Unit 1 WebQuest - Internet Project
|Lessons in Home Buying, Selling
Introduction | Task | Process | Guidance | Conclusion | Questions
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
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.
To successfully complete this project, you will need to complete the following items.
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?
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?
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?
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?
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.
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?