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Chapter 8

Chapter 8. The Home and Automobile Decision. Smart Buying--Controlled Buying. Step 1: Do your homework. Is the purchase a “need’ or “want”? Consider alternative products and features. Does the purchase fit your budget? Step 2: Make your selection.

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Chapter 8

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  1. Chapter 8 The Home and Automobile Decision

  2. Smart Buying--Controlled Buying • Step 1: Do your homework. • Is the purchase a “need’ or “want”? • Consider alternative products and features. • Does the purchase fit your budget? • Step 2: Make your selection. • Comparison shop: price, product features, and quality. • Be informed: check library and Web sources.

  3. Smart Buying (cont’d) • Step 3: Make your purchase. • Negotiate the price. • Evaluate financing alternatives. • Complete the purchase. • Step 4: Maintain your purchase. • Resolve complaints; keep good records.

  4. Transportation Needs • Step 1: Narrow your choices. • Step 2: Pick your vehicle. • Step 3: Make the purchase. • Lease versus buy decision • Step 4: Maintain your purchase. • Step 5: Consumer protection and your vehicle.

  5. Step 1: Narrow Your Choices • Consider your lifestyle and needs versus wants • Look at the alternatives • Fit your car into your budget; calculate the payment.

  6. Step 2: Pick Your Vehicle • Do your comparison shopping via the internet or publications. • compare price • compare features • compare quality • Determine what is available in your price range. • Test-drive the exact vehicle you are considering.

  7. Step 3: Make the Purchase • Take advantage of sales, but negotiate the price • know the dealer’s cost of the vehicle and any holdback • understand the various dealer markups • be aware of any rebate(s) that may apply

  8. Step 3: Make the Purchase (cont’d) • Evaluate financing alternatives • determine the length of financing • shop around to find the best interest rate • choose a financing period and rate to give you an affordable monthly payment • Consider a lease • negotiate a fair vehicle value and a low rent or finance charge • choose a vehicle with slow depreciation

  9. Step 3: Lease Versus Buy • Closed-end leases, or walk-away leases • normally offer a purchase option • require the dealer to be responsible for resale • account for about 80% of all leases • Open-end leases • compare the market value to the lease’s residual value of the vehicle • are to be avoided because you pay the difference

  10. When Is Leasing A Good Option? • If you are financially stable. • If you drive less than 15,000 miles annually. • If you take good care of your vehicles. • If you use your vehicles for business travel. • If you do not modify your vehicles. • If the vehicle you are considering doesn’t depreciate too quickly.

  11. Calculating Your Monthly Lease Payment • Your lease payment depends on the following factors • agreed-upon price • up-front fees • down payment or trade allowance • residual value • rent or finance charge • length of the lease

  12. Step 4: Maintain Your Purchase • Read the owner’s manual and perform regular maintenance. • Don’t ignore warning signals. • Choose a good garage; check training and experience.

  13. Step 5: Consumer Protection and Your Car • Know and use your warranty • Use the “lemon laws,” if necessary, to get a refund • Made 4 attempts to fix the problem • Car out of service at least 30 days during the 12 months after purchase or the first 12,000 miles

  14. Addressing Your Housing Needs • Step 1: Do your shopping homework • Step 2: Make your selection • Step 3: Make your purchase • Step 4: Postpurchase activities

  15. Comparing Options for Housing • Houses – typically single-family, free-standing dwellings • Cooperatives – multi-unit dwellings • Condominiums – multi-unit dwellings • Planned unit developments (PUDs) – planned development with common land • Apartments and other housing – multi-unit dwellings

  16. Houses • Advantages • more space • greater privacy • builds equity • Disadvantages • maintenance time and costs • repair costs • resale hassles

  17. Corporate-owned dwellings in which the residents, as shareholders, own stock representative of the value of their unit. Monthly homeowner’s fee. Advantages low maintenance more amenities higher security Disadvantages lower capital appreciation difficult to sell less privacy harder to finance Cooperatives

  18. Residents have sole ownership of the living space but joint ownership of the land and common areas. Monthly maintenance fee. Advantages low maintenance more amenities higher security Disadvantages lower capital appreciation difficult to sell less privacy Condominiums

  19. Planned Unit Developments (PUDs) • Own home and land it sits on as well as shared ownership of the development. • Monthly homeowner’s fee for maintenance and common expenses. Popular on West Coast.

  20. Apartments and Other Housing • Advantages • lower cost • ease of moving (no house to sell) • little upkeep • Disadvantages • limited remodeling ability • limited lifestyle choices (e.g., pet) • less privacy

  21. Housing Step 1: Do Your Housing Homework • Compare your needs versus wants for housing • Compare your options for housing and the costs of each • Weigh your alternatives of renting versus buying

  22. Housing Step 1: Homework (cont’d) • Determine what’s most affordable • Lending standards • Your financial history • Your ability to pay • The appraised value of the home • Maximum mortgage • The down payment • Prequalifying

  23. Comparing Needs Versus Wants for Housing • Decide on the fundamentals such as bathrooms, bedrooms, and closet space • Decide on property size • Compare other considerations like school systems, proximity to shopping centers, or safety • Consider the future -- such as additional family members

  24. Costs of Housing: What’s Involved in Ownership • One-time or initial costs • Recurring costs • Maintenance and operating costs

  25. One-Time or Initial Costs • Down payment • Closing or settlement costs • Discount points • Loan origination fees • Loan application fee • Appraisal fee • Other fees and costs

  26. Recurring Cost: • Monthly mortgage payments(PITI) • Maintenance and operating expenses

  27. Monthly Mortgage Payments (PITI) • Principal -- what you borrowed • Interest -- the cost of borrowing • Taxes -- support of government • Insurance -- protection of your dwelling and contents Note: T & I are held in an escrow account.

  28. Maintenance and Operating Costs • Repairs to the structure • Replacing an appliance • Landscaping

  29. Weighing the Alternatives of Renting Versus Buying • Personal and lifestyle considerations • Financial considerations • Appreciation with time. • Tax considerations.

  30. Advantages of Renting • Mobility • No downpayment • Can be less expensive • Protection from declining housing values • More extensive amenities • No home repair or maintenance • No groundskeeping responsibilities • No property taxes

  31. Advantages of Buying • Build equity in your home • Allows for capital appreciation • Greater personal freedom • Tax advantages • Protection from rising rent costs • Potential source of cash with home equity loan

  32. Determining What’s Affordable: Lending Standards 1. Financial history • income stability • credit history 2. Ability to pay • Housing cost ratio at a maximum of 28% of gross income • Housing and other long-term debt ratio at a maximum of 36% of gross income 3. Appraised home value

  33. Determining What’s Affordable: Other Factors • Calculation of your mortgage limit • 28% rule • 36% rule • 80% rule • Prequalification, or knowing for sure what is affordable

  34. Determining What’s Affordable: Other Factors • Accumulation of a down payment • Down payment sources and “gift letters” • FHA, VA, and FmHA federally-backed loans require a lower downpayment • Private mortgage insurance (PMI) • IRA loan of up to $10,000 for first-time homebuyer

  35. Housing Step 2: Selection • The search process • use a traditional real estate agent • use an independent or exclusive buyer-broker • use the Internet to learn about buying a home • The inspection process • structural • mechanical

  36. Housing Step 3: Making the Purchase • Guidelines for renting • Negotiating a sales price • Signing the sales contract • Financing the purchase – the mortgage

  37. Guidelines for Renting • Determine what you can afford • Compare the location with shopping, employment, and schools • Understand the lease • Get every detail in writing • Research the reliability of the landlord • Acquire renter’s insurance

  38. Negotiating a Sales Price • Always haggle on the actual purchase price and counteroffers • Include all contingencies • Consider closing costs • Offer earnest money • Note: You may never see the seller because often the real estate agents carry the offers between parties

  39. Signing the Sales Contract • Always have a fixed price • Do a title search • Perform a pest or other inspection • Make the contract contingent on receiving the proper financing

  40. Signing the Contract (cont’d) • Divide the utilities, insurance, taxes, and interest equitably with the seller • Stipulate the condition of the dwelling upon transfer • Include all other contingencies that may interfere with a satisfactory purchase

  41. Financing the Purchase • Shop for the lowest interest rate. • Determine where you want to finance. • Determine the length of the mortgage. • Choose the type of mortgage. • Note: Make sure you understand every aspect of the mortgage before you sign. This could be your largest purchase ever.

  42. Sources of Mortgages • Mortgage bankers • Mortgage brokers

  43. Conventional Or Government-Backed? • Conventional • Veteran’s Administration (VA) mortgages • Federal Housing Administration (FHA) mortgages

  44. Government-Backed Mortgages • Advantages • Lower interest • Smaller down payment requirement • Less strict lending standards • Disadvantages • More paperwork to qualify • Higher closing costs • Maximum lending limits

  45. Types of Mortgages • Fixed-rate mortgage loans • Adjustable-rate mortgage (ARM) loans • Other mortgage loan options

  46. Fixed-Rate Mortgage Loans • Assumable loans -- allow for transfer of the mortgage with the home. • Prepayment privilege -- allows the payee to increase the monthly payment without a fee.

  47. Adjustable-Rate Mortgage (ARM) Loans • Initial rate – the first rate on the mortgage, usually short-term. • Interest rate index – determines annual rate adjustment. • Margin – the difference between the index rate and the quoted rate. • Adjustment interval – the length of time between adjustments.

  48. Adjustable-Rate Mortgage (ARM) Loans (cont’d) • Rate cap – the maximum rate increase allowed either per year or over the life of the loan. • Payment cap – the maximum allowable payment amount. Normally not a desired feature due to the risk of negative amortization.

  49. ARM Innovations • Convertible • Reduction-option • Two-step • Price level adjusted

  50. Other Mortgage Loan Options • Balloon payment mortgage • Graduated payment mortgage • Growing equity mortgage • Shared appreciation mortgage

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