CHAPTER 5: MAKING AUTOMOBILE & HOUSING DECISIONS

1. CHAPTER 5:MAKING AUTOMOBILE & HOUSING DECISIONS

2. Could This Happen to You?

3. Buying an Automobile • Research purchase thoroughly, considering the market and your needs. • Select the item most suitable. • Negotiate the best price. • Arrange favorable financing. • Understand terms of sale before you buy. • Maintain and repair after you buy.

4. Choosing a Car Research • Industry resources—manufacturers’ brochures; dealer personnel • Car magazines; consumer magazines • Internet Knowing what you want and can afford before purchasing either a new or used car will prevent a slick auto salesperson from talking you into buying a car you do not need

5. Affordability Factors to Consider: • Amount of down payment • Will it come from savings; do not deplete your emergency fund • Monthly loan payment • Consider your other expenses • No more than 20% of monthly net income

6. Operating Costs Factors to Consider: • Fixed costs • Loan payment • Insurance • License • Variable costs • Fuel • Oil • Tires • Operating/maintenance costs Depreciation—the difference between the price you paid for the car and what you can sell it for

7. Gas, Diesel, or Hybrid? • Which type of fuel do you prefer? • Comparable gas-fueled and diesel-powered cars have similar fuel economy • Diesels may be a bit noisier, have less acceleration but more power, & longer engine life • Hybrids blend gas & battery power • More economical & less polluting • Disadvantages include high cost of battery replacement, more sluggish acceleration, higher repair costs & higher purchase price

8. How Does a Hybrid Work?

9. New or Used? • Franchise dealerships – Offer latest models, provide financing, will negotiate • Superstores – Offer no-haggle pricing and a large selection, certify cars and may offer a limited warranty • Independent used car lots – Offer older (4 to 6 yrs) cars, lower overhead, no industry standards • Private individuals – cost less, may have maintenance records; make sure seller has car title • How to buy a used car

10. Size, Body Style, & Features • Direct relationship between size and cost • List all options you want before shopping for a new car • On new cars, window sticker details each option and its price • Be certain you compare comparably equipped models.

11. Reliability and Warranties • Assessing reliability • Talk to friends who own similar cars • Read objective assessments published by consumer magazines & buying guides • Warranties • On new cars, manufacturer guarantees general reliability and quality of construction for specified period • Most have limitations

12. Other Considerations • What to do with existing car? • Trade it in • Sell it yourself • Fuel economy • EPA mileage ratings are useful—number of miles per gallon for both city and highway • Safety features • Government regulations • Can affect insurance cost

13. The Purchase Transaction • Comparison shop. • Discuss price first, not financing or trade-in. • Don’t pay the sticker price. • Find out the dealer’s cost. • Check for special buyer’s incentives. • Negotiate for the best deal. • Be able to walk away.

14. How to Buy A Car

15. Refinancing an existing auto loan: • Do you have enough equity in your car to serve as collateral? • Credit unions or online banks may be more interested in providing used car loans. • Homeowners can possibly use an equity line of credit to pay off auto loan.

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

17. The Leasing Process • Closed-end lease • When the lease is over, you “walk away” from the car. • Most customers choose this type. • Open-end lease • The car’s residual value is used to determine the payment. • If you return the car and it is worth less than estimated, you pay the difference. • Purchase Option • Price at which lessee can buy car at end of lease term

18. Lease payment calculation based on: 1. Capitalized cost (price) of the car 2. Estimated residual value at end of lease 3. Money factor (financing rate) on lease 4. Term or length of lease (typically 2 to 5 years) The lower the cost and the higher residual value, the lower your payment

19. Lease vs. Purchase Analysis • More or less costly to lease? • When the lease ends • Return the car? • Buy the car?

20. Meeting Housing Needs • Single family home • Most popular type. • Offers more privacy and property control. • Cost has increased dramatically in recent years.

21. Condominium • Can be apartment, townhouse, or cluster housing. • Buyer receives title to an individual unit and jointly owns common areas. • Owner usually pays monthly homeowner’s fee in addition to mortgage payments. • Generally costs less than single family home.

22. Cooperative Apartment • Tenants own shares of the corporation that owns the apartment building. • Tenants lease units from corporation. • Tenants are assessed fees based on amount of space they occupy. • Fees cover service, maintenance, taxes, and mortgage on entire building. • Usually costs less than renting similar apartment.

23. Rental Unit Appropriate for: • Those who do not have enough cash for a down payment. • Those who are unsettled in their job or family status. • Those who do not want responsibilities of home ownership. • Those who feel current conditions for home ownership are unattractive.

24. The Rental Option A rental contract protects both the lessor (owner) and lessee (one who leases). Understand your rights and responsibilities BEFORE signing! • Contract specifies • Monthly payment and due date • Penalties for late payment • Length of lease agreement • Deposit requirement • Renewal options, restrictions, etc.

26. How Much Housing Can You Afford? • Benefits of owning a home • Provides personal satisfaction • Offers tax shelter • Acts as inflation hedge

27. The costs of home ownership: 1. Down payment 2. Points and closing costs 3. Mortgage payments 4. Property taxes and insurance 5. Maintenance and operating expenses

28. 1. Down payment: • Represents the buyer’s equity. • Must be paid at time of closing. • Anywhere from 5% to 20% of the purchase price of the house, depending on lender's Loan to Value Ratio

29. Private Mortgage Insurance (PMI) • Buyer is seen as more risky—has little equity in the home. • Usually adds $40-$70 to monthly payment. • Protects the lender from the buyer defaulting on the loan (does not protect you!). If down payment is less than 20%, lender usually requires

30. 2. Points . . . • One-time fee charged by lender which increases effective rate of interest. • Represent a premium paid for obtaining a lower mortgage rate (pay more up front at closing for slightly lower payments). • Usually 0–3 points assessed on a mortgage; paying points does not lower the amount borrowed. • One point = 1%of the loan amount (not the purchase price).

31. . . . and Closing Costs: • Expenses paid by borrower to close on the purchase of a home. • Can be 50% or more of down payment costs and may include: • Loan application and origination fees • Points, if any • Title search and insurance • Attorney fees • Appraisal fees • Other costs, such as inspections, credit report, survey of property, filing fees, etc.

32. Composed of 4 parts: 3. The Mortgage Payment (PITI): P —Principal I — Interest T —Taxes I — Insurance Go to lender to repay mortgage Collected by lender and held in escrow account

33. Lenders' guidelines determine your maximum monthly mortgage payment. • Typical Affordability Ratios: • Monthly mortgage payment less than 25–30% of monthly gross income. • Total of all monthly installment loan payments less than 33–38% of monthly gross income.

34. 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?

35. Mortgage payment should not exceed: $4,500 x .25 = $1,125 • Total installment payments should not exceed: $4,500 x .33 = $1,485

36. 4. Property Taxes & Insurance: • Typically, each month the lender collects 1/12 of yearly amount and places in escrow account. • Lender then pays these expenses on homeowner's behalf when they come due. • It is possible for the homeowner to pay these expenses directly; requires discipline to have the money when needed, but gives more flexibility and the opportunity to earn interest.

37. 5. Maintenance & Operating Expenses: May be greater for larger or older homes • Consider upkeep expenses: • Painting • Repairs • Lawn maintenance • Consider operating expenses: • Utilities

38. Calculating the Mortgage Payment: Example: What will the monthly mortgage payments be (PI only) on a $100,000, 30-year, 7% mortgage?

39. The Mortgage Payment— Mostly Interest Monthly payment $665.30 INTEREST ($139,508 total) PRINCIPAL ($100,000) Note that most of the mortgage payment will go toward interest until after year 20!

40. Over the 30-year life of the loan, the buyer will pay: $665.30 x 360 = $239,508 Loan amount = –100,000 Interest paid = $139,508

41. How Much Mortgage Will Your Payment Buy?

42. 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

43. Using an Agent Most realtors belong to Multiple Listing Service (MLS) with access to a large part of the market Agents, usually employed by seller, are paid a commission if they make a sale may range from 5-6% of sales price

44. Prequalify and apply Present a sales contract Provide an earnest money deposit Contingency clause The Home-Buying Process

45. Real Estate Settlement Procedures Act (RESPA) Title check necessary to ensure title is clear, free of liens Closing statement provides details of costs for both buyer and seller Closing the Deal

46. Financing the Transaction • Shop various lenders for mortgage • Commercial banks • Savings & loans • Credit unions • Mortgage banks • Mortgage brokers • Online mortgage resources

47. 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 house payment (PITI) can increase! • Balloon-payment mortgages are a type of fixed rate mortgage with large final payment.

48. AdjustableRateMortgage(ARM) Interest rate varies, causing monthly payments (PI) to vary. May cause negative amortization! Features of ARMs: • Adjustment period • Index rate • Margin • Interest rate caps • Payment caps

49. Fixed vs. Adjustable Rate Mortgage

50. Negative Amortization • Increase in the balance of the principal that results from monthly loan payments that are lower than the amount of monthly interest being charged • You could end up with a larger mortgage balance on the next anniversary of your loan than on the previous one