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Economics and Personal Finance/Home Ownership

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Home Ownership

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A mortgage is a home loan. You pay off this loan by making monthly payments. Loan approval also depends on your credit history. Equity is the portion of your home that you truly "own". You would take the home's value and subtract by how much you owe on the home. Any equity you own can be put towards the purchase of your next home.

Appraisal is the unbiased estimate of the true/fair market value of a home. This is based on the condition of your home, location, etc.

Renting a Home

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Costs
  • You don't build equity.
  • No tax deduction for interest paid.
  • Limited ability or incentive to upgrade.
  • You don't build assets.
Benefits
  • No downpayment.
  • Flexibility to move.
  • Fewer maintenance expenses.
  • No property taxes.
  • Nicer amenities.

Buying a Home

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Costs
  • You pay a downpayment.
  • The process is stressful.
  • Pay property taxes.
  • Pay for maintenance.
  • Limited mobility.
  • Property taxes and insurance costs can go up.
  • Home's value could go down.
Benefits
  • You can deduct interest paid.
  • Build equity.
  • Personalization.
  • You gain a sense of belonging in the community.
  • Home value increases.
  • Can hand down to future generations.
  • Mortgage payments are sometimes less than rent.
  • Many mortgages are fixed-rate.
  • Your credit score improves.

5 C's

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1. Character
- The impression you make on the lender, such as your education, experience, credit score and manners.
- The time you have lived at your address.
- The time you have worked at your current occupation.
- If you pay your bills on time.
- If you pay your bills in full.

2. Capacity
- Are you able to produce enough money to repay the loan you're due with?
- How is your debt?
- Your debt to income ratio will go under evaluation (the lower the ratio, the better).

3. Capital
- Your net worth (value of your assets).

4. Collateral
- Do you have the assets that a lender can take control of if you decide to not pay the payment you're due?

5. Conditions
- Outside circumstances, such as how the economy is doing, is under consideration.

Foreclosure: A home that is the bank's property, which once belonged to a homeowner. The homeowner stopped making payments for some reason. These reasons could be because they got laid/fired, can't work due to medical conditions and/or excessive debt and mounting bill obligations. Downpayment is how much you give to the home's seller at the moment of the sale (the rest of the payment comes from your mortgage). Most mortgage lenders require a downpayment of at least 3%, though ideally 20%.

If credit history is bad, lenders might want for more money.

What is meant by a house is "underwater" is that you owe more on the house than your house is worth -- which is not good at all!

Mortgage Loan Terms

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30 year loan
  • Lower monthly mortgage plan
  • BUT you'll pay more interest
15 year loan
  • Higher monthly mortgage payments
  • BUT you'll pay less interest
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