Moving Out: Apartment or House?

image: for the vast majority of American homeowners, their home is their most important financial asset. Some 34% of homeowners say their home accounts for "all or most" of their personal financial worth and another 34% say it represents about half of their worth. Purchasing a home is one of the biggest investments a person will ever make. A home is also an important asset when determining your financial health. There are many factors to consider when purchasing a home, such as down payments, interest rates, and the terms of the loan. These factors affect the overall price paid for the home. We'll look at all the things that need to be considered when it comes to financing a home.

Getting a Home Loan

Regardless of their size and location, homes are expensive: they are probably the most expensive items that most of us will ever purchase. Whether you're talking about a $100,000 home or one that costs millions of dollars, the simple fact is that most people do not have enough money saved to purchase a home outright. Because of this, most home buyers turn to banks, credit unions, or finance companies to get a mortgage to purchase their home.

Part of purchasing a home involves saving up enough money to make a down payment. Most banks and finance companies require buyers to make a down payment; depending on a buyer's qualifications, this down payment may be anywhere from 5% to 20% or more.

Examples and Practice

A family decides to purchase a home for $150,000. They currently have $30,000 in savings, but they are only willing to make a down payment of $25,000 on the house. In order to buy the home, the bank must agree to give the family a loan for $125,000.

Using the information above, calculate the following:

If the family puts $25,000 down on the house, what percentage of the purchase price of the home does this amount represent?
Do you think it is a good idea for the family to put more than 5% down for the house? Why or why not?

Once the down payment and loan amounts have been determined, it is important for home buyers to think about the loan repayment process. Since they are borrowing a very large amount of money, they cannot expect to pay it back quickly. Instead, they should plan to pay back small amounts on the loan month by month over a long period of time. Since most people have to pay the loan back in small amounts, home loans are considered long-term loans. Borrowers typically select loans that are repaid over 15 to 30 years. Review the presentation below to understand more about home loans.

Understanding Home Loans Presentation

Loans Module Review

In this module, you learned information about different types of loans. As a borrower you have to ensure that you have a good credit rating and that you maintain that by paying your bills on time. You should now understand how simple and compound interest works. Compound interest can benefit you with your bank account or cause you to pay more if your loan has compounding interest. Student loans, car loans, and home loans are loans provided by financial institutions to allow you to pay for expensive items over time. Review your Presentations, Content, and Resources and complete the self-assessment below to prepare for your quiz.

Loans Review Self-Assessment

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