Presentation on theme: "The Home and Automobile Decision"— Presentation transcript:
1 The Home and Automobile Decision Chapter 8The 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 decisionStep 4: Maintain your purchase.Step 5: Consumer protection and your vehicle.
5 Step 1: Narrow Your Choices Consider your lifestyle and needs versus wantsLook at the alternativesFit your car into your budget; calculate the payment.
6 Step 2: Pick Your Vehicle Do your comparison shopping via the internet or publications.compare pricecompare featurescompare qualityDetermine 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 priceknow the dealer’s cost of the vehicle and any holdbackunderstand the various dealer markupsbe aware of any rebate(s) that may apply
8 Step 3: Make the Purchase (cont’d) Evaluate financing alternativesdetermine the length of financingshop around to find the best interest ratechoose a financing period and rate to give you an affordable monthly paymentConsider a leasenegotiate a fair vehicle value and a low rent or finance chargechoose a vehicle with slow depreciation
9 Step 3: Lease Versus Buy Closed-end leases, or walk-away leases normally offer a purchase optionrequire the dealer to be responsible for resaleaccount for about 80% of all leasesOpen-end leasescompare the market value to the lease’s residual value of the vehicleare 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 factorsagreed-upon priceup-front feesdown payment or trade allowanceresidual valuerent or finance chargelength 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 warrantyUse the “lemon laws,” if necessary, to get a refundMade 4 attempts to fix the problemCar 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 homeworkStep 2: Make your selectionStep 3: Make your purchaseStep 4: Postpurchase activities
15 Comparing Options for Housing Houses – typically single-family, free-standing dwellingsCooperatives – multi-unit dwellingsCondominiums – multi-unit dwellingsPlanned unit developments (PUDs) – planned development with common landApartments and other housing – multi-unit dwellings
16 Houses Advantages Disadvantages more space greater privacy builds equityDisadvantagesmaintenance time and costsrepair costsresale hassles
17 CooperativesCorporate-owned dwellings in which the residents, as shareholders, own stock representative of the value of their unit. Monthly homeowner’s fee.Advantageslow maintenancemore amenitieshigher securityDisadvantageslower capital appreciationdifficult to sellless privacyharder to finance
18 CondominiumsResidents have sole ownership of the living space but joint ownership of the land and common areas. Monthly maintenance fee.Advantageslow maintenancemore amenitieshigher securityDisadvantageslower capital appreciationdifficult to sellless 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 Advantageslower costease of moving (no house to sell)little upkeepDisadvantageslimited remodeling abilitylimited lifestyle choices (e.g., pet)less privacy
21 Housing Step 1: Do Your Housing Homework Compare your needs versus wants for housingCompare your options for housing and the costs of eachWeigh your alternatives of renting versus buying
22 Housing Step 1: Homework (cont’d) Determine what’s most affordableLending standardsYour financial historyYour ability to payThe appraised value of the homeMaximum mortgageThe down paymentPrequalifying
23 Comparing Needs Versus Wants for Housing Decide on the fundamentals such as bathrooms, bedrooms, and closet spaceDecide on property sizeCompare other considerations like school systems, proximity to shopping centers, or safetyConsider the future -- such as additional family members
24 Costs of Housing: What’s Involved in Ownership One-time or initial costsRecurring costsMaintenance and operating costs
25 One-Time or Initial Costs Down paymentClosing or settlement costsDiscount pointsLoan origination feesLoan application feeAppraisal feeOther fees and costs
26 Recurring Cost: Monthly mortgage payments(PITI) Maintenance and operating expenses
27 Monthly Mortgage Payments (PITI) Principal -- what you borrowedInterest -- the cost of borrowingTaxes -- support of governmentInsurance -- protection of your dwelling and contentsNote: T & I are held in an escrow account.
28 Maintenance and Operating Costs Repairs to the structureReplacing an applianceLandscaping
29 Weighing the Alternatives of Renting Versus Buying Personal and lifestyle considerationsFinancial considerationsAppreciation with time.Tax considerations.
30 Advantages of Renting Mobility No downpayment Can be less expensive Protection from declining housing valuesMore extensive amenitiesNo home repair or maintenanceNo groundskeeping responsibilitiesNo property taxes
31 Advantages of Buying Build equity in your home Allows for capital appreciationGreater personal freedomTax advantagesProtection from rising rent costsPotential source of cash with home equity loan
32 Determining What’s Affordable: Lending Standards 1. Financial historyincome stabilitycredit history2. Ability to payHousing cost ratio at a maximum of 28% of gross incomeHousing and other long-term debt ratio at a maximum of 36% of gross income3. Appraised home value
33 Determining What’s Affordable: Other Factors Calculation of your mortgage limit28% rule36% rule80% rulePrequalification, or knowing for sure what is affordable
34 Determining What’s Affordable: Other Factors Accumulation of a down paymentDown payment sources and “gift letters”FHA, VA, and FmHA federally-backed loans require a lower downpaymentPrivate mortgage insurance (PMI)IRA loan of up to $10,000 for first-time homebuyer
35 Housing Step 2: Selection The search processuse a traditional real estate agentuse an independent or exclusive buyer-brokeruse the Internet to learn about buying a homeThe inspection processstructuralmechanical
36 Housing Step 3: Making the Purchase Guidelines for rentingNegotiating a sales priceSigning the sales contractFinancing the purchase – the mortgage
37 Guidelines for Renting Determine what you can affordCompare the location with shopping, employment, and schoolsUnderstand the leaseGet every detail in writingResearch the reliability of the landlordAcquire renter’s insurance
38 Negotiating a Sales Price Always haggle on the actual purchase price and counteroffersInclude all contingenciesConsider closing costsOffer earnest moneyNote: 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 priceDo a title searchPerform a pest or other inspectionMake the contract contingent on receiving the proper financing
40 Signing the Contract (cont’d) Divide the utilities, insurance, taxes, and interest equitably with the sellerStipulate the condition of the dwelling upon transferInclude 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 MortgagesMortgage bankersMortgage brokers
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
51 Adjustable-Rate Versus Fixed-Rate Mortgages Fixed-rate issues to consider:fixed paymentslower interest rate riskno risk of negative amortizationAdjustable-rate issues to consider:lower initial interest ratemay qualify for a larger loan due to lower monthly paymentswith rising rates, rising payments
52 Mortgage Decisions: Term of the Loan 15-year advantagesless total interest paidfaster equity accumulation and payofflower interest rate30-year advantageslower monthly payments increase affordability and financial flexibilityhigher time value of moneygreater tax advantages due to interest payment deductions
53 Mortgage Decisions: Term of the Loan Two other considerations:Time value of moneyThe effect of taxes
54 Housing Step 4: Postpurchase Activities Time and money for upkeep and maintenance.Refinancing your mortgage2% ruleclosing costs
55 SummarySmart buyingStep 1: Do your homework to narrow your car choice.Step 2: Make your selection.Step 3: Make your purchase.Step 4: Maintain your purchaseStep 5: Consider consumer protection and your car.
56 Summary (cont’d) Choosing a vehicle consider your needs versus your wantslook at the alternativesfit your car into your budgetdo your comparison shopping via the internet or publicationsdetermine what is available in your price rangetest-drive the exact vehicle you are considering
57 Summary (cont’d) Deal negotiation take advantage of sales, but always negotiate the priceknow the dealer’s cost of the vehicleunderstand the various dealer markupsbe aware of any rebate that may applyevaluate financing alternatives
58 Summary (cont’d) Leasing alternatives Choosing a housing type closed-end leases, or walk-away leasesopen-end leasesChoosing a housing typedecide on the fundamentals such as bathrooms, bedrooms, and closet spacedecide on property sizecompare 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: SelectionHousing Step 3: Making the purchaseHousing Step 4: Postpurchase activities
60 Summary (cont’d) Buying versus renting Types of mortgages personal and lifestyle considerationsfinancial considerationsTypes of mortgagesfixed-rate mortgage loansadjustable-rate mortgage (ARM) loansother mortgage loan options
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