pfin 4 making automobile and housing decisions 5 copyright ©2016 cengage learning. all rights...
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PFIN 4
Making Automobile and Housing Decisions
5
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GITMAN/ JOEHNK/ BILLINGSLEY
2Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1 Design a plan to research and select a new or used automobile
2 Decide whether to buy or lease a car
3 Identify housing alternatives, assess the rental option, and perform a rent-or-buy analysis
4 Evaluate the benefits and costs or homeownership and estimate how much you can afford to pay for a home
5 Describe the home-buying process
6 Choose mortgage financing that meets your needs
LEARNING OUTCOMES
PFIN4 | CH5
Guidelines for Purchasing Decisions
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• Research purchase thoroughly considering the market and the personal needs
• Base the selection on the needs• Negotiate the best price and arrange
financing on favorable terms• Understand all the terms of the sale before
signing the contract• Maintain the purchase and make
necessary changes promptly
PFIN4 | CH5
Factors That Affect Affordability
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• Amount of down payment• Size of the monthly loan payment• Operating costs• Type of vehicle
• Gas, diesel, or hybrid• New or used• Size, body style, and features
• Other considerations• Trading in/selling, fuel economy, safety
measuresPFIN4 | CH5
Purchase Transactions
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• Negotiating price• Sticker price - Manufacturer’s suggested retail
price• Key to negotiating a good price is knowing the
dealer’s cost for the car• Closing the deal
• Sales contract: Agreement to purchase an automobile that states the offering price and all conditions of offer• When signed by the buyer and seller, the
contract legally binds them to its terms
PFIN4 | CH5
Lease
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• Arrangement in which the lessee receives the use of an asset in exchange for monthly payment• Closed-end lease• Open-end lease
PFIN4 | CH5
Variables Affecting Monthly Lease Payment
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Lease versus Purchase Analysis
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• Performed to compare the differences between the total costs
• When the lease ends, the lessee can:• Return the car• Purchase the car
PFIN4 | CH5
Housing Prices and the Recent Financial Crisis
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• Analyze the history of housing prices• Foreclosures: Lenders attempt to recover
loan balances from borrowers who have quit making payments by forcing the sale of the home pledged as collateral
PFIN4 | CH5
Types of Housing Units
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Types of Housing Units
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Benefits of Owning a Home
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Types of Costs to be Considered
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• Down payment: Portion of the full purchase price provided by the purchaser when a house or other major asset is purchased• Loan-to-value ratio: Maximum percentage of
the value of a property that the lender is willing to loan
• Private mortgage insurance (PMI): Policy that protects the mortgage lender from loss in the event the borrower defaults on the loan
PFIN4 | CH5
Types of Costs to be Considered
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• Mortgage points: Fees charged by lenders at the time they grant a mortgage loan
• Closing costs: Expenses that borrowers pay when a mortgage loan is closed and they receive title to the purchased property
• Mortgage payments
PFIN4 | CH5
Types of Costs to be Considered
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• Property taxes: Levied by local governments on the assessed value of real estate for the purpose of:• Funding schools• Law enforcement• Local services
• Homeowner’s insurance• Required by mortgage lenders and covers the
replacement value of a home and its contents• Maintenance and operating expenses
PFIN4 | CH5
Home Buying Process
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Home Buying Process
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Sources of Mortgage Loans
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• Mortgage loans• Secured by the property
• Mortgage bankers• Firm that solicits borrowers, originates
primarily government-insured and government-guaranteed loans, and places them with mortgage lenders
• Mortgage brokers• Firm that solicits borrowers, originates
conventional loans, and places them with mortgage lenders
PFIN4 | CH5
Types of Mortgage Loans
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Features of ARM
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• Adjustment period• Period of time between rate or payment
changes• Index rate
• Baseline index rate that captures interest rate movements
• Margin• Percentage points a lender adds to the index
rate to determine the rate of interest
PFIN4 | CH5
Features of ARM
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• Interest rate cap• Limit on the amount that the interest rate can
increase each adjustment period and over the life of the loan
• Payment cap• Limit on the monthly payment increase that
may result from a rate adjustment
PFIN4 | CH5
ARM
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• Negative amortization• Principal balance on a mortgage loan
increases because the monthly loan payment is lower than the amount of monthly interest being charged
• Convertible ARM• Allows borrowers to convert from an
adjustable-rate to a fixed-rate loan• Two-step ARM
• Have two interest rates - one for the first 5 to 7 years of the loan, and another for the remaining term of the loan
PFIN4 | CH5
Mortgage Payments Options
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Mortgage Payments Options
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Conventional, Insured, and Guaranteed Loans
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Refinancing Mortgage
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• If the interest rates drop, consider refinancing the mortgage• Should be refinanced after comparing and
analyzing the terms of old and new mortgages
PFIN4 | CH5
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• Depreciation • Anchoring• Sales contract• Lease• Closed-end lease• Open-end (or finance)
lease• Residual value• Capitalized cost• Money factor• Purchase option
KEY TERMS
• Foreclosures• condominium (condo)• Cooperative
apartment (co-op)• Rent ratio• Down payment• Loan-to-value ratio• Private mortgage
insurance (PMI)• Mortgage points• Closing costs
PFIN4 | CH5
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• Homeowner’s insurance
• Real estate short sale• Multiple Listing
Service• Prequalification• Earnest money
deposit• Contingency clause• Real Estate
Settlement Procedures Act
• Mortgage loan
KEY TERMS
• Mortgage banker• Mortgage broker• Fixed-rate mortgage• Adjustable-rate
mortgage• Adjustment period• Index rate• Margin• Interest rate cap• Payment cap• Negative amortization
PFIN4 | CH5
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SUMMARY
• Guidelines for purchase decisions• Research the purchase• Select the best item based on the needs• Buy the item after negotiating• Maintain the purchase and make necessary
repairs
• Leasing is an arrangement in which the lessee receives the use of an asset in exchange for making monthly lease payments over a specified period
PFIN4 | CH5
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SUMMARY
• Bubble in real estate prices encouraged increase in construction and extraction of a lot of home equity through home equity loans and refinancing
• Home buying process• Shop the market• Use an agent• Apply for a mortgage• Enter into a sales contract • Close the deal
PFIN4 | CH5