Making Automobile and Housing Decisions

1. Making Automobile and Housing Decisions #5

2. Learning Goals

3. 2009 Ferrari 599 $312,000.00

4. BMW – 1 series $50,000.00

5. Aston Martin - Vanquish $350,000.00

6. Aspid Sports Car - IRF $400,000.00

7. Buying an Automobile

8. Q. 1. What are the steps in buying an automobile?

9. Choosing a Car Factors to Consider

10. Choosing a Car Other Considerations:

11. The Purchase Transaction Negotiating price Sticker price versus dealer’s cost Closing the deal http://www.motortrend.com/index.html

12. 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

13. Q. 2. What are the two types of Leases?

14. 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

15. Leasing a Car Lease Payment Calculation Based on:

16. Lease versus Purchase Analysis

17. Calculation of Lease • Term of Lease and Loan (months) = Item 2 (Term of Lease and Loan in years) x 12 • Total Payments over term of Lease = Item 3 (Term of Lease and Loan in months) x Item 4 (Monthly Lease payments) • Opportunity Cost of Initial Payment = Item 1 (Initial Payment) x Item 2 (Term of Lease and Loan in years) x Item 6 (Interest Rate earned on savings) • Total Cost of Leasing = Item 1a (Down Payment) + Item 5 (Total Payments over term of Lease) + Item 7 (Opportunity Cost) +/- Item 8 (Payment/Refund)

18. Calculation of Purchase • Sales Tax = Item 10 (Purchase price) x Item 12 (Sales Tax rate in decimal) • Total Payments over term of Loan = Item 3 (Term of Lease and Loan in months) x Item 14 (Monthly Loan payments) • Opportunity Cost of Down Payment = Item 11 (Down Payment) x Item 2 (Term of Lease and Loan in years) x Item 6 (Interest Rate earned on savings) • Total Cost of Purchasing = Item 11 (Down Payment) + Item 13 (Sales Tax) + Item 15 (Total Payments over term of Loan) + Item 16 (Opportunity Cost) - Item 17(Trade –in)

19. Q. 3. What are the four types of housing needs?

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

21. Condominiums

22. Cooperative Apartments “Co-op”

23. Rental Units Appropriate for those:

24. Q. 4. What are the two types of rental options?

25. 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!

26. Rent or Buy Analysis

27. Q. 5. What are the benefits and costs of owning a home?

28. Benefits of Owning a Home

29. The Cost of Home Ownership

30. 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

31. 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

32. …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

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

34. 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)

35. 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

36. 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)

37. 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)

38. Monthly Mortgage Payments for $10,000 loan

39. 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

40. Property Taxes & Insurance

41. Maintenance & Operating Expenses

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) – a comprehensive listing, updated daily, of properties for sale Agents, usually employed by seller, are paid a commission if they make a sale

44. Q. 6. What are the steps in the home buying process?

45. The Home-Buying Process

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

47. Financing the Transaction Sources of mortgage loans

48. Q. 7. What are the types of mortgage loans?

49. 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

50. 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