The Home and Automobile Decision Chapter 8 The Home and Automobile Decision

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.

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.

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.

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.

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.

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

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

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

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.

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

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.

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

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

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

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

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

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

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.

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

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

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

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

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

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

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

Sources of Mortgages Mortgage bankers Mortgage brokers

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

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

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

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.

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.

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.

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

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

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

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

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

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

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.

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

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

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

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

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

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