1. The Home and Automobile Decision
Chapter 8
The Home and Automobile Decision

2. Learning Objectives Make good buying decisions.
Choose a vehicle that suits your needs and budget.
Choose housing that meets your needs.

3. Learning Objectives Decide whether to rent or buy housing.
Calculate the costs of buying a home.
Get the most out of your mortgage.

4. Introduction
Buying a home is the single biggest investment most people will make.
Buying a car is another major purchasing decision.
Must fit lifestyle and wallet.
Probably need a loan making dramatic impact on personal finances.

5. Smart Buying
Step 1: Differentiate Want From Need Step 2: Do Your Homework Step 3: Make Your Purchase Step 4: Maintain Your Purchase

6. Checklist 8.1

7. Checklist 8.2

8. Figure 8.1 Sample Complaint Letter

9. Smart Buying in Action: Buying a Vehicle
Choices to consider:
Buy new
Buy used
Leasing

10. Smart Buying in Action: Buying a Vehicle
Step 1: Differentiate Want From Need
Features and qualities wanted
Features and qualities needed

11. Smart Buying in Action: Buying a Vehicle
Step 2: Do Your Homework
How much can you afford?
Down payment
Monthly payment
Which vehicle is right for you?
Comparison shop—price and attributes
Operating and insurance costs, and warranty.

12. Smart Buying in Action: Buying a Vehicle
Step 3: Make Your Purchase
Get a fair price:
Know the dealer cost or invoice price
Dealer holdback—2 to 3% that manufacture gives the dealer on the sale of an automobile
Approach dealers and get quotes
Negotiate

13. Checklist 8.3

14. Checklist 8.4

15. Smart Buying in Action: Buying a Vehicle
Step 3: Make Your Purchase
Financing Alternatives:
Cheapest—cash
Investigate all financing options before buying.
Keep financing out of the negotiations.
The shorter the term, the higher the monthly payments.

16. Smart Buying in Action: Buying a Vehicle
Step 3: Make Your Purchase
Leasing: ideal for financially stable, want new car every few years, drive less than 15,000 miles annually, good credit, no down payment
Closed-end or walk-away lease
Purchase option
Open-end lease

17. Checklist 8.5

18. Smart Buying in Action: Buying a Vehicle
Step 3: Make Your Purchase
Keys to getting a good lease:
Negotiate value for car before signing lease
Minimum down payment
Warranty—define “normal wear and tear”
Termination fee
Depreciation factor
Rent or finance charge

19. Figure 8.2 Federal Consumer Leasing Act Lease Disclosure Form

20. Smart Buying in Action: Buying a Vehicle
Step 4: Maintain Your Purchase
Keep vehicle in best running condition.
Don’t ignore signs of trouble.
Your first line of protection is the warranty.
Know your rights under the Lemon laws.

21. Figure 8.3 Worksheet for the Lease-Versus-Purchase Decision

22. Smart Buying in Action: Housing
Many people equate home ownership with financial success.
Housing costs can take up over 25% of after-tax income.
Home ownership is also an investment—biggest investment you will ever make.
Use smart-buying approach.

23. Your Housing Options A House: Cooperatives and Condominiums:
Most potential for capital appreciation.
Cooperatives and Condominiums:
Homeowner’s fee
Planned unit developments
Apartments and other rental housing

24. Smart Buying in Action: Housing
Step 1: Differentiate Want From Need
What about the house is important?
Know what you want before you look.
Affordability, location, neighborhood, conveniences, schools

25. Smart Buying in Action: Housing
Step 2: Do Your Homework
Investigate the potential home and all that goes along with it:
Neighborhood, community lifestyle, satisfy needs.
How much you can afford to pay?

26. Smart Buying in Action: Housing
One-time Costs:
Down payment
Closing/settlement costs
Points
Loan origination fee
Application fee
Appraisal fee
Title search fee

27. Figure 8.4 Estimated Initial Costs of Buying a Home
The Down Payment, Points, and Closing Costs on the Purchase of a $150,000 House, Borrowing $120,000, with 20% Down at a Rate of 6% with 2 Points

28. Smart Buying in Action: Housing
Recurring Costs
Monthly mortgage payments
PITI
Maintenance and Operating Costs:
repairs, renovations, upgrades, landscaping

29. Table 8.1 Monthly Mortgage Payments Required to Repay a $10,000 Loan with Different Interest Rates and Different Maturities

30. Renting Versus Buying Decision based on lifestyle Renting advantages:
Financial and lifestyle flexibility
Compare costs for each alternative
Buying advantages:
Longer stay and appreciation, itemized taxes, forced savings

31. Figure 8.5 Renting Versus Buying

32. Figure 8.6 Worksheet for the Rent-Versus-Buy Decision

33. Determining What You Can Afford
What is the maximum amount the bank will lend me?
Financial history
Ability to pay
Appraised home value
Calculating your mortgage limit
Should I borrow up to this maximum?
How big a down payment can I afford?

34. Figure 8.7 Worksheet for calculating the maximum size mortgage loan you qualify for

35. Figure 8.7 Worksheet for calculating the maximum size mortgage loan you qualify for (cont.)

36. Figure 8.7 Worksheet for calculating the maximum size mortgage loan you qualify for (cont.)

37. Figure 8.7 Worksheet for calculating the maximum size mortgage loan you qualify for (cont.)

38. Financing the Purchase—The Mortgage
Sources of mortgages:
S&Ls and commercial banks
Credit unions, mutual savings banks
Mortgage bankers—originate mortgage loans, sell to banks, pension funds, insurance companies and collect payments
Mortgage brokers—middlemen comparison shop for a fee to secure mortgage loans for borrowers but do not originate the loans

39. Conventional and Government-Backed Mortgages
Conventional loans—from a bank or S&L secured by the property.
Government-backed loans—loan from traditional lender but insured by government—FHA and VA loans:
lower interest rate, smaller down payment, less strict financial requirements
more paperwork, higher closing costs, limited funding

40. Fixed-Rate Mortgages
Monthly payment doesn’t change regardless of market interest rate changes.
Can lock in low rates for the life of the loan.
An assumable loan can be transferred to a new buyer.
Prepayment privilege allows early cash payments to be applied to principal.

41. Adjustable-Rate Mortgages (ARM)
Interest rate of ARM fluctuates with level of current interest rates.
Initial Rate—”teaser rate”—low for only a short time period then adjusted upward.
Interest rate index—rates on ARMs are tied to an index not controlled by the lender, such as 6- or 12-month U.S. Treasuries.

42. Adjustable-Rate Mortgages
Margin—the amount over the index rate that the ARM is set.
Adjustment Interval—how frequently the rate can be reset.

43. Adjustable-Rate Mortgages
Payment Cap—sets dollar limit on how much the monthly payment can increase during any adjustment period.
If interest rates go up, the monthly payment may be too small to cover the interest due—negative amortization.
Unpaid interest is added to the unpaid loan balance, increasing its size.

44. Adjustable-Rate Mortgages
ARM Innovations:
Convertible ARM—to fixed-rate loan
Reduction-option ARM—one time opportunity to adjust interest rate.
Two-step ARM—combined aspects of fixed- rate and ARM.

45. Adjustable-Rate Versus Fixed-Rate Mortgages
ARMs:
low interest rate in early years.
can get larger loan because PITI is lower.
reset interest rates push ARM payments upward
Fixed-rate mortgages:
In general, fixed-rate better than ARM.
Payments never change.
Allows for control and planning.

46. Specialty Mortgage Loan Options
Balloon Payment Mortgage Loan—small monthly payments for 5-7 years, then entire loan due.
Graduated Payment Mortgage—payments set in advance, rising for 5-10 years, then level off.
Growing Equity Mortgage—designed to let homebuyer pay off mortgage early.

47. Specialty Mortgage Loan Options
Shared Appreciation Mortgage—borrower receives below-market interest rate, lender receives a portion of future appreciation.
Interest Only Mortgage—interest only payment for initial set period, then pay both interest and principal for remainder of loan.

48. Specialty Mortgage Loan Options
Option Payment ARM Mortgages—can make different types of mortgage payments each month
Options include:
Amount less than interest due
Interest only
Payment amount of 150- or 30-year fixed-rate loan

49. Risks Associated with Specialty Mortgages
Big jump in monthly payments if interest rates rise
Read fine print
Know how much your monthly payment could increase, when, and whether you could afford them
Penalties

50. Beware of Subprime Mortgages and Predatory Lending
Subprime mortgages—mortgages taken out by borrowers with low credit scores.
Predatory lenders take advantage of these lenders.
Abusive loans—high-cost loans with little chance of paying off
Avoid predatory loans with knowledge.

51. Figure 8.9 Common Predatory Mortgage Lending Practices

52. Mortgage Decisions: Length or Term of the Loan
15- or 30-year maturity on mortgage?
Prepayment opportunities
Size of monthly payment
Interest rate

53. Figure The Portion of Each Payment That Goes Toward the Principal and Interest on a 30-Year, 8% Fixed-Rate Mortgage for $80,000

54. Table 8.2 Impact of the Loan Term on the Total Interest Paid and Monthly Payment for an $80,000 Fixed-Rate Mortgage at 8%

55. Figure 8.11 Comparing a Shorter- Versus Longer-Term Loan

56. Smart Buying in Action: Housing
Coming up with the down payment
Save, gifts from family and friends
At least 5% of closing costs have to come from homebuyer
“Gift letter”
Private Mortgage Insurance
Prequalifying—have maximum amount you’ll qualify for confirmed by a lender

57. Smart Buying in Action: Housing
Step 3:Make Your Purchase
Comparison shop
Traditional real estate agent
Independent or exclusive buyer-broker
Get it inspected
Make an offer and haggle

58. Smart Buying in Action: Housing
Contract
Earnest money
Closing
Settlement or closing statement
Step 4: Maintain Your Purchase
Refinancing

59. Summary
Separate needs from wants, compare products, negotiate, maintain product, and resolve complaints.
Lease or buy a vehicle that fits both your personal and financial needs.
Choose housing that meets your needs, preshop, comparison shop home and financing, and maintain if your purchase.
Get the most out of your mortgage.

60. Figure 8.8 Status of Nonprime Loans Originated from 2000 through 2007 as of December 31, 2009

61. Checklist 8.6

62. Figure 8.12 Worksheet for Refinancing Analysis

63. Checklist 8.7

64. Checklist 8.8