Auto and Home Loans

1. Auto and Home Loans CHAPTER PLAYLIST SONG: “Living in the Promised Land” by Willie Nelson

2. Learning Objectives • LO 7-1 Recognize how to get the best deal when purchasing a car, compare purchase vs. lease options, and gain an understanding of the loan approval process. • LO 7-2 Compare buying vs. renting a home and evaluate which stage in life is best to make this investment.

3. Learning Objectives, ctd. • LO 7-3 Describe the steps involved in purchasing a home, including financing options, and discuss the mortgage refinancing decision. • LO 7-4 Explain how home equity loans are used and describe the precautions that need to be taken when using them.

4. Auto and Home Purchases • One of your largest purchases • You need to do your homework • Research comparable purchases for both home and auto • Research the reliability and repair cost for autos • Research the builder’s reputation and construction practices • Ask yourself, Is it better to buy new, buy used, lease, or rent? • Find what you want • Negotiate the price • Close the deal

5. Steps of the Auto Purchase

6. Step 1. Analyze Needs vs. Wants

7. Step 1: Analyzing Needs vs. Wants • In America, your image and personality are often tied to the car or truck you drive. • Do you need 4-wheel drive or just “want” it? • What does driving a Jeep communicate to others? • What does driving a hybrid or all-electric vehicle say about you? • Review your values • Needs are different from wants • Determine your driving habits and vehicle needs

8. Need vs. Want Questions • How much cargo do you carry? • How far do you drive on a daily basis? • Do you drive highway miles or in town? • What type of driving experience do you want? • Do you want the wind blowing through your hair riding in a convertible or something that will keep you warm in the winter? • Are you looking for speed, acceleration, and handling, or fuel economy? • Do you prefer manual or automatic transmission? • How important is a GPS and/or entertainment system? • Do you need two-wheel drive, all-wheel drive, or four-wheel drive?

9. Step 2: Determine What You Can Afford

10. Step 2: Determining What You Can Afford • Keep total debt-to-income ratio at 36% or less

11. Step 3: Do Your Homework

12. Step 3: Do Your Homework • Research new and used vehicles - meet needs/wants • Most new cars depreciate 35% - 40% in the 1st 3 years • Used cars • Have an independent mechanic inspect it • Research online for dependability, repair rate, reliability, and price • New cars • Warranty – 36 months, 36,000 miles • Lower interest rates • Latest safety features

14. Leases • Long-term rental agreement (2-3 years) • Limit on miles driven • Early termination fee

15. 7-15

16. Cost of Leasing vs. Buying: An Automobile Comparison

17. Step 3: Do Your Homework • Determine a fair price • Consumer Reports • Kelley Blue Book • National Auto Dealers Association • Reliability • CarFax • Consumer Reports • Edmonds • Insurance cost

18. Step 4: Comparison Shop

19. Step 4: Comparison Shop • Test drive • How does the vehicle handle? Check acceleration, breaking, cornering, engine noise, power, and passing acceleration • Car dealerships vs. private sale • Dealerships allow trade-ins, warranties, financing, and repairs • Private ownership offers no warranties and it is “Buyer Beware”

20. Step 5: Negotiate a Deal

21. Step 5: Negotiate a Deal • Decide on the vehicle you want • Know the price of similar vehicles that have sold • Dealer cost for new cars • Average trade-in or average private sale price for used cars • Know how much you are willing to spend/can afford, including insurance • Check with other dealers or other private sales • Stay in control • Don’t fall “in love” with a vehicle • Settle on a price • Reopen the negotiation with a trade-in if you have one

22. Step 6: Shop for Financing

23. Step 6: Shop for Financing • Banks and Credit Unions • Talk to your banker to prequalify for a loan and know the amount you can borrow and the rate • Dealer Financing • Dealer might offer special rates and terms • Is zero percent a good deal?

24. Step 6: Shop for Financing

25. Step 7: Close the Deal

26. Step 7: Close the Deal • Dealerships – Finance and Insurance (F&I) person • Will try to sell you extended warranties, extra insurance, rust proofing, fabric protection, and paint sealant • A way for the dealership to increase profits • Plan purchase before you talk to the F&I person • Don’t feel pressured to purchase any extras

27. Step 8: After-Sale Activities

28. Step 8: After the Sale • Perform a final inspection of the vehicle before you drive it off the lot • Look for repairs that need to be made • If repairs need to be made, get them in writing • Call your insurance agent to make sure you have coverage • If you purchase from an individual • Transfer the title • Buy new license plates • Enjoy your ride!

29. Home Ownership • Is it better to rent or buy? • Do you like to make home repairs and do yardwork? • How much should you have for a down payment? • Where do you want to live? • How long do you want to live there? • What is your dream home?

30. Home OwnershipRent vs. Buy 7-30

31. Home OwnershipRent vs. Buy 7-31

32. Home OwnershipRent vs. Buy 7-32

33. Home OwnershipLife Stages • During college and out of college, most people rent • Early Family Life Stage • Buy first home, a starter home • Buy second home as family expands and income increases • Use equity from first home for down payment on second home • Late Family or Empty Nest Life Stage • Purchase third home or dream home • Might purchase vacation home • Retirement Life Stage • Downsize to a smaller, more accessible home

34. Buying a HomeSelection Criteria • Price • No more than two times total gross annual household income • Location, location, location • Shopping, public transportation, resale value, school district • Maintenance • New home: more expensive, less maintenance • Older home: less expensive, more maintenance • School Systems • Reputation of the school will affect your home’s resale value

35. Buying a HomeSelection Criteria • Insurance • Flood insurance • Earthquake insurance • Property Taxes • Based on the assessed value of your property • Support local government services and schools • Homeowners Association • Fees need to be calculated into your monthly budget • Resale Value

36. Real Estate Brokers • Commission of 3%-7% paid by the seller • Listing agent–the seller chooses to advertise the house • Multiple listing service (MLS)–all other real estate agents can see the listing of the house • Will have showing and open houses • Can help you find a house and determine your needs and wants

37. Real Estate Purchase • Down Payment – 20% down

38. Real Estate Purchase • Monthly Payment • Monthly payment—No more than 28% of total monthly household income • Total monthly debt payments—No more than 36% of total monthly household income

39. Mortgage Type Map 7-39

40. Mortgage Type Map 7-40

41. Properties of an Adjustable Rate Mortgage 7-41

42. Closing Costs • The amount due when you close on you home • These fees do not reduce the principal of your loan • Loan application fee • Loan origination fee • Points • Appraisal fee • Home inspection • Title Search • Good Faith Estimate • Required by Real Estate Settlement Procedures Act (RESPA) • Provides a “good faith estimate of all your closing costs” within 3 business days of submitting your application for the loan

43. Closing Costs

44. Refinancing Your Home • When interest rates drop, you might save money by refinancing your home at a lower rate • Determine your break-even point • Calculate your closing costs • Divide your closing costs by you monthly savings in a reduced payment • Provides a rough estimate of the number of months to your break-even point • Determining factor: How long will you live in that house?

45. Refinancing

46. Home Equity Loans • Borrowing money against the equity of your home and using the home as collateral (second mortgage) • Equity = Value of your home – what you owe on your home • Types • Home Equity Line of Credit (HELOC) • Similar to a secured credit card • Fixed Rate/Fixed Term • Similar to an auto loan with a fixed maturity date and rate • Balloon Payment • Fixed rate for a specific time, then the entire balance of the loan is due

47. Second Mortgages Advantages Disadvantages • Ability to access the equity of your home • Interest may be tax deductible • Possible lower interest rates • Risk losing home if you cannot make payments • Cost of origination • Appraisal fee • Title search 7-47

48. Learn • LO 7-1 Recognize how to get the best deal when purchasing a car, compare purchase vs. lease options, and gain an understanding of the loan approval process. • LO 7-2 Compare buying vs. renting a home and evaluate which stage in life is best to make this investment. • LO 7-3 Describe the steps involved in purchasing a home, including the financing options, and discuss the mortgage refinancing decision. • LO 7-4 Explain how home equity loans are used and describe the precautions that need to be taken when using them.

49. Plan & Act • Assess purchase vs. lease options for your next auto purchase (Worksheet 7.1). • If you own or lease a car, review your auto maintenance recommendations to confirm you are taking care of this asset. • Create an online log to maintain your auto maintenance records (Worksheet 7.2). • Comparison-shop for a home equity loan (Worksheet 7.3). • Decide whether your lifestyle today is better suited to renting or buying a home. Use the online calculator to help make this determination. (www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?_r=1#)

50. Evaluate • Review your automotive needs and, if you need or want a new vehicle, start the research stage to find out what vehicle is best suited for you. • If buying a first home is in your future, start saving today for the down payment. • How do these auto and home decisions fit in with your overall goals? • Log on to your online GoalTracker to assess the impact these decisions have on your goals and timelines. • Track overall how you are doing on your short-, mid- and long-term goals.