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Smart Buying: Home and Automobile Decision

Learn how to make good buying decisions for your home and car. Determine your needs, calculate costs, and maximize your purchase. Includes steps for buying a vehicle and choosing housing.

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Smart Buying: Home and Automobile Decision

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  1. 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: • 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 Ratesand 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 YouCan 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 VersusFixed-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.

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