the cost of owning

THE COST OF OWNINGUNIT 5, LESSON 1

ORCUTT ACADEMY HIGH SCHOOL

FINANCE & ACCOUNTING

ASSESSING YOUR TIMELINEWait to buy a home until you plan on being there for at least 3 years (preferably five or more)

PROPERTY MUST APPRECIATE 15% TO COVER EXPENSES

This will take at least 3 years

EXPENSES• Mortgage costs• Inspection expenses• Moving costs• Commissions• Title insurance

BEFORE BUYING, ASK YOURSELF…Are you saving enough money monthly to reach your retirement goals?

BEFORE BUYING, ASK YOURSELF…How much do you spend (and want to continue spending) on fun things such as travel and entertainment?

BEFORE BUYING, ASK YOURSELF…How willing are you to budget your expenses in order to meet your monthly mortgage payments and other housing expenses?

BEFORE BUYING, ASK YOURSELF…How much of your children’s expected college educational expenses do you want to be able to pay for?

CALCULATING HOW MUCH LENDERS WILL ALLOW YOU TO BORROWExisting debt will lower the amount you are eligible to borrow.

Monthly Debt Payments + Housing Expenses < 38% of monthly gross income

CALCULATING HOW MUCH LENDERS WILL ALLOW YOU TO BORROWGeneral Rule: You can borrow up to three times (or two and a half times) your annual income when buying a home.

BUT… HOW MUCH YOU CAN BORROW DEPENDS ON INTEREST RATESSet by the secondary market

WHAT’S THE APPROXIMATE MAXIMUM YOU CAN BORROW?

When mortgage rates are Multiply your gross income by this figure

4% 4.6

5% 4.2

6% 3.8

7% 3.5

8% 3.2

9% 2.9

10% 2.7

11% 2.5

MULTIPLIER

The number you multiply by your gross income to determine how much money you can borrow for a home mortgage; determined by interest rates.

As rates fall, the monthly mortgage payment drops

Lower interest rates make buying real estate more affordable

CALCULATE

What is the maximum amount you can borrow?

1. Annual income $45,870

a) Interest rate 5%

b) Interest rate 11%

2. Annual income $68,900

a) Interest rate 4%

b) Interest rate 8%

3. Annual income $159,650

a) Interest rate 9%

b) Interest rate 6%

TOTAL HOUSING COSTS

MORTGAGE, TAXES, INSURANCE AND MAINTENANCE

CALCULATE MORTGAGE USING MULTIPLIER

Interest Rate 15-year mortgageMultipliers

30-year mortgage

4% 7.4 4.77

4.5% 7.65 5.07

5% 7.91 5.37

5.5% 8.17 5.68

6% 8.44 6.00

6.5% 8.71 6.32

7% 8.99 6.65

8% 9.56 7.34

9% 10.14 8.05

10% 10.75 8.78

Multiply the multiplier by your mortgage expressed in thousands of dollars (divided by 1000)

EXAMPLE

Skye is taking out a $100,000 30-year mortgage at 6.5%. What will be her monthly mortgage payment?

The multiplier is 6.32, so

Monthly mortgage payment = 6.32 x 100,000/1,000

= 6.32 x 100

= $632

CALCULATE MORTGAGE USING FORMULA

M = P [ i(1 + i)n ] / [ (1 + i)n - 1] M = The monthly payment

P = The principal, or the amount of money being borrowed

i = The interest for each compounding period, or the interest per month for a standard mortgage

n = The number of compounding periods, or the number of months for a standard mortgage

EXAMPLE

Go to Mortgage Math Workbook

TAXES: THE COST• Homeowners pay property tax, which helps support local

governments.

• Property taxes vary according to the rate set by the county. Ex: Santa Barbara County

• Usually about 1-2%

TAXES: THE BENEFIT

Interest paid on mortgages is tax deductible