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The Home and Automobile Decision

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Presentation on theme: "The Home and Automobile Decision"— Presentation transcript:

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

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