the home and automobile decision. 8-2 copyright © 2010 pearson education, inc. publishing as...
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The Home and Automobile Decision
8-2Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Learning Objectives
1. Make good buying decisions.
2. Choose a vehicle that suits your needs and budget.
3. Choose housing that meets your needs.
8-3Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Learning Objectives
4. Decide whether to rent or buy housing.
5. Calculate the costs of buying a home.
6. Get the most out of your mortgage.
8-4Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Introduction
Buying a home is the single biggest investment most people will make.
Buying a car is another major purchasing decision.
Must fit lifestyle and wallet.
Probably need a loan making dramatic impact on personal finances.
8-5Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Smart Buying
Step 1: Differentiate Want From Need
Step 2: Do Your Homework
Step 3: Make Your Purchase
Step 4: Maintain Your Purchase
8-6Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
8-7Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
8-8Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
8-9Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Smart Buying in Action:Buying a Vehicle
Choices to consider:
Buy new
Buy used
Leasing
8-10Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Smart Buying in Action:Buying a Vehicle
Step 1: Differentiate Want From Need
Features and qualities wanted
Features and qualities needed
8-11Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Smart Buying in Action:Buying a Vehicle
Step 2: Do Your HomeworkHow much can you afford?
Down paymentMonthly payment
Which vehicle is right for you?Comparison shop—price and attributesOperating and insurance costs, and
warranty.
8-12Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Smart Buying in Action:Buying a Vehicle
Step 3: Make Your Purchase
Get a fair price:Know the dealer cost or invoice price.Dealer holdback—2 to 3% that
manufacture gives the dealer on the sale of an automobile
Approach dealers and get quotesNegotiate
8-13Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
8-14Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Smart Buying in Action:Buying a Vehicle
Step 3: Make Your Purchase
Financing Alternatives:Cheapest—cash Investigate all financing options before
buying.Keep financing out of the negotiations.The shorter the term, the higher the
monthly payments.
8-16Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Smart Buying in Action:Buying a Vehicle
Step 3: Make Your Purchase
Leasing: ideal for financially stable, want new car every few years, drive less than 15,000 miles annually, good credit, no down paymentClosed-end or walk-away leasePurchase optionOpen-end lease
8-17Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
8-18Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Smart Buying in Action:Buying a Vehicle
Step 3: Make Your Purchase
Keys to getting a good lease:Negotiate value for car before signing leaseMinimum down paymentWarranty—define “normal wear and tear”Termination feeDepreciation factorRent or finance charge
8-19Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
8-20Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Smart Buying in Action:Buying a Vehicle
Step 4: Maintain Your Purchase
Keep vehicle in best running condition.
Don’t ignore signs of trouble.
Your first line of protection is the warranty.
Know your rights under the Lemon laws.
8-21Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
8-22Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Smart Buying in Action: HousingMany people equate home ownership with
financial success.
Housing costs can take up over 25% of after-tax income.
Home ownership is also an investment – biggest investment you will ever make.
Use smart-buying approach.
8-23Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Your Housing Options
A House:Most potential for capital appreciation.
Cooperatives and Condominiums:Homeowner’s feePlanned unit developments
Apartments and other rental housing
8-24Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Smart Buying in Action: HousingStep 1: Differentiate Want From Need
What about the house is important?
Know what you want before you look.
Affordability, location, neighborhood, conveniences, schools
8-25Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Smart Buying in Action: HousingStep 2: Do Your Homework
Investigate the potential home and all that goes along with it:Neighborhood, community lifestyle,
satisfy needs.
How much you can afford to pay?
8-26Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Smart Buying in Action: Housing
One-time Costs:Down payment Closing/settlement costs
PointsLoan origination feeApplication feeAppraisal feeTitle search fee
8-27Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
8-28Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Smart Buying in Action: Housing
Recurring Costs Monthly mortgage payments PITI
Maintenance and Operating Costs:repairs, renovations, upgrades,
landscaping
8-29Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
8-30Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Renting Versus Buying
Decision based on lifestyle
Renting advantages: Financial and lifestyle flexibility
Compare costs for each alternative
Buying advantages:Longer stay and appreciation, itemized
taxes, forced savings
8-31Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
8-32Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
8-33Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Determining What YouCan Afford
What is the maximum amount the bank will lend me?Financial historyAbility to payAppraised home value
Calculating your mortgage limitShould I borrow up to this maximum?How big a down payment can I afford?
8-34Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
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8-36Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
8-37Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
8-38Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Financing the Purchase—The Mortgage
Sources of mortgages:S&Ls and commercial banksCredit unions, mutual savings banksMortgage bankers—originate mortgage
loans, sell to banks, pension funds, insurance companies and collect payments
Mortgage brokers—middlemen comparison shop for a fee to secure mortgage loans for borrowers but do not originate the loans
8-39Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Conventional and Government-Backed Mortgages
Conventional loans—from a bank or S&L secured by the property.
Government-backed loans—loan from traditional lender but insured by government—FHA and VA loans: lower interest rate, smaller down
payment, less strict financial requirements
more paperwork, higher closing costs, limited funding
8-40Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Fixed-Rate MortgagesMonthly payment doesn’t change
regardless of market interest rate changes.
Can lock in low rates for the life of the loan.
An assumable loan can be transferred to a new buyer.
Prepayment privilege allows early cash payments to be applied to principal.
8-41Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Adjustable-Rate Mortgages (ARM)
Interest rate of ARM fluctuates with level of current interest rates.
Initial Rate—”teaser rate”—low for only a short time period then adjusted upward.
Interest rate index—rates on ARMs are tied to an index not controlled by the lender, such as 6- or 12-month U.S. Treasuries.
8-42Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Adjustable-Rate Mortgages
Margin – the amount over the index rate that the ARM is set.
Adjustment Interval – how frequently the rate can be reset.
8-43Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Adjustable-Rate Mortgages
Payment Cap – sets dollar limit on how much the monthly payment can increase during any adjustment period. If interest rates go up, the monthly
payment may be too small to cover the interest due—negative amortization.
Unpaid interest is added to the unpaid loan balance, increasing its size.
8-44Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Adjustable-Rate MortgagesARM Innovations:
Convertible ARM—to fixed-rate loan
Reduction-option ARM—one time opportunity to adjust interest rate.
Two-step ARM—combined aspects of fixed-rate and ARM.
8-45Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Adjustable-Rate VersusFixed-Rate Mortgages
ARMs:low interest rate in early years.can get larger loan because PITI is lower.reset interest rates push ARM payments
upward
Fixed-rate mortgages:In general, fixed-rate better than ARM.Payments never change.Allows for control and planning.
8-46Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Specialty Mortgage Loan Options
Balloon Payment Mortgage Loan – small monthly payments for 5-7 years, then entire loan due.
Graduated Payment Mortgage – payments set in advance, rising for 5-10 years, then level off.
Growing Equity Mortgage – designed to let homebuyer pay off mortgage early.
8-47Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Shared Appreciation Mortgage – borrower receives below-market interest rate, lender receives a portion of future appreciation.
Interest Only Mortgage – interest only payment for initial set period, then pay both interest and principal for remainder of loan.
Specialty Mortgage Loan Options
8-48Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Option Payment ARM Mortgages – can make different types of mortgage payments each month
Options include:Amount less than interest dueInterest only Payment amount of 150- or 30-year
fixed-rate loan
Specialty Mortgage Loan Options
8-49Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Big jump in monthly payments if interest rates rise
Read fine print.
Know how much your monthly payment could increase, when, and whether you could afford them
Penalties
Risks Associated with Specialty Mortgages
8-50Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Beware of Subprime Mortgages and Predatory Lending
Subprime mortgages—mortgages taken out by borrowers with low credit scores.
Predatory lenders take advantage of these lenders.
Abusive loans—high-cost loans with little chance of paying off
Avoid predatory loans with knowledge.
8-51Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
8-52Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Mortgage Decisions: Length or Term of the Loan
15- or 30-year maturity on mortgage?
Prepayment opportunities
Size of monthly payment
Interest rate
8-53Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
8-54Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
8-55Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
8-56Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Smart Buying in Action: HousingComing up with the down payment
Save, gifts from family and friendsAt least 5% of closing costs have to
come from homebuyer“Gift letter”
Private Mortgage Insurance
Prequalifying—have maximum amount you’ll qualify for confirmed by a lender
8-57Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Smart Buying in Action: HousingStep 3:Make Your PurchaseComparison shop
Traditional real estate agent
Independent or exclusive buyer-broker
Get it inspected
Make an offer and haggle
8-58Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Smart Buying in Action: HousingContract
Earnest money
Closing
Settlement or closing statement
Step 4: Maintain Your PurchaseRefinancing
8-59Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
8-60Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
SummarySeparate needs from wants, compare products,
negotiate, maintain product, and resolve complaints.
Lease or buy a vehicle that fits both your personal and financial needs.
Choose housing that meets your needs, preshop, comparison shop home and financing, and maintain if your purchase.
Get the most out of your mortgage.
8-61Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.
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