Chapter 9. Learning Objectives (part 1 of 2) Explain the advantages of pre- qualification Describe...
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Transcript of Chapter 9. Learning Objectives (part 1 of 2) Explain the advantages of pre- qualification Describe...
Learning Objectives (part 1 of 2)
Explain the advantages of pre-qualification
Describe the different types of mortgages available
Ascertain how much you could afford to pay for a house
Decide how much of a down payment you would like to make
Learning Objectives (part 2 of 2)
Estimate your closing costs Evaluate whether it would be
profitable to refinance your current mortgage
Describe the process by which property taxes are determined
Evaluate automobile financing choices Analyze an auto lease proposal.
Advantages of Pre-qualification Identifies maximum mortgage one
would be able to obtain Reduces uncertainty about
qualifying for a mortgage Adds creditability to a bid (if two
bids are otherwise equal, the one with the prequal. letter should be chosen
Different types of mortgages (1 of 2) fixed rate mortgage
15-year 30-year
Adjustable rate mortgage (ARM) 1/1, 3/1, 5/1, 7/1, 10/1 5/25, 7/23
Different types of mortgages (1 of 2) Conventional mortgage FHA-insured mortgage VA-guaranteed mortgage Jumbo mortgage Reverse annuity mortgage (RAM)
Elements of an ARM Teaser rate Convertibility Margin Index tied to, & availability of index Caps
Per each change Lifetime
Obtaining a mortgage Get as many quotes as possible Lock period & application fees Miscellaneous fees
Maximum size of mortgage Ultimately, lender’s choice, but
they all follow certain rules PITI not exceed 28% of gross
income PITI and other monthly debt
payments not exceed 36% of gross income
Selection of down payment (1 of 2) Standard is 20% of purchase price If less, then will need some form of
default insurance Any form of insurance is expensive
If income constraints are a problem then a larger down payment may make it easier to get a mortgage
Selection of down payment (2 of 2) Putting more down is equivalent to
investing money risk-free at the mortgage rate
Putting more down may create a liquidity problem later, that could only be solved with a home equity loan or through refinancing
Closing Costs Prepaid interest (for first month) Title insurance Start escrow account Tax Stamps Credit report Survey Potentially many more
Choosing a mortgage (1 of 2) Fixed vs. ARM depends on risk
tolerance, income constraints, expected period of occupancy
15-year vs. 30-year depends on reduction in interest rate vs. opportunity cost of money
Choosing a mortgage (2 of 2) Paying points to get a lower rate
Great if paid by employer Foolish if occupancy less than five
years (typically) Depends on opportunity rate of return Reduces the value of refinancing the
mortgage should interest rates drop
Refinancing a mortgage Sometimes done to get at equity in
the house Popular rule of thumb of 2%
reduction vastly overstates when it can be profitably done
Depends on closing costs and the magnitude of reduction in the monthly payment
Appraised vs assessed value Appraised value = what an appraiser
thinks a home would sell for Required by all lender’s before a
mortgage is closed Required for any home-equity loan or
HELOC Assessed value = an arbitrary value
assigned to a home to set property taxes. Unrelated to appraised value.
Property Taxes Assessed valuation established Each taxing authority establishes a
millage rate (property tax per $1,000 assessed valuation
Some states establish state equilization factors
Financing a Car Rebate or below market interest
rate: both are built in price adjustments, and true value of BMIR needs to be estimated
Amount of down payment Opportunity cost of money Reduction in liquidity May affect ability to obtain a loan
Factors in a lease rate Selling price of vehicle Expected value of vehicle at end of
lease Money factor (interest rate) Monthly depreciation charge Other taxes and fees