Chapter 8 – Homes and Cars

1. Chapter 8 – Homes and Cars • Theme: get most for money with well thought-out spending decisions • Do homework – separate wants and needs • Make selection – compare alternatives, quality, features and price tradeoffs • Base on choice within budget • Maintain purchase – see complaints section

2. Vehicles Narrow choices – needs, wants, affordability Selection – test drive, compare operating cost Invoice price isn't whole story; rebates? 0%? Financing – find lowest cost source Negotiate price first, financing is separate Dealer may offer low rate; compare with rebate Credit union – probably the best source

3. Car Financing • Loans and leases • Sources: credit unions, bank, car finance companies • Loan/Rebate tradeoff • One or the other • Is the rebate worth more than the interest savings?

4. Car Leases • Leasing – lessor owns and rents to you • Pricing = vehicle + interest - residual value +/- other • Closed-end (walkaway) – lessor has risk on residual • Open-end – if market value less than estimated, you pay difference

5. Auto Loan Discrimination • How financing system works • Dealer sends credit info to finance company. • Loan approved at minimum rate say 8% • Dealer may add up to 3% • Finance company buys loan at 8%, dealer keeps 3% • Allegations: markup varies by ethnicity even with comparable credit records

6. Other Dirty Tricks • www.autodealerscam.org • Looks at unfair tactics used by dealers to manipulate customers • Lists and explains 13 watchouts and other advice • Other sites provide tips to buyers

7. Car Summary • Purchase and financing are separate issues. • Choose what’s affordable • New cars – know dealer’s costs and rebates • Typical margin – about 6% • Use Consumer Reports and online dealers • Trade-ins – get history and have inspected

8. Housing • Probably your largest investment and largest monthly outlay • On average, 26% of after-tax income • Balance needs, wants and affordability • Price/quality tradeoffs • Decide where/how to finance • Post purchase costs – maintenance, taxes, insurance

10. Ownership Costs • One-time – down payment, points, closing costs • Mortgage – amount not covered by equity • Lenders like large equity – 20% down • Recurring – mortgage, taxes, insurance • Maintenance – varies by age of house

11. Closing or Settlement Costs • Associated with ownership transfer – 5 to 7% • Purpose is for lender to recoup costs and increase return • Text lists about 11 general types

13. Points • One-time, nonrefundable interest charge at closing to increase lender’s return • 1 point = 1% of mortgage; $3,000 on $300,000 • Lowers nominal rate, not APR • 6.62% + 0  6.50 + 1 point • Analyze tradeoff – how long to recover the points through the lower rate?

14. Rent versus Buy • Rent = flexibility; Buy = financial benefits, personal freedom (and some headaches) • Buying complexities: increasing equity from loan repayment and inflation plus tax savings • Offsets: maintenance and selling costs • Ownership: not desirable if stay less than three years but tax benefits if itemize

15. Renting versus Buying

16. Affordability Questions • Down payment – what can you afford? • Maximum amount you can borrow • Are you comfortable with payments?

17. Credit Factors • Financial history – income, job stability, assets and credit rating • Monthly payment of Principal, Interest, Taxes and Insurance called PITI • PITI < 28% of gross income • PITI + other debt < 36% of gross income • Appraised value > 80% of mortgage

18. Reducing the Down Payment • Government backed mortgage – 5 to 10% down • Private mortgage insurance (PMI) - 0.3 to 2.0% of loan amount • IRA – first time buyers may withdraw without penalty

19. Real Estate Agents • Wealth of information • Possible conflicts – who do they represent? • Probably themselves (get commission quickly) • Consider: • Experience, honesty, knowledge of mortgage market, familiarity with your area, diplomacy, understanding your views

20. Making the Purchase • Listed at asking price • Is it negotiable? Risk of being outbid? • Contract: price, method of payment, closing date, free and clear title, pro-rations • Contingencies hurt; prequals help buyer • Escrow agent – exchanges funds and provides flow-of-funds statement

21. Mortgages • Sources: S&L's, banks, credit unions • Mortgage bankers and brokers • Conventional loans – from traditional sources with standard ratios • Subprime loans • Government backed – FHA, VA, others • Advantage: rates, down payments, standards • Disadvantage: paperwork, default insurance

23. Fixed Rate Mortgages • Monthly payment doesn't change regardless of interest rate changes • 10 to 30 years • May be assumable • Prepayment – penalty or no penalty?

25. Median Home Prices Metro area(000)3 yr change R-side- San Bernd $227 64.5% Los Angeles 362 64.3 San Diego 429 60.0 Orange County 499 58.0

26. Adjustable Rates (ARM's) • Rates fluctuate with current rates • Borrower benefits if rates fall; hurt if rise • Teasers – low initial rate • Index – rate mortgage's rate tied to • Index plus margin = ARM's rate • Adjustment interval • Rate and payment caps

27. Innovations • ARM's – usually lower than fixed • Lender can re-price if rates rise • May qualify for larger loan if payment lowered • ARM's may be convertible to fixed rate • Term – 10, 15, 20 or 30 year payoffs • Pros: lower rate and good if rates drop • Cons: bad if rates rise

28. Home Equity Loans • Home equity loan – amortizing loan secured by second mortgage • Home equity line – revolving loan (repaid, reborrowed, repaid like credit card)- also secured • Advantages: lower rate than credit card; interest may be tax deductible