CHAPTER 5 MAKING AUTOMOBILE & HOUSING DECISIONS

1. CHAPTER 5 MAKING AUTOMOBILE & HOUSING DECISIONS

2. Buying an Automobile • Research purchase thoroughly • consider the market • consider your needs • Select the best to meet your needs. • Negotiate the best price. • Arrange favorable financing. • Understand terms of sale before you buy. • Maintain and repair after you buy.

3. Factors to Consider: Affordability Operating costs Gas, diesel, or hybrid? New or used? Size, body style, and features Reliability and warranties Choosing a Car

4. Other Considerations: What to do with present car Mileage ratings and safety features Insurance costs Choosing a Car

5. Comparison shop. Discuss price first, before 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. The Purchase Transaction

6. Trade in your loan: Do you have enough equity in your car to serve as collateral? Credit unions or online banks may prefer to provide used car loans. Homeowners may be able to use an equity line of credit to pay off an auto loan. Refinancing An Existing Auto Loan

7. 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 A Car Leasing usually offers: • Lower monthly payments • More expensive car for same payments • Lower down payment

8. 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. The Leasing Process

9. 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) Lease Payment Calculation Based on Four Variables

10. More or less costly to lease? When the lease ends Return the car? Buy the car? Lease versus Purchase Analysis

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

12. Apartment, townhouse, or cluster housing. Buyer receives title to a 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. Condominium

13. Fees cover service, maintenance, taxes, and mortgage on entire building. Usually costs less than renting similar apartment. 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.

14. 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. Rental Unit

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

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

18. 1. Down payment 2. Points and closing costs 3. Mortgage payments 4. Property taxes and insurance 5. Maintenance and operating expenses The Cost of Home Ownership

19. 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 1. Down payment Loan to Value Ratio

20. 1. Down payment • If down payment is less than 20%, lender usually requires 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

21. 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). 2. Points…

22. 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. …and Closing Costs

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

24. The Mortgage Payment— Mostly Interest

25. 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. 3. The Mortgage Payment (PITI):

26. 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? 3. The Mortgage Payment (PITI):

27. Mortgage payment should not exceed: $4,500 x .25 = $1,125 Total installment payments should not exceed: $4,500 x .33 = $1,485 3. The Mortgage Payment (PITI):

28. Each month lender collects 1/12 of yearly amount and places in escrow account. Lender pays these expenses on homeowner's behalf when due. Homeowner may pay these expenses directly; requires discipline to have the money when needed, but gives more flexibility and the opportunity to earn interest. 4. Property Taxes & Insurance

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

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

31. Set on 12 P/YR and END mode: 100000 +/- PV 7 I/YR 360 N PMT $665.30 Use the Financial Calculator Set on 1 P/YR and END mode: 100000 +/- PV 7/12 I/YR 360 N PMT $665.30

32. The Mortgage Payment— Mostly Interest 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

33. How Much Mortgage Will Your Payment Buy?

34. Shop the market and decide whether to use an agent. Most realtors belong to Multiple Listing Service (MLS) and have access to a large part of the market. Agents typically are employed by seller and are paid only if they make a sale. Commissions range from 5-7% of sales price. The Home-Buying Process

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

36. Go through the closing process Governed by Real Estate Settlement Procedures Act (RESPA). Title check necessary to make sure title is clear and free of liens. Closing statement provides details of costs for both buyer and seller. The Home-Buying Process

37. Shop various lenders for mortgage Commercial banks Thrifts Credit unions Mortgage banks Mortgage brokers Online mortgage resources Financing the Transaction

38. 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. Types of Mortgage Loans

39. Adjustable Rate Mortgage (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 Types of Mortgage Loans

40. 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 Negative Amortization

41. Convertible ARMs – allow borrowers to convert to fixed-rate loan Two-step ARMs – have only two interest rates: one for the first, short period, and the other for the remaining period of the loan Other Types of ARMs

42. Choosing an index 6-month T-bill LIBOR CD-based 11th Federal Home Loan Bank District Cost of Funds Monitoring your mortgage payments over its life ARMs

43. Interest-only Graduated-payment Growing-equity Shared-appreciation Biweekly Buy-downs Other Mortgage Payment Options

44. Types of Mortgage Loans • Conventional mortgage—lender assumes all risk of loss. • May require larger down payment and PMI.

45. Types of Mortgage Loans • FHA mortgage—payments insured by Federal Housing Administration. Feature lower down payments, interest rates and closing costs.

46. Types of Mortgage Loans • VA loan—payments guaranteed by Veterans Administration. One-time loan with no down payment for veterans.

47. But you will probably have to pay closing costs on the new loan! Refinancing • Can reduce your monthly payment if new rate is lower • Can reduce the total borrowing costs in financing the home

48. Mortgage Refinancing Analysis