MORTGAGE Sage By B & I Computer Consultants, Inc. ( 1

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1 MORTGAGE Sage (Rent versus Buy Calculator) B & I Computer Consultants, Inc. (301) INTRODUCTION: Many people have asked whether they should buy a home or continue to rent? A manual calculation of the financial pluses and minuses of home ownership can get complicated. The purpose of this calculator is to analyze the most cost-effective solution for your situation. This system will recommend the best outcome, which is determined by calculating the relevant total costs of home ownership investment and total rental costs. There are many factors to consider when calculating the cost of home ownership including the down payment, closing costs, mortgage insurance, property taxes, utilities, and repairs. There are also benefits to home ownership including the income tax benefits, the predicted resale value of your home in the future, and how much of the original loan balance you have paid off. The costs of renting include the monthly rent (with an annual rental increase), utilities and insurance. By inputting all of this data into the calculator, the system is able to produce a dollar figure that would ultimately give a comparison between buying and renting. The advantages and disadvantages can be determined to an extent which will make more sense for a user to buy or rent, but only the user can weigh the emotional factors and decide if they are ready for home ownership. Some of the financial advantages of buying a home vs. renting are that you build equity, and qualify for tax benefits that assist you in dealing with your new financial responsibilities such as insurance, real estate taxes, and maintenance issues. Disadvantages of owning a home include incurring upfront expenses such as the down payment and closing costs, and the time and money it takes to keep a house in good shape. In renting there are no fixed costs, when the lease is up the contract is over, less maintenance, and a security deposit (usually one month's rent.) Conversely, some of the disadvantages of renting are that you never build equity, there are no tax advantages, and you have limited or no ability to personalize your home. This system was designed in Microsoft Access There were some assumptions made in this system. Traditional mortgage insurance is based on your credit history and down payment amount. In this system the monthly mortgage insurance was the average loan amount * / 12. Monthly renters insurance is recommended but not required. (Renters insurance insures the items in the rental unit.) Homeowner's insurance is required until your mortgage is paid off. Private mortgage insurance (PMI) is a way a lender makes sure that the ability of the homeowner to repay the mortgage is insured if the homeowner secures the loan with less than a 20% down payment. The required down payment and loan points all depend on your credit history. To facilitate ease-of-use, the user can only access system functions that are on the screen. MORTGAGE Sage By B & I Computer Consultants, Inc. ( 1

2 SYSTEM SPECIFICATIONS: The Rent vs. Buy Calculator was designed in Microsoft Access The system consists of 4 screens: Start screen Contact Data Entry screen Results screen Monthly Payment Screen The system can be used without a mouse. To click any button with the keyboard, hold down Alt and press the underlined letter on the button label. (To Close, hold down Alt and press c.) FEATURES: MORTGAGE Sage By B & I Computer Consultants, Inc. ( 2

3 Based on the input criteria, the system calculates and summarizes the following: Total home purchase cost consists of: -Monthly mortgage payment MORTGAGE Sage By B & I Computer Consultants, Inc. ( 3

4 -Accumulated equity value -Total interest and principal amounts paid -Loan points and loan origination cost Total rental cost consists of: -Cumulative rent paid -Utilities (includes renter s portion of electric, water, or gas expenses) -Renter s property insurance (optional coverage) Total home ownership cost consists of: -Cumulative mortgage payments -Property mortgage insurance-pmi -Property tax -Association fee (applied only if required by the homeowner s association) -Property insurance (required by the state and mortgage lending company) -House maintenance (accounts for additional home improvement expenses) -Home utilities (includes electricity, water, and gas expenses) -Loan origination cost -Mortgage interest write-off benefit Home selling results forecasts: -Future home value -Home selling costs -Proceeds from home purchase investment MORTGAGE Sage By B & I Computer Consultants, Inc. ( 4

5 ASSUMPTIONS: For the purpose of this expert system design, some assumptions have been developed: 1. Property mortgage insurance (PMI) is based on the down payment amount and the borrower s credit history. For the purpose of this system, the monthly PMI factor has been averaged to be 0.5% / 12 of the outstanding loan amount. 2. Income tax calculation does not include any additional deductions by the borrower that may, in turn, decrease the total tax amount and, therefore increase the home purchase benefit. LIMITATIONS: The time period involved for the comparison between renting and buying option has been projected to no further than 30 years. It is assumed that after 30 years the home mortgage will be paid off completely. The breakeven point only works within the loan repayment period. If no breakeven point is given, the breakeven point is past the loan repayment period. ANALYSIS: Analysis between the two options is calculated on the Results screen. This section consists of four factors that enable us to calculate the final advantage/disadvantage of either option. 1. Payment Difference + costs + interest: The sum of the future value of all the monthly payment differences between buying and renting, the upfront loan costs, and the interest earned on the down payment if it was invested. 2. Total equity appreciation: Represents the net proceeds from buying and selling a home. The calculation is based on the expected home value at the time of the sale, minus the selling costs associated with the sale, minus the original down payment at the time of the purchase, plus cumulative principal paid. 3. Home purchase benefit: Represents the bottom line advantage/disadvantage of buying a home. It is the difference between the total rental cost minus the invested payment difference and the total home ownership cost minus the accumulated equity. If this number is positive, it indicates the positive advantage of buying a home. If this number is negative (number surrounded by parentheses), it indicates the positive advantage of renting instead of buying. MORTGAGE Sage By B & I Computer Consultants, Inc. ( 5

6 GLOSSARY ADJUSTABLE/VARIABLE RATE MORTGAGE (ARM) These mortgages usually have a term of 30 years and the interest rate fluctuates throughout the life of the loan, based on some index. There are many kinds of Adjustable Rate Mortgages. Some adjust every year, every 6 months, or even every month. The most common one is a T-Bill ARM. A One Year T-Bill ARM with 2/6 Caps adjusts once per year using the Treasury Bill as it's index and won't increase more than 2% a year and 6% over it's lifetime. The advantages of an ARM are that they usually start at a very low 'teaser' rate and, depending on the economy may stay at that rate or even decrease over the life of the loan. The disadvantages are that the rate can also rise substantially, and that your exact payments over time are unpredictable. AMORTIZATION A method of paying off debt by making regular installment payments over a period of time. It is the basis for all fixed rate and balloon mortgages. ANNUAL GROSS INCOME Income before taxes, insurance, or other benefits are taken out of your paycheck ANNUAL PERCENTAGE RATE (APR) A stated interest rate that reflects all the financing costs of a mortgage. The APR includes points, origination fees, and other finance charges in addition to the interest on the mortgage, and includes them all in a yearly interest rate. As a result, the APR is usually higher than the interest rate alone it also provides a benchmark for comparing different types of mortgages based on the annual cost for each loan. ANNUAL RENT INCREASE (%): Annual percentage increases in a monthly rental amount and is regulated by the state and the landlord. CLOSING COSTS The costs and fees associated with the official change in ownership of the property and with obtaining your mortgage that are assessed at the closing or settlement. Closing costs include required certifications, insurance, taxes, and other fees, and typically total between 3 and 6 percent of the mortgage amount. CREDIT REPORT A report that documents a borrower's credit history and current status. Borrowers can examine their own credit reports, although most credit reporting companies charge a fee to provide a report. CURRENT RETURN ON SAVINGS (%) The expected interest income earning on savings DOWN PAYMENT: The part of the purchase price of a home that the buyer pays in cash up front not included in the loan. EQUITY The value of your home after the outstanding balance of any loans is subtracted. CURRENT TAX BRACKET (%): Income tax rate, which depends on the income level and family situation. MORTGAGE Sage By B & I Computer Consultants, Inc. ( 6

7 FIXED MORTGAGE RATE This is the most typical type of conforming loan. The rate is fixed for the life of the loan. Fixed rate mortgages are available with terms of 10, 15, 20, 25, or 30 years. The most common are 30 or 15- year terms. HOME PURCHASE PRICE: Purchase price of the home you buy. HOME VALUE: Selling price of your home HOUSE'S APPRECIATION RATE (%): Appreciation you expect in the home you are purchasing. INFLATION RATE (%): The sum, expressed as a percentage, changed for a loan. Inflation rate used to adjust amounts subject to annual increases. INTEREST The sum paid for borrowing money, which pays the lender's costs of doing business. LOAN ORIGINATION FEE The fee charged by a lender to prepare all the documents associated with your mortgage. LOAN TERM PERIOD (in years): The number of expected years for the term of the loan. MONTHLY ASSOCIATION FEE: The monthly maintenance fee (condominium fee or planned unit development) owners must pay to cover common area expenses. MONTHLY RENT: Amount you currently pay for rent per month. MONTHLY RENTER'S INSURANCE: A policy that covers the replacement value of possessions. MONTHLY UTILITIES: Sum of all gas, electric and water expenses per month. LOAN POINTS (LOAN DISCOUNT POINTS) Points are prepaid interest on your mortgage, charged by the lender at the time of the closing. Each point is one percent of the loan amount that is, 2 points on a $100,000 mortgage would be $2,000. PRINCIPAL The amount of debt, not including interest, left on a loan; also the face amount of the mortgage. PRIVATE MORTGAGE INSURANCE (PMI) An insurance policy the borrower buys to protect the lender from non-payment of the loan. Private mortgage insurance policies are usually required if you make a down payment that is below 20% of the appraised value of the home. PROPERTY INSURANCE: MORTGAGE Sage By B & I Computer Consultants, Inc. ( 7

8 An insurance policy that combines hazard insurance and liability coverage. RECOMMENDED MONTHLY PAYMENT: The monthly payments that a person can afford with respect to gross income. SELLING COSTS (%): The percent of your homes selling price you expect to pay to a broker or real estate agent. These are costs associated with selling a home such as closing costs (transferring fees, city, county and state transfer taxes, and cost of obtaining a mortgage). YEARLY HOUSE MAINTENANCE: Small repairs and general maintenance expenses YEARLY PROPERTY TAXES: Annual tax that can be levied each year by a governmental unit on real and personal property. The amount of the tax is tied to the value of the property. YEARS TO RENT OR OWN (HOME): The number of years over which you will rent or buy a property MORTGAGE Sage By B & I Computer Consultants, Inc. ( 8