Fannie Mae Foundation: How to Buy a Home

Expected outcomes of
Lesson 2

1. To be able to create and use a monthly household budget that will allow for saving to buy a home or for making regular mortgage payments.

2. To know the tax advantages of owning a home.

3. To understand the advantages and responsibilities associated with being part of a community.

Vocabulary
household budget, utilities, net income, expenses, itemize, deductions,
take-home pay

Introducing the concepts
1. Introduce the concept of budgeting. Ask how many students currently keep a household budget. What do they find helpful about keeping a budget? What is the most difficult thing about keeping and living within a budget? Describe your own experiences with budgeting.

2. Ask students to make a list of reasons why it might be a good idea to make and keep a budget. Ask them to suggest other ways to put away regular savings without keeping a budget (e.g., having money taken out of your paycheck automatically).

3. Explain to students that they will be reading one example of how a family came up with a creative solution to their goal of having a home sometime in the future. Ask them to be thinking about other solutions that might work either for themselves or for people they know.

Saving for a home
Read about the plans Joe and Teresa Ramirez made to buy a home. Discuss the story with your students.

1. After doing their first household budget, how do you think they felt?

2. Do you think moving in with Teresa’s family is a good solution to Joe and Teresa’s problem? Why? Why not?

3. What else might Joe and Teresa do to save money for a house instead of moving in with Teresa’s parents?

4. What were the advantages for Joe and Teresa of preparing a household budget that included setting savings goals for the long-term future?

5. Many families would not be able to buy a home without the help of family members. Sometimes parents will help their children by paying for part of the down payment on a house. Other times they may become co-borrowers, buying a house with their son or daughter. What examples do you know of families whose members have helped one another in housing purchases?

6. Teresa’s father and mother were able to pay off their house by the time they retired. What are the advantages of being able to do this? How is buying
a home a built-in retirement plan?

7. Teresa is part of a strong extended family. What are the advantages of being part of this kind of family? What are the disadvantages?

Unit 4: Your home is your castle

Lesson 2: Planning for monthly expenses
in your new home

planning for monthly expenses

Whether you plan to buy a home in the near future or have buying a house as a more long-term goal, we hope this book has taught you the importance of financial planning. With good planning and patience, many a dream that once seemed impossible has come true.

This lesson will show you how to make and use one of the most important tools for financial planning: a monthly budget. With a budget, you can keep track of your monthly spending and figure out how to “build in” savings. You’ll also learn how owning a home can save on taxes. And we’ll mention some other kinds of investments that money can’t buy—the investments of your time and energy in the community you call home.

Joe and Teresa Ramirez are an example of one family who will need to make some more sacrifices to meet their goal. After working on their household budget, they saw they wouldn’t have enough money to buy the kind of house they wanted. They had too much monthly debt and not enough for a down payment. With a new baby on the way, the monthly bills were not going to go down. Although Joe qualifies to get a Veterans Affairs loan, they still would not have enough to pay the mortgage. At first they were very disappointed.

On the next page is Joe and Teresa’s first household budget. They wrote down all of their expenses. Some of their bills were not paid monthly. For example, their car insurance was paid only twice each year. In order to figure out how much they should budget each month, they first figured out how much they paid a year. Twice each year they paid $150. That made $300 a year.

Next, they took the $300 and divided it by 12 months. The answer was $25. Then they knew they had to set aside $25 each month to pay for car insurance. In addition, since their gas heating bills went up in the winter and down in the summer, they figured out how much they spent all year and divided that by twelve.

Before they could buy a house, Teresa and Joe knew they would have to pay off most of their long-term debts. They would also have to save enough for a down payment and closing costs and for extra expenses for the first six months in their new home. They knew there would be extra costs to maintain their new home. For example, it is suggested that you put aside 1 percent of the cost of your house for yearly repairs. For the $50,000 Joe and Teresa expected to pay for a house that was already in good condition, they would have to set aside about $500 each year for maintenance and repairs.

As you’ll see on the next page, when Teresa and Joe compared their expenses to their monthly income, they knew they could not save enough to meet their goals.

Teresa’s mother was the one who came up with a solution. For the next year, she suggested, Joe and Teresa could live with her and her husband. Since Teresa’s mom is retired, she could take care of their children and the baby that was coming soon. That would mean double savings. With no rent payment and with Teresa’s mom to help with the kids, Joe could also put in more overtime.

working on a budget Joe and Teresa made out a second budget for what it would cost them to live with Teresa’s parents. If they did this, they would be able to save as much as $1,200 each month. Over 12 months, this would be $14,400. With this amount, they could pay off their car and credit card debt and save money to buy the house.

Teresa’s father agreed to the plan. He remembered how hard he struggled to buy a house when he first came to this country. However, he also knows how good it feels now to retire with a home that is paid off. The next year will be a sacrifice for everyone. But it will be worth it!

Not everyone has the option of moving in with their in-laws to save money. Perhaps you could save in other ways. You could do without cable channels on television. You could reduce your spending on food and clothing. Perhaps you could take your lunch to work instead of eating out in a restaurant. You’ll find cutting back a lot easier if you have a goal in mind.

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