1 Chapter 8 – Homes and Cars Theme: get most for money with well thought-out spending decisions –Do homework – separate wants and needs –Make selection – compare alternatives, quality, features and price tradeoffs Base on choice within budget Maintain purchase – see complaints section

2 Vehicles Narrow choices – needs, wants, affordability Selection – test drive, compare operating cost Invoice price isn't whole story; rebates? 0%? Financing – find lowest cost source Negotiate price first, financing is separate Dealer may offer low rate; compare with rebate Credit union – probably the best source

3 Car Financing Loans and leases Sources: credit unions, bank, car finance companies Loan/Rebate tradeoff –One or the other –Is the rebate worth more than the interest savings?

4 Car Leases Leasing – lessor owns and rents to you Pricing = vehicle + interest - residual value +/- other Closed-end (walkaway) – lessor has risk on residual Open-end – if market value less than estimated, you pay difference

5 Auto Loan Discrimination How financing system works –Dealer sends credit info to finance company. –Loan approved at minimum rate say 8% –Dealer may add up to 3% –Finance company buys loan at 8%, dealer keeps 3% Allegations: markup varies by ethnicity even with comparable credit records

6 Other Dirty Tricks Looks at unfair tactics used by dealers to manipulate customers Lists and explains 13 watchouts and other advice Other sites provide tips to buyers

7 Car Summary Purchase and financing are separate issues. Choose what’s affordable –New cars – know dealer’s costs and rebates Typical margin – about 6% Use Consumer Reports and online dealers –Trade-ins – get history and have inspected

8 Housing Probably your largest investment and largest monthly outlay –On average, 26% of after-tax income Balance needs, wants and affordability –Price/quality tradeoffs –Decide where/how to finance –Post purchase costs – maintenance, taxes, insurance

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10 Ownership Costs One-time – down payment, points, closing costs –Mortgage – amount not covered by equity –Lenders like large equity – 20% down Recurring – mortgage, taxes, insurance Maintenance – varies by age of house

11 Closing or Settlement Costs Associated with ownership transfer – 5 to 7% Purpose is for lender to recoup costs and increase return Text lists about 11 general types

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13 Points One-time, nonrefundable interest charge at closing to increase lender’s return –1 point = 1% of mortgage; $3,000 on $300,000 –Lowers nominal rate, not APR –6.62% + 0  point Analyze tradeoff – how long to recover the points through the lower rate?

14 Rent versus Buy Rent = flexibility; Buy = financial benefits, personal freedom (and some headaches) Buying complexities: increasing equity from loan repayment and inflation plus tax savings –Offsets: maintenance and selling costs Ownership: not desirable if stay less than three years but tax benefits if itemize

15 Renting versus Buying

16 Affordability Questions Down payment – what can you afford? Maximum amount you can borrow Are you comfortable with payments?

17 Credit Factors Financial history – income, job stability, assets and credit rating Monthly payment of Principal, Interest, Taxes and Insurance called PITI PITI < 28% of gross income PITI + other debt < 36% of gross income Appraised value > 80% of mortgage

18 Reducing the Down Payment Government backed mortgage – 5 to 10% down Private mortgage insurance (PMI) to 2.0% of loan amount IRA – first time buyers may withdraw without penalty

19 Real Estate Agents Wealth of information Possible conflicts – who do they represent? –Probably themselves (get commission quickly) Consider: –Experience, honesty, knowledge of mortgage market, familiarity with your area, diplomacy, understanding your views

20 Making the Purchase Listed at asking price –Is it negotiable? Risk of being outbid? Contract: price, method of payment, closing date, free and clear title, pro- rations Contingencies hurt; prequals help buyer Escrow agent – exchanges funds and provides flow-of-funds statement

21 Mortgages Sources: S&L's, banks, credit unions –Mortgage bankers and brokers Conventional loans – from traditional sources with standard ratios –Subprime loans Government backed – FHA, VA, others –Advantage: rates, down payments, standards –Disadvantage: paperwork, default insurance

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23 Fixed Rate Mortgages Monthly payment doesn't change regardless of interest rate changes –10 to 30 years –May be assumable –Prepayment – penalty or no penalty?

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25 Median Home Prices Metro area (000)3 yr change R-side- San Bernd $ % Los Angeles San Diego Orange County

26 Adjustable Rates (ARM's) Rates fluctuate with current rates –Borrower benefits if rates fall; hurt if rise Teasers – low initial rate Index – rate mortgage's rate tied to –Index plus margin = ARM's rate –Adjustment interval –Rate and payment caps

27 Innovations ARM's – usually lower than fixed –Lender can re-price if rates rise –May qualify for larger loan if payment lowered ARM's may be convertible to fixed rate Term – 10, 15, 20 or 30 year payoffs –Pros: lower rate and good if rates drop –Cons: bad if rates rise

28 Home Equity Loans Home equity loan – amortizing loan secured by second mortgage Home equity line – revolving loan (repaid, reborrowed, repaid like credit card)- also secured Advantages: lower rate than credit card; interest may be tax deductible