1. PFIN 5 5 Making Automobile and Housing Decisions
BILLINGSLEY/ GITMAN/ JOEHNK/
PFIN 5 5
Making Automobile and Housing Decisions
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2. LEARNING OUTCOMES
1 Design a plan to research and select a new or used automobile
2 Decide whether to buy or lease a car
3 Identify housing alternatives, assess the rental option, and perform a rent-or-buy analysis
4 Evaluate the benefits and costs or homeownership and estimate how much you can afford to pay for a home
5 Describe the home-buying process
6 Choose mortgage financing that meets your needs
PFIN5 | CH5
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3. Guidelines for Purchasing Decisions
Research purchase thoroughly considering the market and the personal needs
Base the selection on the needs
Negotiate the best price and arrange financing on favorable terms
Understand all the terms of the sale before signing the contract
Maintain the purchase and make necessary changes promptly
PFIN5 | CH5
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4. Factors that Affect Affordability
Amount of down payment
Size of the monthly loan payment
Operating costs
Type of vehicle
Gas, diesel, or hybrid
New or used
Size, body style, and features
Other considerations
Trading in/selling, fuel economy, safety measures
PFIN5 | CH5
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5. Purchase Transactions
Negotiating price
Sticker price - Manufacturer’s suggested retail price
Key to negotiating a good price is knowing the dealer’s cost for the car
Closing the deal
Sales contract: Agreement to purchase an automobile that states the offering price and all conditions of offer
When signed by the buyer and seller, the contract legally binds them to its terms
PFIN5 | CH5
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6. Lease
Arrangement in which the lessee receives the use of an asset in exchange for monthly payment
Closed-end lease
Open-end lease
PFIN5 | CH5
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7. Variables Affecting Monthly Lease Payment
Price of a car that is being leased
Capitalized cost
Remaining value of a leased car at the end of the lease term
Residual value
Financing rate on a lease
Money factor
Lease period as mentioned in the contract
Lease term
PFIN5| CH5
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8. Lease versus Purchase Analysis
Performed to compare the differences between the total costs
When the lease ends, the lessee can:
Return the car
Purchase the car
PFIN5 | CH5
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9. Housing Prices and the Recent Financial Crisis
Analyze the history of housing prices
Foreclosures: Lenders attempt to recover loan balances from borrowers who have quit making payments by forcing the sale of the home pledged as collateral
PFIN5 | CH5
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10. Types of Housing Units Capitalized cost
Price of a car that is being leased
Capitalized cost
Remaining value of a leased car at the end of the lease term
Residual value
Financing rate on a lease
Money factor
Lease period as mentioned in the contract
Lease term
PFIN5 | CH5
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11. Types of Housing Units Cooperative apartment (co-op)
Apartment in a building
in which each tenant owns a share of the nonprofit corporation that owns the building
Cooperative apartment (co-op)
Range from duplexes, fourplexes, and single-family homes to large, high-rise apartment complexes containing several hundred units
Rental units
PFIN5 | CH5
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12. Security and peace of mind
Benefits of Owning a Home
Security and peace of mind
Tax shelter
Inflation hedge
PFIN5 | CH5
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13. Types of Costs to be Considered
Down payment: Portion of the full purchase price provided by the purchaser when a house or other major asset is purchased
Loan-to-value ratio: Maximum percentage of the value of a property that the lender is willing to loan
Private mortgage insurance (PMI): Policy that protects the mortgage lender from loss in the event the borrower defaults on the loan
PFIN5 | CH5
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14. Types of Costs to be Considered
Mortgage points: Fees charged by lenders at the time they grant a mortgage loan
Closing costs: Expenses that borrowers pay when a mortgage loan is closed and they receive title to the purchased property
Mortgage payments
PFIN5 | CH5
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15. Types of Costs to be Considered
Property taxes: Levied by local governments on the assessed value of real estate for the purpose of:
Funding schools
Law enforcement
Local services
Homeowner’s insurance
Required by mortgage lenders and covers the replacement value of a home and its contents
Maintenance and operating expenses
PFIN5| CH5
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16. Home Buying Process Real estate short sale
Sale of real estate property in which the proceeds are less than the balance owed on a loan secured by the property sold
Real estate short sale
Comprehensive listing of properties for sale in a given community or metropolitan area
Multiple Listing Service (MLS)
PFIN5 | CH5
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17. Home Buying Process
Makes the agreement conditional on factors such as the availability of financing, property inspections, or obtaining expert advice
Contingency clause
Requires lenders to give potential borrowers a government publication describing the closing process
Requires lenders to provide clear, advance disclosure of all closing costs to home buyers
Real Estate Settlement Procedures Act (RESPA)
PFIN5 | CH5
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18. Sources of Mortgage Loans
Secured by the property
Mortgage bankers
Firm that solicits borrowers, originates primarily government-insured and government-guaranteed loans, and places them with mortgage lenders
Mortgage brokers
Firm that solicits borrowers, originates conventional loans, and places them with mortgage lenders
PFIN5 | CH5
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19. Types of Mortgage Loans
Rate of interest and the monthly mortgage payment are fixed over the full term of the loan
Fixed-rate mortgage
Rate of interest is adjusted based on market interest rate movements
Adjustable-rate mortgage (ARM)
PFIN5 | CH5
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20. Features of ARM Adjustment period Index rate Margin
Period of time between rate or payment changes
Index rate
Baseline index rate that captures interest rate movements
Margin
Percentage points a lender adds to the index rate to determine the rate of interest
PFIN5 | CH5
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21. Features of ARM Interest rate cap Payment cap
Limit on the amount that the interest rate can increase each adjustment period and over the life of the loan
Payment cap
Limit on the monthly payment increase that may result from a rate adjustment
PFIN5 | CH5
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22. Negative amortization
ARM
Negative amortization
Principal balance on a mortgage loan increases because the monthly loan payment is lower than the amount of monthly interest being charged
Convertible ARM
Allows borrowers to convert from an adjustable-rate to a fixed-rate loan
Two-step ARM
Have two interest rates - one for the first 5 to 7 years of the loan, and another for the remaining term of the loan
PFIN5| CH5
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23. Mortgage Payments Options
Requires the borrower to pay only interest
Interest-only mortgage
Starts with unusually low payments that rise over years to a fixed payment
Graduated-payment mortgage
Fixed-rate mortgage with payments that increase over a specific period
Extra funds are applied to the principal so that the loan is paid off quickly
Growing-equity mortgage
PFIN5 | CH5
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24. Mortgage Payments Options
Payments equal to half the regular monthly payment that are made every two weeks
Biweekly mortgage
Financing made available by a builder or seller to a potential new-home buyer at well below market interest rates
Buydown
PFIN5 | CH5
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25. Conventional, Insured, and Guaranteed Loans
Offered by a lender who assumes all the risk of loss
Conventional mortgage
Offers lenders mortgage insurance on loans having a high loan-to-value ratio
Intent is to encourage loans to home buyers who have very little money available for a down payment and closing costs
Federal Housing Administration (FHA) mortgage insurance
Offered by the U.S. Veterans Administration to lenders who make qualified mortgage loans to eligible veterans of the U.S. Armed Forces and their unmarried surviving spouses
VA loan guarantee
PFIN5 | CH5
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26. If the interest rates drop, consider refinancing the mortgage
Refinancing Mortgage
If the interest rates drop, consider refinancing the mortgage
Should be refinanced after comparing and analyzing the terms of old and new mortgages
PFIN5 | CH5
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27. KEY TERMS Foreclosures Depreciation condominium (condo) Anchoring
Sales contract
Lease
Closed-end lease
Open-end (or finance) lease
Residual value
Capitalized cost
Money factor
Purchase option
Foreclosures
condominium (condo)
Cooperative apartment (co-op)
Rent ratio
Down payment
Loan-to-value ratio
Private mortgage insurance (PMI)
Mortgage points
Closing costs
PFIN5 | CH5
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

28. KEY TERMS Homeowner’s insurance Real estate short sale
Multiple Listing Service
Prequalification
Earnest money deposit
Contingency clause
Real Estate Settlement Procedures Act
Mortgage loan
Mortgage banker
Mortgage broker
Fixed-rate mortgage
Adjustable-rate mortgage
Adjustment period
Index rate
Margin
Interest rate cap
Payment cap
Negative amortization
PFIN5| CH5
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

29. Guidelines for purchase decisions
SUMMARY
Guidelines for purchase decisions
Research the purchase
Select the best item based on the needs
Buy the item after negotiating
Maintain the purchase and make necessary repairs
Leasing is an arrangement in which the lessee receives the use of an asset in exchange for making monthly lease payments over a specified period
PFIN5 | CH5
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30. SUMMARY
Bubble in real estate prices encouraged increase in construction and extraction of a lot of home equity through home equity loans and refinancing
Home buying process
Shop the market
Use an agent
Apply for a mortgage
Enter into a sales contract
Close the deal
PFIN5 | CH5
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