ross received a signed contract from the buyer accepting their $273,000 offer! The
seller also agreed to pay two points toward Jamie Lee and Ross’ mortgage. Calculate the benefit of
having points paid toward the mortgage if Jamie Lee and Ross are putting a $40,000 down payment on
the home.

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Solution:
Each point represents prepaid interest on a home loan. Each discount point is equal to one percent of the
loan amount and will enable Jamie Lee and Ross to get a lower interest rate on their mortgage.

Calculation:
1. Home Purchase Price 1. $273,000
2. (-) Down Payment 2. 40,000
3. = Loan Amount 3. $233,000
4. 4.
5. 2 Discount Points Paid (= $233,000 x .02) 5. $4,660.00

As negotiated in the sales contract for the home, the seller has agreed to pay $4,660.00 toward discount
points to lower Jamie Lee and Ross’ interest rate on their home loan.

6. Calculate Jamie Lee and Ross’ mortgage payment, using the 5 percent rate for 30 years on the
mortgage balance of $233,000.

Solution:
(Using table found in Exhibit 7-7, 4th ed. pg. 230):

233 × $5.37 = $1,251.21

Jamie Lee and Ross’ monthly mortgage payment would be $1,251.21.

DAILY SPENDING DIARY (p. 243)

Maintaining a record of daily spending will help students prepare for the purchase of a home or will help
them better manage their financial resources is they are currently purchasing their own home.

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