Unit 1 WebQuest - Internet
Project
| Lessons in Home Buying, Selling |
 |
Introduction
| Task
| Process
| Guidance
| Conclusion
| Questions
Introduction
USA Today, November 18, 1999
Buying a home, says Housing
and Urban Development Secretary Andrew Cuomo, "is the most
expensive, most complicated and most intimidating financial
transaction most Americans ever make."
Cuomo almost has it right. Selling
a home is just as bad.
And when you double up - selling
and buying simultaneously - the pain increases exponentially.
After changing jobs last summer,
my wife and I sold our 80-year-old house in Des Moines for
$121,000. We're near settlement on a $264,000 townhouse in
the Washington suburb of Vienna, Va.
Despite the huge price difference,
both are nice homes, roughly equal in size. We bought our
first house in 1978, and this is our third time through the
sell-and-buy drill. The current transactions certainly don't
rank as our worst experience. That distinction belongs to
the deal we started in 1985 and finished in 1987. But that's
a different story.
For now, we'd like to share
10 lessons we learned (or re-learned) in our latest round
of house deals:
1. Be realistic in pricing your house. We set our price
too high, asking $140,000 initially. As a result, we waited
three months in a hot market for our first offer, which was
disappointingly low.
A lack of recent comparable
sales in the neighborhood left us guessing about a realistic
price. And our judgment was clouded by our desire to recoup
dollar-for-dollar the cost of improvements we made in preparation
for the sale. Also, we overlooked a peculiarity of the property
that we had become accustomed to: no backyard.
That virtually assured that
families with young children would take a pass on our three-bedroom
home.
2. Simplify your offer. The basic elements of a home
bid are sale price and liability for closing costs. That's
where the negotiations should focus. As a buyer, don't start
demanding bookcases, porch furniture and the like. In the
greater scheme of the deal, they're unimportant. You'll antagonize
the seller and make it harder to resolve more important issues.
3. As a buyer, ask the seller for help with closing costs.
Up-front costs of financing and other expenses related to
closing a deal typically run into the thousands of dollars.
Because those costs are piled on top of a down payment, most
buyers are frantically looking for ways to maximize their
available cash on settlement day.
The best way to free up extra
cash is to get the seller to cover - or at least share in
- closing costs. Ask for a specific sum or for a percentage.
From a seller's point of view,
it's immaterial whether a concession is made as a credit against
closing costs or as a price reduction.
But for the buyer, a credit
of, say, $5,000 against closing costs is the equivalent of
cash on settlement day.
A corollary here is that the
buyer should hang tough in negotiations on a closing cost
subsidy, and be more flexible on a purchase price.
The reason: Amortized over 30
years, a $5,000 difference in the sale price changes a monthly
house payment by only about $37 at today's interest rates.
Closing costs vary with property
value, so requests for a subsidy tend to be more common in
high-cost areas like Washington, D.C., than in low-cost areas
like Iowa. Wherever you are, it's important to try.
4. The offer is the beginning, not the end. For your
psychological well-being, it's important to remember that
just because you've agreed to the general terms of a deal,
it doesn't mean the house is sold.
In our sale, for example, the
haggling over inspection issues became so distasteful, we
tried to pull the plug on the deal a week before settlement.
We told our agent in Iowa to put the house back on the market
even though it would have meant spending several more months
in temporary housing and scuttling the deal we had made on
the Virginia townhouse.
5. Your agent has a stake. Ours saved the troubled
deal, in part, by taking less than she was entitled to.
6. The Internet offers limited help. It's a great source
of basic information about available homes and mortgage products.
But house deals are too big to be consummated by an amateur
who feels falsely empowered by the Internet.
So, tutor yourself in the basics
on the Internet, then find an agent and a lender you can trust.
If you sell your house without an agent, make sure you have
a good lawyer who can handle the deal from offer to settlement.
7. Know your credit score. Although lenders insist
that many factors determine whether you'll get financing and
on what terms, most still reduce every customer to a single
number. It helps to know where you stand.
The three major national credit
bureaus - Trans Union, Experian and Equifax - each generate
a credit score, which is supposed to be a predictor of the
likelihood that you'll re-pay the mortgage.
The companies work from the
same credit history, but weight it differently. Scores range
from 300 to 900. Anything 660 or higher should get you a mortgage
on favorable terms. You'll have problems if your score is
below 620. Your lender probably will use the middle of the
three credit bureau scores.
8. If you really want a particular home, try to start the
negotiations at 90% or more of the asking price. That
leaves plenty of room for good-faith bargaining. But the fact
of the matter is some houses are wildly over-priced.
If you want a place and truly
believe it's over-priced, talk to the owner before making
an offer. Ask for the rationale in setting the price. That
could lead the owner to the conclusion that recent sales in
the neighborhood simply don't justify the asking price, and
it could open the way to acceptance of what the owner may
otherwise view as an insultingly low offer.
9. Adjustable-rate mortgages are under-appreciated.
ARMs accounted for just 23% of lending activity last week,
according to the Mortgage Bankers Association.
It makes little sense that so
many people lock into a rate for 15 or 30 years when the average
period of home ownership is only about eight years.
Chances of us being in our new
place more than 10 or 12 years are slim. So there's no sense
in buying the security of a 30-year fixed-rate mortgage. We'll
buy an ARM that locks in an interest rate for five years,
then adjusts annually.
10. Hold back some money from your sale. You'll need
money to get settled in the new house. In our case, we'll
need cash to subsidize our living expenses until my wife gets
her career as a medical records consultant on track in the
Washington area. Consider holding down your down payment in
the interest of liquidity. That, obviously, will bump up your
monthly payment, so keep that in mind.
Even if you hold back a small
percentage of your sale proceeds, you're likely to be handling
a greater sum of cash than you're used to. Consider parking
the extra cash in a money market mutual fund. It'll be safe,
though not guaranteed. And you'll get a modest return while
still being able to write checks against your account
The Task
You have just finished college or
technical school and have selected a city in which you would
like live. You want to be sure that you can get a good-paying
job and be able to afford to buy a house. In this project,
you will prepare a portfolio containing your research regarding
a job and housing in your new location. You want to show the
portfolio to some friends and relatives so they can help you
to decide whether you are making a wise decision. If you prefer,
you can prepare a Web page with this information that others
can view. Be sure that your portfolio or Web page contains
the following information:
- the name of the career you have
chosen and the salary range that you can expect for the
job in the city of your choice;
- information on housing in the
city, such as the range of prices of houses for sale;
- calculations showing what you
can afford to borrow to buy a home;
- information about a loan for the
amount you intend to borrow. This should include a table
showing the amount of the loan, the interest rate, the number
of years of the loan, and the payments.
The Process
To successfully complete this project,
you will need to complete the following items.
Guidance
Here are some additional questions
and ideas you may want to consider for your project.
- What additional costs are involved
in owning a home?
- What other expenses must you budget
for each month from your paycheck?
- How do salaries vary from area
to area in the United States? Research and compare salaries
for several areas.
- How does the cost of homes vary
from area to area in the United States? Research and compare
home prices for several areas.
- What are the advantages and disadvantages
of owning your own home?
- How do various taxes affect your
income? Consider federal income tax, state income tax, property
tax, and sales taxes.
- What type(s) of insurance must
you purchase as a homeowner?
- What are the advantages and disadvantages
of longer—term versus shorter—term loans, for
example, a 15 versus a 30—year loan?
Conclusion
Here are some ideas for concluding
your project.
- Present your project to your class
or at a family night.
- Present the information on a Web
page. Have other students critique your project and help
you to make improvements to your project.
- Write a one—page summary
of your project, including what you have learned from researching
this topic.
- Interview a loan officer at a
bank or home—mortgage company. Find out why the amount
of principle and interest paid varies over the period of
the loan. Why do you pay more in interest in your payments
at the beginning of the loan?
Questions
Lesson 1—3
Ms. Martin was researching the costs of financing $125,000
for a home. She found that the monthly payment for a 6.875%
loan for 30 years would be $821.16 per month. She found that
the monthly payment for a 6.875% loan for 20 years would be
$959.77 per month.
- Write and solve an equation to
find the amount of interest she would pay altogether for
the 30-year loan.
- Write and solve an equation to
find the amount of interest she would pay altogether for
the 20-year loan.
- For which loan would she pay less
interest? How much would she save with that loan?
- A loan officer tells Ms. Martin
that her payment should be no more than 25% of her gross
monthly income (income before taxes). How much must Ms.
Martin's gross yearly salary be in order to borrow $125,000
for each loan?
Lesson 2—5
Refer to the Exercise in Lesson 1—3. Ms. Martin receives
the following amortization table showing her first twelve
payments for the $125,000 20-year loan at 6.875%. Each payment
is $959.77. Column three shows the amount of each payment
that is interest, column four shows the amount of each payment
that is principal, and column five shows the loan balance.
- Make a scatter plot of the data
where the x-values are the payment number (column
1) and the y-values are the balance of the loan (column
5).
- Write the equation for a line
of fit for the scatter plot in part a. What does the slope
represent?
- This table shows the balance due
on Ms. Martin's loan at the end of each year for 20 years.
Make a scatter plot of the data where the x-values
are the year numbers and the y-values are the balances
due at the end of each year.
- Write the equation for a line
of fit for the scatter plot in part c. What does the slope
represent?
- Why are the equations of the lines
in part b and part d different?
- Consider the two scatter plots.
Do you think a linear equation is a good model for each
set of data? Why or why not?
Lesson 3—2
Mr. Pearson was researching loans for $150,000. He chose a
rate of 6.25% for 15 years. Each payment is $1286.13. The
table shows the balance for his loan at the end of each year.
- Make a scatter plot for the data
where the x-values are the year numbers and the y-values
are the balances due at the end of each year. Find an equation
for a best—fit line for the data.
- Refer to the Exercise in Lesson
2—5. Mr. Pearson wants to know if his loan balance
and Ms. Martin's loan balance will ever be approximately
equal at the same time before the final payment is made.
An equation for Ms. Martin's loan where x represents
the year number and y represents the loan balance
is y = -6089.8x + 136,558. Determine when
the balances will be the same, if ever.
Lesson 4—4
Two loan balances can be approximated by the equations given
in the table. The time x is in years.
- Use Cramer's Rule to find when
the loan balances will be approximately the same for the
two loans before the final payment is made.
- What will the approximate balance
of each loan be at that time?
- Why might your estimate of the
time when the loan balances will be the same be somewhat
inaccurate?
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