1. The Home and Automobile Decision
Chapter 8
The Home and Automobile Decision

2. Smart Buying--Controlled Buying
Step 1: Do your homework.
Is the purchase a “need’ or “want”?
Consider alternative products and features.
Does the purchase fit your budget?
Step 2: Make your selection.
Comparison shop: price, product features, and quality.
Be informed: check library and Web sources.

3. Smart Buying (cont’d) Step 4: Maintain your purchase.
Step 3: Make your purchase.
Negotiate the price.
Evaluate financing alternatives.
Complete the purchase.
Step 4: Maintain your purchase.
Resolve complaints; keep good records.

4. Transportation Needs Step 1: Narrow your choices.
Step 2: Pick your vehicle.
Step 3: Make the purchase.
Lease versus buy decision
Step 4: Maintain your purchase.
Step 5: Consumer protection and your vehicle.

5. Step 1: Narrow Your Choices
Consider your lifestyle and needs versus wants
Look at the alternatives
Fit your car into your budget; calculate the payment.

6. Step 2: Pick Your Vehicle
Do your comparison shopping via the internet or publications.
compare price
compare features
compare quality
Determine what is available in your price range.
Test-drive the exact vehicle you are considering.

7. Step 3: Make the Purchase
Take advantage of sales, but negotiate the price
know the dealer’s cost of the vehicle and any holdback
understand the various dealer markups
be aware of any rebate(s) that may apply

8. Step 3: Make the Purchase (cont’d)
Evaluate financing alternatives
determine the length of financing
shop around to find the best interest rate
choose a financing period and rate to give you an affordable monthly payment
Consider a lease
negotiate a fair vehicle value and a low rent or finance charge
choose a vehicle with slow depreciation

9. Step 3: Lease Versus Buy Closed-end leases, or walk-away leases
normally offer a purchase option
require the dealer to be responsible for resale
account for about 80% of all leases
Open-end leases
compare the market value to the lease’s residual value of the vehicle
are to be avoided because you pay the difference

10. When Is Leasing A Good Option?
If you are financially stable.
If you drive less than 15,000 miles annually.
If you take good care of your vehicles.
If you use your vehicles for business travel.
If you do not modify your vehicles.
If the vehicle you are considering doesn’t depreciate too quickly.

11. Calculating Your Monthly Lease Payment
Your lease payment depends on the following factors
agreed-upon price
up-front fees
down payment or trade allowance
residual value
rent or finance charge
length of the lease

12. Step 4: Maintain Your Purchase
Read the owner’s manual and perform regular maintenance.
Don’t ignore warning signals.
Choose a good garage; check training and experience.

13. Step 5: Consumer Protection and Your Car
Know and use your warranty
Use the “lemon laws,” if necessary, to get a refund
Made 4 attempts to fix the problem
Car out of service at least 30 days during the 12 months after purchase or the first 12,000 miles

14. Addressing Your Housing Needs
Step 1: Do your shopping homework
Step 2: Make your selection
Step 3: Make your purchase
Step 4: Postpurchase activities

15. Comparing Options for Housing
Houses – typically single-family, free-standing dwellings
Cooperatives – multi-unit dwellings
Condominiums – multi-unit dwellings
Planned unit developments (PUDs) – planned development with common land
Apartments and other housing – multi-unit dwellings

16. Houses Advantages Disadvantages more space greater privacy
builds equity
Disadvantages
maintenance time and costs
repair costs
resale hassles

17. Cooperatives
Corporate-owned dwellings in which the residents, as shareholders, own stock representative of the value of their unit. Monthly homeowner’s fee.
Advantages
low maintenance
more amenities
higher security
Disadvantages
lower capital appreciation
difficult to sell
less privacy
harder to finance

18. Condominiums
Residents have sole ownership of the living space but joint ownership of the land and common areas. Monthly maintenance fee.
Advantages
low maintenance
more amenities
higher security
Disadvantages
lower capital appreciation
difficult to sell
less privacy

19. Planned Unit Developments (PUDs)
Own home and land it sits on as well as shared ownership of the development.
Monthly homeowner’s fee for maintenance and common expenses. Popular on West Coast.

20. Apartments and Other Housing
Advantages
lower cost
ease of moving (no house to sell)
little upkeep
Disadvantages
limited remodeling ability
limited lifestyle choices (e.g., pet)
less privacy

21. Housing Step 1: Do Your Housing Homework
Compare your needs versus wants for housing
Compare your options for housing and the costs of each
Weigh your alternatives of renting versus buying

22. Housing Step 1: Homework (cont’d)
Determine what’s most affordable
Lending standards
Your financial history
Your ability to pay
The appraised value of the home
Maximum mortgage
The down payment
Prequalifying

23. Comparing Needs Versus Wants for Housing
Decide on the fundamentals such as bathrooms, bedrooms, and closet space
Decide on property size
Compare other considerations like school systems, proximity to shopping centers, or safety
Consider the future -- such as additional family members

24. Costs of Housing: What’s Involved in Ownership
One-time or initial costs
Recurring costs
Maintenance and operating costs

25. One-Time or Initial Costs
Down payment
Closing or settlement costs
Discount points
Loan origination fees
Loan application fee
Appraisal fee
Other fees and costs

26. Recurring Cost: Monthly mortgage payments(PITI)
Maintenance and operating expenses

27. Monthly Mortgage Payments (PITI)
Principal -- what you borrowed
Interest -- the cost of borrowing
Taxes -- support of government
Insurance -- protection of your dwelling and contents
Note: T & I are held in an escrow account.

28. Maintenance and Operating Costs
Repairs to the structure
Replacing an appliance
Landscaping

29. Weighing the Alternatives of Renting Versus Buying
Personal and lifestyle considerations
Financial considerations
Appreciation with time.
Tax considerations.

30. Advantages of Renting Mobility No downpayment Can be less expensive
Protection from declining housing values
More extensive amenities
No home repair or maintenance
No groundskeeping responsibilities
No property taxes

31. Advantages of Buying Build equity in your home
Allows for capital appreciation
Greater personal freedom
Tax advantages
Protection from rising rent costs
Potential source of cash with home equity loan

32. Determining What’s Affordable: Lending Standards
1. Financial history
income stability
credit history
2. Ability to pay
Housing cost ratio at a maximum of 28% of gross income
Housing and other long-term debt ratio at a maximum of 36% of gross income
3. Appraised home value

33. Determining What’s Affordable: Other Factors
Calculation of your mortgage limit
28% rule
36% rule
80% rule
Prequalification, or knowing for sure what is affordable

34. Determining What’s Affordable: Other Factors
Accumulation of a down payment
Down payment sources and “gift letters”
FHA, VA, and FmHA federally-backed loans require a lower downpayment
Private mortgage insurance (PMI)
IRA loan of up to $10,000 for first-time homebuyer

35. Housing Step 2: Selection
The search process
use a traditional real estate agent
use an independent or exclusive buyer-broker
use the Internet to learn about buying a home
The inspection process
structural
mechanical

36. Housing Step 3: Making the Purchase
Guidelines for renting
Negotiating a sales price
Signing the sales contract
Financing the purchase – the mortgage

37. Guidelines for Renting
Determine what you can afford
Compare the location with shopping, employment, and schools
Understand the lease
Get every detail in writing
Research the reliability of the landlord
Acquire renter’s insurance

38. Negotiating a Sales Price
Always haggle on the actual purchase price and counteroffers
Include all contingencies
Consider closing costs
Offer earnest money
Note: You may never see the seller because often the real estate agents carry the offers between parties

39. Signing the Sales Contract
Always have a fixed price
Do a title search
Perform a pest or other inspection
Make the contract contingent on receiving the proper financing

40. Signing the Contract (cont’d)
Divide the utilities, insurance, taxes, and interest equitably with the seller
Stipulate the condition of the dwelling upon transfer
Include all other contingencies that may interfere with a satisfactory purchase

41. Financing the Purchase
Shop for the lowest interest rate.
Determine where you want to finance.
Determine the length of the mortgage.
Choose the type of mortgage.
Note: Make sure you understand every aspect of the mortgage before you sign. This could be your largest purchase ever.

42. Sources of Mortgages
Mortgage bankers
Mortgage brokers

43. Conventional Or Government-Backed?
Veteran’s Administration (VA) mortgages
Federal Housing Administration (FHA) mortgages

44. Government-Backed Mortgages
Advantages
Lower interest
Smaller down payment requirement
Less strict lending standards
Disadvantages
More paperwork to qualify
Higher closing costs
Maximum lending limits

45. Types of Mortgages Fixed-rate mortgage loans
Adjustable-rate mortgage (ARM) loans
Other mortgage loan options

46. Fixed-Rate Mortgage Loans
Assumable loans -- allow for transfer of the mortgage with the home.
Prepayment privilege -- allows the payee to increase the monthly payment without a fee.

47. Adjustable-Rate Mortgage (ARM) Loans
Initial rate – the first rate on the mortgage, usually short-term.
Interest rate index – determines annual rate adjustment.
Margin – the difference between the index rate and the quoted rate.
Adjustment interval – the length of time between adjustments.

48. Adjustable-Rate Mortgage (ARM) Loans (cont’d)
Rate cap – the maximum rate increase allowed either per year or over the life of the loan.
Payment cap – the maximum allowable payment amount. Normally not a desired feature due to the risk of negative amortization.

49. ARM Innovations Convertible Reduction-option Two-step
Price level adjusted

50. Other Mortgage Loan Options
Balloon payment mortgage
Graduated payment mortgage
Growing equity mortgage
Shared appreciation mortgage

51. Adjustable-Rate Versus Fixed-Rate Mortgages
Fixed-rate issues to consider:
fixed payments
lower interest rate risk
no risk of negative amortization
Adjustable-rate issues to consider:
lower initial interest rate
may qualify for a larger loan due to lower monthly payments
with rising rates, rising payments

52. Mortgage Decisions: Term of the Loan
15-year advantages
less total interest paid
faster equity accumulation and payoff
lower interest rate
30-year advantages
lower monthly payments increase affordability and financial flexibility
higher time value of money
greater tax advantages due to interest payment deductions

53. Mortgage Decisions: Term of the Loan
Two other considerations:
Time value of money
The effect of taxes

54. Housing Step 4: Postpurchase Activities
Time and money for upkeep and maintenance.
Refinancing your mortgage
2% rule
closing costs

55. Summary
Smart buying
Step 1: Do your homework to narrow your car choice.
Step 2: Make your selection.
Step 3: Make your purchase.
Step 4: Maintain your purchase
Step 5: Consider consumer protection and your car.

56. Summary (cont’d) Choosing a vehicle
consider your needs versus your wants
look at the alternatives
fit your car into your budget
do your comparison shopping via the internet or publications
determine what is available in your price range
test-drive the exact vehicle you are considering

57. Summary (cont’d) Deal negotiation
take advantage of sales, but always negotiate the price
know the dealer’s cost of the vehicle
understand the various dealer markups
be aware of any rebate that may apply
evaluate financing alternatives

58. Summary (cont’d) Leasing alternatives Choosing a housing type
closed-end leases, or walk-away leases
open-end leases
Choosing a housing type
decide on the fundamentals such as bathrooms, bedrooms, and closet space
decide on property size
compare other considerations like school systems, or proximity to shopping centers

59. Summary (cont’d) Smart buying for housing Housing Step 1: Homework
Housing Step 2: Selection
Housing Step 3: Making the purchase
Housing Step 4: Postpurchase activities

60. Summary (cont’d) Buying versus renting Types of mortgages
personal and lifestyle considerations
financial considerations
Types of mortgages
fixed-rate mortgage loans
adjustable-rate mortgage (ARM) loans
other mortgage loan options

61. Summary (cont’d) Sources of mortgages mortgage bankers
mortgage brokers
conventional mortgages
government-backed mortgages