1. THE FIRST
STEPS TO
HOME
OWNERSHIP
UNIT 6, LESSON 1
ORCUTT ACADEMY HIGH SCHOOL
FINANCE & ACCOUNTING

2. Renting vs. Owning
Are You Ready to Buy?
How Much Can You Borrow?
The Down Payment & Closing Costs
PREVIEW

3. RENTING VS. OWNING

4. ADVANTAGES OF
RENTING
• Possibly lower cost
• If you can save 10% or more of your earnings, you are
on your way to meeting your financial goals.
• No maintenance costs
• Flexibility
• Financial freedom: spend without obligation
• Psychological freedom: move more easily
• Liquidity
• Wealth not tied up in home

5. COSTS OF RENTING
• Monthly rent is subject to inflation
• Consider your costs in the long-term
Cost of owning versus renting over 30 years
Year Ownership cost per
month
Rental cost per month
1 $920 $800
5 $980 $940
10 $1,080 $1,140
20 $1,360 $1,690
30 $1,800 $2,500
Comparing the costs of owning a home that costs $160,000
to renting that same home for $800/month.

6. COSTS OF RENTING
• Owning becomes less expensive in the long run
• As a homeowner, you build equity

7. ARE YOU READY TO BUY

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

9. PROPERTY MUST
APPRECIATE 15%
TO COVER EXPENSES

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

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

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

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

14. HOW MUCH CAN YOU BORROW

15. THE EFFECT OF DEBT
Existing debt will lower the amount you are eligible to borrow.
Monthly Debt Payments + Housing Expenses < 38%
of monthly gross income

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

17. BUT… HOW MUCH YOU
CAN BORROW DEPENDS
ON INTEREST RATES
Set by the secondary market

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

19. 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

20. 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.
OR
The number you multiply by your mortgage expressed in
thousands of dollars (divided by 1000) to determine your
monthly mortgage payment

21. As rates fall, the monthly mortgage payment drops
Lower interest rates make buying real estate more affordable

22. 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%

23. DOWN PAYMENT & CLOSING COSTS

24. THE DOWN PAYMENT
If you put down 20% of the purchase price of the home
• Most favorable terms, including interest rate and closing
costs
• Don’t have to pay mortgage insurance
For a $100,000 home, the down payment would be $20,000
• (100,000)(.2) = $20,000

25. PMI: PRIVATE
MORTGAGE INSURANCE
• If you put less than 20% down
• Protects lenders if you default on your loan
• Several hundred $ per year
• Varies depending on the percent of the purchase price you
put down
• The higher the down payment, the lower the PMI
• Visit http://www.goodmortgage.com/Calculators/PMI.html

26. PURCHASE PRICE
Purchase Price = Mortgage Loan + Down Payment

27. CLOSING COSTS
• In addition to a down payment, you must have cash saved
for closing costs
• Includes escrow fees, inspection fees, title insurance, and
other miscellaneous fees
• On average from 2-3 percent of the price of the home
• Could be anywhere from 1-8% of the price of the home
• Your lender will give you a “Good Faith Estimate”

28. HELP WITH CLOSING
COSTS
• You can request
• Your seller pay part of the closing costs
• Your lender add part of the closing costs to your mortgage
loan
• Interest rate will go up about .25%

29. 1. How can you determine if you are ready to buy a home?
2. How do lenders decide how much money you can borrow to
purchase a home?
3. What factors should you consider when determining how
much money to save to buy a home?
ESSENTIAL QUESTIONS
WHAT ARE YOU LEARNING? WHY ARE YOU LEARNING IT? HOW WILL YOU USE IT?