Lesson Component Description

Transcription

1 Lesson Component Description Purpose In the buying a home topic, the students gain a fundamental understanding of purchasing a home. Learning Objectives 1. Understands that buying a home could be the biggest investment and purchase in one s life. 2. Explains the process of purchasing a home. 3. Identifies key features to consider when purchasing a home. 4. Evaluates the costs of owning a home. 5. Computes the interest for a home loan. 6. Learns the various method of paying on home loans and ways to save. Time Required 300 Minutes Materials Student Guide, Teacher Guide, PowerPoint, Quiz Procedure Follow the PowerPoint and/or use the Teaching Guide as the student follows along with the Student Guide. The guides are merely a framework for the teacher and the student. Implementing additional resources to engage the students is highly recommended. Homework Recommended but feel free to develop your own Homework assignments. 1. Have the students conduct an Internet search and identify three homes that they would like to purchase if they had the resources. Have the students compute or develop the following for each home: a. Monthly payment b. Amortization schedule c. Total interest paid over the life of the loan d. Total amount paid over the life of the loan e. Savings if paid biweekly instead of monthly Assessment Quiz 10 questions (5 True/False; 5 Multiple Choice) Quiz Key 1.T 2.F 3.T 4.F 5.T 6.A 7.D 8.C 9.D 10.B

2 Alignment to Standards Common Core State Standards: Math 1. Use units as a way to understand problems and to guide the solution of multi-step problems; choose and interpret units consistently in formulas; choose and interpret the scale and the origin in graphs and data displays (N-Q 1). 2. Define appropriate quantities for the purpose of descriptive modeling (N-Q 2). 3. Choose a level of accuracy appropriate to limitation on measurement when reporting quantities (N-Q 3). 4. Interpret expressions that represent a quantity in terms of its context (A-SSE1). 5. Explain each step in solving a simple equation as following from the equality of numbers asserted at the previous step, starting from the assumption that the original equation has a solution. Construct a viable argument to justify a solution method (A-REI 1). 6. Recognize situations in which one quantity changes at a constant rate per unit interval relative to another (F-LE). Common Core State Standards: English Language Arts and Literacy in History/Social Studies, Science, and Technical Subjects 1. Integrate and evaluate multiple sources of information presented in different media or formats (RI 7). 2. Integrate multiple sources of information presented in diverse formats and media in order to make informed decisions and solve problems, evaluating the credibility and accuracy of each source and noting any discrepancies among the data (SL 2). 3. Acquire and use accurately general academic and domain-specific words and phrases, sufficient for reading, writing, speaking, and listening at the college- and career-readiness level; demonstrate independence in gathering vocabulary knowledge when considering a word or phrase important to comprehension or expression (L 6). 4. Determine the central ideas or information of a primary or secondary source; provide an accurate summary that makes clear the relationships among the key details and ideas (RH 2). 5. Integrate and evaluate multiple sources of information presented in diverse formats and media in order to address a question or solve a problem (RH 7). 6. Determine the central ideas or conclusions of a text; summarize complex concepts, processes, or information presented in a text by paraphrasing them in simpler but still accurate terms (RST 2). 7. Integrate and evaluate multiple sources of information presented in diverse formats and media (RST 7). 8. Draw evidence from informational texts to support analysis, reflection, and research (WHST 9). Common Core College- and Career-readiness Anchor Standards: 1. Determine central ideas or themes or a text and analyze their development; summarize the key supporting details and ideas (CCR Reading 2). 2. Prepare for and participate effectively in a range of conversations and collaborations with diverse partners, building on others ideas and expressing their own clearly and persuasively (CCR Speaking and Listening 1). 3. Integrate and evaluate information presented in diverse media and formats, including visually, quantitatively, and orally (CCR Speaking and Listening 2). 4. Adapt speech to a variety of contexts and communicative tasks, demonstrating command of formal English when indicated or appropriate (CCR Speaking and Listening 6). 5. Demonstrate command of the conventions of Standard English grammar and usage when writing or speaking (CCR Language 1).

3 6. Determine or clarify the meaning of unknown and multiple-meaning words and phrases by using context clues, analyzing meaningful word parts, and consulting general and specialized reference Materials, as appropriate (CCR Language 4). 7. Acquire and use accurately a range of general academic and domain- specific words and phrases sufficient for reading, writing, speaking, and listening at the college- and careerreadiness level; demonstrate independence in gathering vocabulary when considering a word or phrase important to comprehension or expression (CCR Language 6). Web Resources Homes for sale Biweekly vs. Monthly Mortgage Calculator: Video Links Home Buying Tips: Biweekly Payments: Life Smart Applications 1. Determines the costs of owning a home. 2. Understands amortization and methods for paying off a home loan early. 3. Researches the cost of homes.

4 Name Date True or False Questions: You decide to borrow money to purchase a home. More than likely, the length of your loan will be for 30 years. 2. You find your dream home and want to purchase it immediately. For this reason, you should not have it appraised and pay whatever the seller is asking for it. 3. FHA and the VA are organizations that help people obtain loans to purchase a home. 4. You ve been looking for a home to buy. The price you can afford is $150,000. You find one you really like for $250,000. The smart thing to do is buy it now so that no one else makes on offer on it. 5. An amortization schedule breaks down the amount of interest and principal paid during the course of a loan. Multiple Choice Questions: Which of the following methods can save you thousands of dollars when paying on a mortgage loan? a. Biweekly payments b. Monthly payments c. a and b d. None of the above 7. Which of the following is included in your monthly mortgage payment? a. Property taxes b. Home insurance c. Interest d. All of the above 8. The amount you end up paying for a house usually ends up being: a. About the same as the original price of the home b. Less than the original price of the home c. More than the original price of the home d. None of the above 9. When buying a home, you should consider which of the following: a. Age of the home b. Square footage of the home c. Number of bathrooms in the home d. All of the above 10. The last step in obtaining keys to the home you are purchasing is: a. Meeting the seller at a restaurant to obtain the keys b. Going to the closing at a title company and signing all of the paperwork c. Getting an appraisal d. None of the above

5 Sequence: - Solicit class understanding of the topic - Introduce vocabulary and definitions to provide Purpose for reading - Review Key Points - Teacher Tips - Large Group Discussion Questions Slide 2 Vocabulary: - Agent a person who acts as an intermediary ( middleman ) between sellers and buyers of real estate (homes or commercial buildings) or real property (land). - Appraisal the practice of determining the value of real property. - Comps, or Comparables refers to properties with similar characteristics; for example, homes approximately the same size and price to a potential seller s home. - Title Legal Title the actual ownership of the property. - Escrow Real Estate Escrow refers to money held by a third-party on behalf of an intermediary ( middleman ) between sellers and buyers. - HOA Homeowners Association provides people with shared values, an opportunity to enforce regulations within their neighborhood. - Amortization refers to the process of paying off a debt (often from a loan or mortgage) over time through regular payments. Key Points: - Purchasing a home might be the biggest investment purchase of your life. - Key terms are important to know when purchasing a home. - A commonality of all millionaires is owning a home. Teacher Tips: - Engagement Ask the students how many want to own a home rather than renting a place to live. Why? - Check for Understanding Determine if the students understand the pluses to owning a home rather than renting from the answers above. Teacher Reflection:

6 An Investment to Live In Life Smarts: 1. Determine costs of owning a home. 2. Understand amortization and methods for paying off a home loan early. One of the most important money decisions to you ll make relates to the choice to own a home. Home ownership has several important advantages for the smart money investor. In this module, you will learn the process of purchasing and selling a home or real property. Each important step in this process will be discussed in detail so you will be confident when making this vital money management decision. Key terms Agent a real estate agent is a person who acts as an intermediary ( middleman ) between sellers and buyers of real estate (homes or commercial buildings) or real property (land). The agent attempts to find people who wish to sell and buy. HOA a Homeowners Association (HOA) provides people with shared values, an opportunity to enforce regulations within their neighborhood. An HOA s rules may surpass city codes (rules). For example, the Homeowners Association s regulations could include conformity in the exterior appearance of homes within the neighborhood; landscape requirements; or time limits on activities generating noise. HOAs typically require monthly fees by the members of the association to maintain shared structures and areas Nusenda Federal Credit Union. All rights reserved.

7 Slide 3 Vocabulary: - Interest the amount of money you pay the lender above the principal - Principal the amount you pay the lender that relates exclusively to the price of the home. It does not include additional charges such as interest. - Fixed Interest Rate interest rate stays the same throughout the time of a loan. - Adjustable Rate Mortgage (ARM) or Variable Rate Mortgage interest rate changes during the term of the loan based on market conditions. - Amortization Schedule a schedule showing each payment on an amortizing loan; including the amount of the payment, interest, and the amount towards the principal balance. Key Points: - Adjustable Rate Mortgages (ARM) or Variable Rate Mortgages might be good to have in times when interest rates are low. However, if interest rates begin to rise, so will your monthly payments. Therefore, more people feel more secure by utilizing a fixed interest rate rather than one that changes. - Location is very important in choosing whether or not you want to purchase a home. - The size of the home is just as important. This includes the number of rooms, garage, kitchen, number of bathrooms, and size of backyard. - Determine if you have the income to afford what you are looking for in a home. - You will need to get a loan to purchase the home; therefore, it s important to have good credit and a steady job with consistent income. - You will need to provide tax returns, check stubs, and other financial information to the lender so that it can determine if you have consistent financial resources so that you don t default on the loan if they decide to lend you the money. Teacher Tips: - Engagement Ask the students what they might be looking for in the purchase of their own home. - Check for Understanding Have the students complete the activities in the Student Guide and check their answers for accuracy. Teacher Reflection: 7

8 Appraisal the practice of determining the value of real property Comps or Comparables - refers to properties with similar characteristics; for example, homes approximately the same size and price to a potential seller s home. This can be accomplished either by a real estate agent or a certified appraiser or surveyor who will establish the value of a potential client's home or property (through a market analysis). Legal Title the actual ownership of the property. When a contract for the sale of land is executed, equitable title passes to the buyer (prior to closing). When the conditions of the sales contract are met, legal title passes to the buyer, in what is known as the closing. Real estate escrow refers to money held by a third-party on behalf of the transacting parties (the buyers and sellers). Appreciating Asset real property or other possessions you own that grow in value over time. Amortization refers to the process of paying off a debt (often from a loan or mortgage) over time through regular payments. A portion of each payment is for interest, while the remaining amount is applied towards the principal balance. Most home loans come with a fixed interest rate, meaning it never changes. An alternative to a fixed rate is an Adjustable Rate Mortgage or ARM. It is also known as a Variable Rate Mortgage because the interest rate changes throughout the life of the loan based on market conditions. The percentage of interest vs. principal in each payment is determined in an amortization schedule. Important things to consider When making a choice about owning a home, it is important to consider where the home is located. There are different reasons for choosing one house over another. Establishing a list of your daily activities can help in the decision of where to live. How close your home is to work, school, recreation, shopping, other family members, etc., can make living in the home more rewarding. 1. List three things you would consider important when deciding where you would like to live. Answers will vary. 8

9 Slide 3 (Continued) Key Points: - Selecting a real estate agent is important; they have access to many databases and information that most of us don t. Trusting who you select will be a very important step in the process. - A good agent will give you lots of homes to consider. - An appraisal of the home will tell you the going price for that home. - Once you find a home that you like and think you can afford, always negotiate the price. This process can go on for several weeks, as the seller might counter offer. - Once a price is determined, contracts are drawn up by your agent. - The location of your home is important. You should consider proximity to your work and schools that you might want your children to attend. Teacher Tips: - Engagement Ask the students if they know how much a real estate agent makes for selling a home. Answer: Between 3 and 6% of the selling price of the home. - Check for Understanding Review with the class the importance of finding a real estate agent that they can trust and the importance of that relationship. Large Group Discussion: - Ask the students where they would like to buy a home in Albuquerque and have them explain why. Teacher Reflection: 9

10 Once you have determined where you would like to live, other factors about the home come into play. The overall size of the home, details on the bedrooms, bathrooms, living room, offices, kitchen specifics, garage, and back yard all contribute to the final decision about purchasing a particular home. 2. In which part of your home do you spend the most time? Answers will vary. After you have determined your housing requirements, make a realistic evaluation of your current expenses and annual income to decide if you can afford everything you are looking for in a house. Having a good relationship with your credit union or bank is a vital component to the home ownership process. Most people do not have the cash on hand to pay for a home outright. Because of this, borrowing money from a lender has become the most common method for purchasing a home today. Lenders require a buyer to provide evidence of the ability to repay a loan. Examples include copies of paychecks from a steady job and proof of income from investments. Working with your own credit union or bank may be a convenient place to obtain a loan; however, there are many options available, so it is wise to shop around. Compare the mortgage lending rates offered by three local banks in your area. Find the rates for a: 30-year, fixed loan: Lender 1 - Lender 2 - Lender 3-15-year, fixed loan: Lender 1 - Lender 2 - Lender 3-10

11 Slides 4 and 5 Vocabulary: - Square Footage the size of a home computed by taking the measurement of each room (length x width) and adding all the room measurements together. Key Points: - Buying a new home vs. an older home is something you will need to consider when you buy a home. Newer homes might look prettier and have nicer amenities; however, an older home might be better built. - The cost of the home will be based on location, actual size, and other factors such as front and backyard landscaping, fireplaces, high-end kitchen appliances, hardwood or tile flooring, and expensive bathroom fixtures can dramatically change the value of a house. - Determining the price per square footage of the home will help you compare the prices of other homes. The more square footage, the more you might be paying. Teacher Tips: - Engagement Ask the students to share with each other the number of rooms and various amenities each would like in a home. - Check for Understanding Have the students complete the calculation of square footage activity in the Student Guide and check for accuracy. Teacher Reflection: 11

12 In addition to shopping for a loan, it is crucial to select the right person as your real estate agent. This person must understand your wants and needs and be willing to represent your interests during this process. There are times when the agent will represent you when you are not present. It is important there is a good line of communication between the two of you and a relationship based on trust. A lack of communication or untimely information can make the difference between getting the home you want and possibly losing out to another buyer. Once again, shop around, and select someone you believe you can work with who will help you get the best deal for the home you want. Once you have secured an agent to assist you in purchasing a home, begin the task of finding a home to buy. This is where the agent now earns his/her pay. Many agents work with a network of other agents, locally and nationally, to generate a database of available homes to buy and sell. They can easily access this list and narrow the different choices based on location, size, price, amenities, or other criteria to provide a place to begin your home search. After you have narrowed your home choices and have decided on one, the next step is to negotiate a price. There are several components that go into this negotiation. First, the seller will establish a price for their home. An appraisal of the home s value will be determined according to home s age, size, location, condition; and most importantly, the value of other similar homes recently sold in the area. If the appraisal is close to the asking price of the seller, you (the buyer) can make an offer on the home. It is up to you, with the advice of your real estate agent, to determine an appropriate offer for the home. You may choose to offer less than the asking price. At this time, the agent will deliver the offer and counter offers from the buyer and the seller. When a price is agreed upon by the buyer and seller, contracts are drawn up by the agent to be signed by both parties. This transaction usually involves a title search, a mortgage, and an escrow company. Location, location, location Of the many variables that go into selecting a home, choosing the location is an important first step. Knowing how far your commute will be to and from work; how much time you will spend stuck in traffic; and whether you may need to leave earlier to make it to work on time, will help you decide whether your quality of life will be impacted by your choice. 12

13 You may or may not want to start a new family and have children in the home you buy. If you are planning to have children, the location and quality of the schools in the area become a concern. Just like your commute to work, forcing your children to ride a bus or walk a long distance to and from school can lead to potential problems that could be avoided if the school were closer to home Remember, we are talking about choosing a place to live. If you can have all the things you want to enhance your quality of life, you owe it to yourself to add them to the list of what you want in a home. How far is it to the grocery store? Where are the shopping malls? How about movie theaters? Are you an active individual? Do you enjoy hiking, camping, swimming, bike riding, etc.? Where would you go for those things? What about pets? Is there a park nearby? All these things should be thought about before you make your pick. Once you have worked through these considerations, one more question remains: How much are you willing to pay to live in a better place? This does not mean, How much house can you afford? It relates to spending money on a monthly basis to live in a community with gated entrances, security patrols, restrictive covenants, and homeowners associations. What do you want in a home? Everyone enjoys getting something new. We are told each day we need new clothes, a new car, and even the newest technology in cell phones. When it comes to owning a home, this is no exception. An argument could be made, however, with regards to a new versus an older home, as to which one is more valuable. Ultimately, it becomes a matter of personal preference depending on the homes you are comparing. Sometimes, an older home is a better option. Modern construction technology and materials can bring the cost of a new home down in the short run. In many cases, however, the older, established house might have been better built by well-trained craftsmen. Don t allow yourself to be fooled by the shiny exterior of a newer home. What you need to look for is a house with a solid structure, built by a reputable contractor. The cost of a home is based on three factors: The first factor is location, as discussed previously. The second factor is the actual size of the home. The price of a home is determined by the amount of living space in the home. 13

14 Key Points: - Although the diagrams look the same size, the size of each home is considerably different Teacher Reflection: 14

15 21 4 This is referred to as the Square footage. Calculating the square footage is done by taking the measurement of each room (length x width) and adding all the room measurements together. This normally includes only heated spaces and does not factor in garage size or storage space outside the house. Understanding that adding square footage will drive up the cost of the home will help you decide what you can ultimately afford House Plan 1 House Plan 2 1. In the above floor plans, calculate the square footages of each house. Answer: House Plan square feet (44-0 x 27 0 ) House Plan square feet (31-0 x 21 4 ) 15

16 Slides 6 and 7 Vocabulary: - FHA or Federal Housing Administration offers government-insured loans with flexible credit guidelines. - VA or Veterans Affairs offers loans to help veterans and their families obtain home financing. - Amortization the practice of separating principal and interest and applying a greater portion of your monthly payment toward the interest during the first half of the loan period. Key Points: - Credit unions, banks, and lending companies are financial institutions that can lend you money to buy a home. - FHA is a government-insured loan with flexible credit guidelines. - VA is a loan offered by the Veterans Affairs to help veterans buy their homes. - The concept of amortization forces you to pay more in interest up front during the course of a mortgage loan. - You can expect to pay considerably way more than the price of the home after adding all of the interest you end paying over the length of the loan. Teacher Tips: - Engagement Conduct an Internet search to locate some homes around the surrounding area so that the students can see the prices that homes are selling for. - Check for Understanding Have the students complete the activity in the Student Guide, calculating a mortgage payment, and check their answers for accuracy. Web Resources: - Homes for sale Teacher Reflection: 16

17 2. If the cost of the two houses is the same, say $158,000, which home is the better value? Explain: The third and final factor to the cost of a house relates to optional items. Front and backyard landscaping, fireplaces, high-end kitchen appliances, hardwood or tile flooring, and expensive bathroom fixtures can dramatically change the value of a house. Establishing a budget and a musthave option list prior to shopping for a house will help you determine the extras you must absolutely have and the items you could potentially live without. Find a loan One of the major obstacles you face when deciding to buy a home is finding the money to pay for it. Today, there are several places to secure the financing needed to purchase your dream home. The most common place to get a home loan is a bank. Banks make money by lending money. Historically, banks were eager and willing to give loans to just about anyone who wanted one. Instability in the housing industry, however, has forced banks to become more cautious when approving loans. Individuals asking to borrow money must now provide documentation proving their eligibility for a loan. Other institutions that offer loans are credit unions and lending companies that can be accessed through the Internet. Regardless of the source of financing for your loan, the two most common types of mortgages are FHA and VA. FHA stands for the Federal Housing Administration which offers government-insured loans with flexible credit guidelines. VA stands for Veterans Affairs, which offers loans to help veterans and their families obtain home financing. 17

18 Slide 7 (Continued) Vocabulary: - Amortization Table a table or chart showing each payment on an amortizing loan; including the amount of the payment, interest, and the amount toward the principal balance. Key Points: - The average length of a mortgage loan is 30 years - The number of payments you will make for a 30 year loan is 360 (12 months x 30 years) - There is a standard formula to determine your monthly payment. The formula encompasses the amount of the loan, the interest rate, and the total number of payments. A = monthly payment P = amount of the initial loan i = monthly interest rate i = monthly interest rate n = total number of payments Teacher Tips: - Engagement After going over the above formula with the students, see if they can determine the monthly payment given in the example in the Student Guide. - Check for Understanding Most students will struggle with the above problem. - Determine how many of the students were able to solve the problem and assist those who struggled. Web Resources: Amortization Calculator: Teacher Reflection: 18

19 How much home can you afford Now that you have chosen everything you want in a home, it s time to calculate how much you can afford. In most cases, people wanting to own a home must borrow the money to pay for it. The term used to describe this borrowed money is called a Mortgage. In its simplest form, a mortgage is defined as principal (actual amount borrowed) times interest (usually an annual percentage rate) times the length in years of the loan. 1. Calculate what your mortgage would be for a home costing $275,000 with an interest rate of 4.5% for 30 years. Answer: ($275,000 x.045 x 30 years) = $371,250 Once you know the amount of the mortgage, determine how much your monthly payment will be by multiplying the number of years of the loan by 12 and dividing the mortgage by this number. The resulting monthly payment is a combination of the principal and interest of the loan. Simply stated, each month you pay off a portion of the principal and a portion of the interest for the life of the loan. However, there is one more wrinkle added to this process. Lending institutions want more of their interest paid back during the first years of the loan as a safeguard against borrowers not honoring their debts. This is accomplished using a payment schedule that separates the payments based on principal and interest and applying a greater portion of your monthly payment toward the interest during the first half of the loan period. This is amortization, as defined earlier. How is an Amortization Schedule Calculated? An amortization schedule is a table or chart showing each payment on an amortizing loan and including the amount of the payment, interest, and the amount toward the principal balance. Thankfully, there are many free websites and calculators that create amortization schedules automatically. The downside to this is that people are less informed on the mathematical calculations involved in creating the schedule. The following example below provides step-by-step calculations for a simple, fixed-rate mortgage. 19

20 Let's say you are purchasing a new home for $280,000 with a $30,000 down payment. Your bank agrees to provide you with a $250,000 mortgage at a fixed interest rate of 5% for 30 years. What is your monthly payment? How much money are you paying toward interest and principal each month? Let's find out. Determine the total number of payments In this example, you must make one payment per month for 30 years. This means you will make 360 payments over the course of the mortgage (12 x 30 = 360) Determining a monthly payment If there were no interest rate, determining your monthly rate would be simple. Divide the loan amount by the number of payments: $250,000 / 360 = $ Obviously, the bank has to make money, so the mortgage includes a 5% interest rate (to provide profit for the bank). It is important to note that 5% is an annual interest rate. Since all of the following calculations are based on a monthly payment schedule, the annual rate needs to be converted to a monthly rate as follows: 5% / 12 = 0.416% Determining the monthly payment to account for interest requires a complicated formula shown below. 20

21 Slide 7 (Continued) Key Points: - After determining how much your monthly payment will be, you can now determine how much you will pay for the home over the length of the loan as well as the total interest paid. o Total Paid for House = (Monthly Payment) x (# of payments) o Total Interest Paid = (Total Paid for House) (Loan Amount) - Although the monthly payment will stay the same every month, the amount of money that goes to interest will vary. - Go over the Amortization table in the Student Guide to show students how the interest varies from month to month and how a larger portion of the monthly payment goes toward interest in the beginning of the loan. Teacher Tips: - Engagement Ask the students to determine why they pay so much on interest over the term of a mortgage loan. - Check for Understanding Ask the students if they have any questions regarding the way amortization works. Teacher Reflection: 21

22 A is the monthly payment; P is the loan's initial amount; i is the monthly interest rate; and n is the total number of payments. Using our numbers (P = $250,000; i = 0.416%; and n = 360), the formula yields a monthly payment of $1, Determining the total interest The total cost of the loan can now calculated, since there will be 360 payments of $1, The total cost is approximately $483,139 (actually $483, if you don't round the monthly payment to two decimals). Subtracting the original loan amount ($250,000) leaves the amount of interest: approximately $233,139. Even though the interest rate is only 5%, the interest paid is almost as much as the purchase price! Determining the breakdown of each monthly payment Even though the monthly payment is fixed, the amount of money paid to interest varies monthly. The remaining amount is used to pay off the loan itself. The complicated formula above ensures that after 360 payments, the mortgage balance will be $0. For the first payment, we already know the total amount is $1, To determine how much goes toward interest, multiply the remaining balance ($250,000) by the monthly interest rate: $250,000 x 0.416% = $1, The rest goes toward the mortgage balance: $1, $1, = $ After the first payment, the remaining amount on the mortgage is $249, ($250,000 - $ = $249,699.61) The second payment's breakdown is similar except the mortgage balance has decreased. The portion of the payment going toward interest is now slightly less: $1, ($249, x 0.416% = $1,040.42) 22

23 This process of calculating interest based on the remaining balance continues until the mortgage is paid off. Each month, the amount of interest declines, and the amount paid towards the loan increases. After 360 payments, the mortgage is paid in full. It is important to note that our calculations do not include any additional fees, such as closing costs. Create an amortization schedule for purchasing a motorcycle. The cost of the motorcycle is $ 6,000. The loan is for four years at an interest rate of 5%. Search the Internet for an amortization calculator to assist you in this problem. Be prepared to share with the class. To honestly know how much you can afford to pay for a house, additional expenses must be added to your monthly mortgage payment. Other expenses include Homeowner s Insurance, Property Taxes, and Utilities (gas, electric, and water). Property taxes are paid annually and are based on the assessed value of the property and improvements. In addition, other costs must be considered including maintenance and repair and possibly monthly or annual fees paid to housing associations if you live in a gated or protected community. 23

24 Slides 7 (Continued) and 8 Vocabulary: - Property Taxes mandatory taxes that are paid to the county that you live in based on the value of your house and the land it sits on. - Utilities gas, electricity, and water, etc. Key Points: - Other expenses of owning a home include Homeowner s Insurance, Property Taxes, and Utilities (gas, electric, and water). You will also have to consider maintenance and repair and possibly monthly or annual fees to housing associations. - Finding a real estate agent can be critical to finding the home that you want to live in. - Real estate agents work for you. They in some respects can be considered as your employees. If you don t feel like they are helping you, you might consider finding another agent. - You may want to consider interviewing your agent and asking for his or her track record and recent sales over the last six months prior to beginning your house search. - Real estate agents have access to national databases and can sort home listings by many different categories including prices ranges, locations, styles, square footage, amenities, etc. - Real estate agents can also give you price comparisons of other homes in the area, so that you have something to base your decision on. These comparisons are known as comps. Teacher Tips: - Engagement Ask the class if they know anyone who is a real estate agent, or if they can name some common real estate companies. - Check for Understanding Ask the students to list some attributes that they feel a real estate agent should have. Have them explain why. Teacher Reflection: 24

25 Real estate agents In today s real estate market, finding the right person to represent you during the various stages of buying a home can be the difference between a good experience and a bad one. The people who do this work are a very diverse group with differing approaches to their jobs. Try to find someone you believe to be honest and a good communicator. Remember, real estate agents work for you and are contractually obligated to represent your interests. This means they are your paid employees throughout the purchasing process. How do you decide which agent to contract to help buy or sell your home? Investigate the track record of the agents you select. Ask them to provide a list of their recent house sales from the past six months. It doesn t matter whether the agent works for a large national real estate firm or is a part of a small local office. The agent should have a strong understanding of the housing market in the area you are interested in living to get the results you are looking for at a price you can afford. Real Estate Agents use several tools in locating homes for a potential buyer. Almost all agents are part of or have access to national databases that track home sales in the U.S. This is a huge advantage when trying to locate homes that are selling in your area. Available houses can be sorted based on a price range or other attributes like square footage, garage space, or style of the home. Agents also gather data related to recent home sales to use as a comparison to the available homes for sale to provide an idea of the true value of the houses in a certain area. These comparisons, or Comps, help buyers and sellers settle on a reasonable price for their homes. Of course, this does not mean a seller won t ask a high price. The comps will help you as a buyer, however, from paying too much for a house based on the average price of other recently sold homes in your area. The services that a real estate agent provide make the process of finding, negotiating a price, and closing on a house easier and quicker for you as a buyer. However, this service is not free. Agents charge a fee based on the final sale price of the house. This fee is usually split between buyer and seller and is paid at the time of final signing of all the mortgage and title documents (also known as the time the sale is closed or at Closing ). 25

26 Slides 8 (Continued) 9 and 10 Vocabulary: - Closing refers to when you sign all the documents to purchase your home. - Buyer Inspection Services are involved in home sales/purchases to protect consumers from major defects/deficiencies such as structural, roof, plumbing, and HVAC issues that could result in major repair or replacement costs. Key Points: - Once the price is agreed for your home, the real estate agent will schedule a time for you to sign all of the paperwork. This date is referred to as the closing. It usually occurs at an escrow company with a real estate broker. - Again, real estate agents normally charge between 3% and 6% for their services. Sometimes if the seller has an agent, and you have an agent, they will split the fee with each receiving 3% on the sale. - You can do some legwork on your own to find a house for sale by driving up and down neighborhoods, searching the Internet, and looking in the newspapers. You can even find real estate for sale in magazines at grocery stores and other convenience stores. - Appraisal companies are in the business of viewing homes and evaluating them against a defined set of criteria to better define their worth. Teacher Tips: - Engagement Have the students conduct research and find a minimum of three homes that they would like to purchase if they had the resources to do so. - Check for Understanding Have the students explain their selections above to the class. Teacher Reflection: 26

27 Typically, agents charge a 6% fee for their services. This fee can be negotiated (under certain conditions) but as a buyer, you can expect to pay at least 3% to an agent once the house is bought. Be diligent with your agent, and make sure they are working hard for their money. As an industry, realtors have established a fixed rate for their services; therefore, it is possible to employ an agent who is not as motivated as others might be. As a buyer, it is important to know how long an agent has been working as a realtor and his/her home sales record. Any prior client referrals would also be helpful. The last thing to know about real estate agents is that they perform only one function in the overall process of buying a home. Real estate brokers are required to complete the legal documents necessary for a closing to be legitimate and final. Find your dream home Finding your dream home takes a lot of time and leg work. The easiest way to do this is to drive around the area you wish to live and look for homes for sale in the neighborhood. You can do this efficiently by searching the Internet and newspapers. Professional marketing materials, available in stands at many grocery stores, restaurants, etc., will help target homes before you ever get in the car. What is the home worth? What is a home worth? This is not an easy question to answer. The seller of the home will have an asking price, but that is not necessarily the actual worth of the home. The age, condition, and size are components in determining a home s worth. Appraisal companies are in the business of viewing homes and evaluating them against a defined set of criteria to better define their worth. Another way to evaluate a home is to compare it to other homes of similar age, size, and in close proximity; this process is known as comps. Buyer inspection services are involved in home sales/purchases to protect consumers from major defects/deficiencies such as structural, roof, plumbing, and HVAC issues that could result in major repair or replacement costs. Purchasing a home will almost always involve negotiation which is why it is smart to work with a competent and trustworthy real estate agent that can negotiate effectively on your behalf. Just like any item for sale, the worth of a home is what someone is willing to pay for it. 27

28 Slides 11, 12, 13 and 14 Key Points: - Homeowner s insurance is mandatory if you are borrowing money from a financial institution. The premiums are usually paid monthly and are included in your monthly mortgage payment. - Real estate taxes are also required and are normally included in your monthly mortgage payment. - At the closing, you are required to produce funds for a down payment, appraisal reports, escrow, and the fees for closing your loan. - Once all the paperwork is signed, you will be given the keys and you officially take ownership of the home. - Verify with the Title Company that you have three days after the signing of the paperwork to change your mind. - If you make extra payments, you can save thousands of dollars in interest and pay off your loan early. - Consider setting up a biweekly payment schedule instead of a monthly payment schedule. - You will need to notify your lender that you want to set up your payment schedule biweekly. Another option is to make an extra payment at the end of each year if you choose not to pay biweekly. Both these methods will save you thousands of dollars in interest. Teacher Tips: - Engagement Have the students go to the following website and compute various loan amounts and compare biweekly payments vs. monthly payments. - Check for Understanding Ask the students to review Slide 14 in the Student Guide and solicit each for understanding. Teacher Reflection: 28

29 Insurance and taxes Homeowner s insurance is often required; and it covers the house (structure) replacement due to fire or other hazards. It also covers belongings inside the home in the event of disaster or burglary. The premiums for this insurance are usually paid monthly along with the mortgage payment. Real estate taxes will also be required and are computed and held in escrow as a part of your monthly mortgage payment. Closing on a home Closing on a home involves a meeting at the Title Company. It is during this meeting that you are required to produce any funds for a down payment, appraisal reports, escrow, and the fees for closing your loan. The title company representative will review the details of the loan including your monthly mortgage payment and all of the components that make up that payment. At the end of this meeting, you will be given the keys, and you officially take ownership of your dream home! Last things to know Many of the fees associated with purchasing a home, such as closing costs, appraisal reports, etc., can be paid by either the seller or the buyer or even split between the two parties. You do not need a real estate agent to buy a home, but a good agent can be extremely helpful in negotiating the price of the home; determining who pays the costs/fees; and in the end, help you realize a significant savings. A home is usually an appreciating (goes up in value) asset in contrast to renting an apartment, where you pay a monthly rent. Regardless of how long you stay in an apartment, however, you never build equity. The biggest saving tip when buying a home As mentioned earlier, the length of a mortgage is normally 30 years. You can even negotiate a 15- year mortgage. The difference is that your monthly payment will be higher for a 15-year mortgage because you are borrowing the same amount but paying it off in less time. Borrowers who pay monthly are required to make at least 12 payments a year. Another option is to pay bi-weekly (every two weeks), where you make 26 payments but each payment will be half of what you pay on a monthly basis. You end up making one extra payment per year by paying bi-weekly. 29

30 Example: Let s say your monthly payment is $1,000 per month and the loan is for 30 years. In a year, you will pay: $12,000 = ($1,000 x 12 months). For 30 years, you will pay $360,000 = ($1,000 x 12months x 30 years). Now let s say you pay bi-weekly. In a year you will pay $13,000 = ($500 x 26 bi-weekly periods in a year) Note: Every two weeks, you will pay half of what you would ve paid during the month; however, there are 26 two-week periods in a year (52 weeks / 2 weeks). This extra payment made every year means that you will pay off the house sooner, thus saving thousands of dollars in interest. The next table shows that if you borrowed $100,000 at 5% interest for 30 years and made bi-weekly payments, you will pay off the loan in 303 months instead of 360 months (4.75 years earlier) and save $17, in interest. Tip: Make bi-weekly payments or make an extra payment at the end of each year to save thousands of dollars in interest. 30

31 Enter the principal balance owed: Enter the annual interest rate percentage: 5% Enter the number of months: 360 Here is your monthly payment amount: $ Here is your bi-weekly payment amount: $ This is how much interest you will pay using monthly payments: $93, This is how much interest you will pay using bi-weekly payments: $76, Bi-weekly Mortgage Interest Savings: $17, Assignment: In the table below, list all of the expenses that you might incur with owning a home. Use the following website to determine your monthly/bi-weekly payments. Cost of Home $200,000 Interest rate on loan 4% 30 Year Loan Expenses: Monthly payment amount Bi-weekly payment amount Other Expenses: (list and estimate each amount) 31