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Making Automobile and Housing Decisions

Making Automobile and Housing Decisions. #5. Learning Goals. Buying an Automobile. Choosing a Car. Factors to Consider. Choosing a Car. Other Considerations: . The Purchase Transaction. Negotiating price Sticker price versus dealer’s cost

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Making Automobile and Housing Decisions

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  1. Making Automobile and Housing Decisions #5

  2. Learning Goals

  3. Buying an Automobile

  4. Choosing a Car Factors to Consider

  5. Choosing a Car Other Considerations:

  6. The Purchase Transaction Negotiating price Sticker price versus dealer’s cost Closing the deal

  7. Leasing A Car Leasing usually offers: • Lower monthly payments • More expensive car for same payments • Lower down payment At the end of lease, you have nothing When leasing a car, you pay for its use during a specified period of time

  8. The Leasing Process Closed-end lease “walk away” from car when lease is over most popular Open-end lease payment based on car’s residual value upon return, pay difference if car’s worth is less than estimated

  9. Leasing a Car Lease Payment Calculation Based on:

  10. Lease versus Purchase Analysis

  11. Meeting Housing Needs:Buy or Rent? Single family homes

  12. Condominiums

  13. Cooperative Apartments “Co-op”

  14. Rental Units Appropriate for those:

  15. The Rental Option Contract Protects lessor = owner lessee = one who leases Contract Specifies Monthly rent and due date penalties for late payment length of lease agreement deposit requirement renewal options Know your rights and responsibilities before signing!

  16. Rent or Buy Analysis

  17. Benefits of Owning a Home

  18. The Cost of Home Ownership

  19. Down Payment Represents buyer’s equity Paid at time of closing Typically 5% to 20% of purchase price If less than 20%, lender may require private mortgage insurance (PMI) Protects lender of buyer defaults Loan to Value Ratio

  20. Points… Premium paid for obtaining lower mortgage rate pay at closing One-time fee charged by lender increases effective rate of interest From 0–3 points assessed on mortgage 1 point = 1% of the loan amount

  21. …and Closing Costs Expenses to close on a home may include Loan application, origination fees Points Title search, insurance Attorney fees Appraisal fees Costs, such as inspections, credit report, property survey, filing fees

  22. Closing Costs – the Hidden Costs of Buying a Home

  23. P = Principal I = Interest T = Taxes I = Insurance Go to lender to repay mortgage Collected by lender and held in escrow account The Mortgage Payment (PITI)

  24. Lender determines maximum monthly payment Typical Affordability Ratios The Mortgage Payment (PITI) Monthly mortgage payment < 25–30% of monthly gross income Total of all monthly installment loan payments < 33–38% of monthly gross income

  25. Example: If your monthly gross income is $4500, what would your maximum monthly mortgage payment be if the lender's affordability ratios stipulate that your mortgage payment not exceed 25% nor your total installment payments exceed 33% of your monthly gross income? The Mortgage Payment (PITI)

  26. Mortgage payment should not exceed: $4,500 x .25 = $1,125 Total installment payments should not exceed: $4,500 x .33 = $1,485 The Mortgage Payment (PITI)

  27. Monthly Mortgage Payments for $10,000 loan

  28. Property Taxes & Insurance Each month lender collects 1/12 of annual amount and places in escrow account • Homeowner may pay these directly • provides more flexibility and opportunity to earn interest

  29. Property Taxes & Insurance

  30. Maintenance & Operating Expenses

  31. Real Estate Short Sales Foreclosure - borrower cannot make mortgage payments so lender repossesses property Short sale - proceeds of the sale are less than balance owed on the mortgage

  32. Using an Agent Most realtors belong to Multiple Listing Service (MLS) – a comprehensive listing, updated daily, of properties for sale Agents, usually employed by seller, are paid a commission if they make a sale

  33. The Home-Buying Process

  34. Closing the Deal Real Estate Settlement Procedures Act (RESPA)

  35. Financing the Transaction Sources of mortgage loans

  36. Types of Mortgage Loans Fixed Rate Mortgage Interest rate and monthly payments (PI) fixed for life of loan Taxes and insurance not fixed, so total payment (PITI) can increase

  37. Types of Mortgage Loans Adjustable Rate Mortgage (ARM) Interest rate varies, so monthly payments vary May cause negativeamortization ARM Features Adjustment period Index rate Margin Interest rate caps Payment caps

  38. Negative Amortization If monthly loan payment is lower than the monthly interest charged then principal balance will increase could result in a larger mortgage balance on the next loan anniversary than on previous one

  39. Other Types of ARMs Convertible ARMs allow borrowers to convert to fixed-rate loan Two-step ARMs have two interest rates: one for initial 5-7 years Higher one for remaining loan period

  40. Other Mortgage Payment Options

  41. Types of Mortgage Loans Conventional mortgage - lender assumes all risk of loss • Usually requires 20% down payment • If lower than 20% then PMI required

  42. Types of Mortgage Loans FHA mortgage payments insured by Federal Housing Administration lower down payment, interest rates, closing costs VA loan payments guaranteed by Veterans Administration one-time loan with no down payment

  43. Refinancing • New lower rate can reduce monthly payment • Can reduce total borrowing costs in home financing May pay closing costs on new loan!

  44. Mortgage Refinancing Analysis

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