Making Automobile & Housing Decisions Chapter 5

Choosing a Car Research your purchase – Select based on your needs and ability to pay – Negotiate a fair price – Maintain the car – Make necessary repairs when needed

Affordability Down Payment & Monthly Payment

Operating Cost

Type of Car Gas, Diesel, or Hybrid New, Used or Nearly New Size, Body Style & Features Reliability and Warranties

Other Considerations What to do with your existing car – Sell or Trade Fuel Economy Safety Features

The Purchase Transaction Comparison shop using the same criteria. Apples to Apples not apples & oranges.

Negotiate the Price The sticker price is the dealer’s starting point.

Research The Value Before You Shop Negotiate From a Position of Strength Edmund’s Car Buying Guide National Automobile Dealers Association (NADA) Kelley Blue Book

Closing the Deal Beware of Sales Tactics

Sales Contract Once you agree, you are committed

Give Yourself an Out Add contingencies that give you control Contingent on Financing not to exceed a specified rate Contingent on passing inspection Contingent on another’s approval

Leasing

Closed or Open-End Leases Closed End – If the car is not damaged and contracted miles are not exceeded, you may walk away at the end of the lease regardless of the car’s value. Open End – If the value of the car is less than the residual value used in the lease you are responsible for the difference

Leases are Negotiable Things to Negotiate are: The down payment (capital cost reduction) The residual value The money factor Miles driven and the penalty for exceeding those miles The term of the lease

Lease End Do you purchase the car? Do you walk away? What do you do about replacement transportation?

Lease versus Purchase Lease: Down Payment Security Deposit Total of monthly Payments Interest lost on down payment and security deposit Purchase Down Payment Sales Tax Total of Monthly Payments Interest lost on down payment Less: Value at end of the loan

Problem Lease or Purchase You can lease a new Ford. The lease calls for a down payment of $1,600 and security deposit of $400. the monthly lease payment is $325 per month for 48 months. You earn 2% on your money. You can purchase the car for 23,500 requiring a down payment of $3,000. The sales tax is 6% and the monthly loan payment is $385 for 48 months. You earn 2% on your savings and the car should have a value of 13,650 at the end of the loan

Lease Down Payment$ 1,600 Security Deposit 400 Total of Payments 15,600 Opportunity cost $2,000 At 2% for 4 years 164 Payment at lease end0 Total Cost of Lease$17,764

Purchase Down Payment$ 3,000 Sales Tax 1,410 Total of Payments (385 X 48) 18,480 Opportunity Cost $3,000 at 2% for 4 years 246 Less Value after 4 years(11,650) Cost of Purchase$11,846

Housing Needs

What Meets Your Needs Single Family Home Condominium Cooperative Apartment Rental Unit

Rental Option Long term lease or month to month

Things to Consider Housing Prices Mortgage Interest Rates Tax write offs Expected appreciation Versus Monthly rent for a comparable rental unit Expected changes in rent

What Can You Afford Customary ratios stipulate that the monthly mortgage payment including taxes and insurance cannot exceed 25 to 30% of a borrowers gross monthly income. All installment loan payments including the mortgage cannot exceed 33 to 38% of gross monthly income.

Shop the Market For the Best Rate

Where to shop Mortgage Banker Mortgage Broker Commercial Bank Savings Bank Credit Union

Mortgage Banker Underwrites and Services Loans

Mortgage Broker Consults with clients to secure a program that fits the needs of the client

Commercial Banks, Savings Banks & Credit Unions Underwrite loans but sell most mortgage loans to investors

Types of Loans Fixed Rate Adjustable Rate Convertible Adjustable Rate Graduated Payment Balloon-payment Interest Only Negative Amortization

Guaranteed & Insured Loans FHAVAPMI

Refinancing When is it feasible Cost to refinance – Monthly savings with a lower rate – shorten the term

Cost to Refinance Appraisal Title Insurance Credit Report Loan Fees Underwriting Fees

Pay Cost at Closing or Role Cost in the new Mortgage What does it cost?

Fun with Money Math

Does She Qualify Taylor makes $5,000 per month and wants to purchase a home. The lender’s affordability ratio is 28% and a maximum installment ratio of 33% the taxes and insurance on the home she want to purchase come to $300 per month. How large of a monthly payment can Taylor qualify for including taxes & insurance? How much of this will be for principal and interest? How much in other monthly payments can Taylor have and still qualify under the bank’s ratio’s

Solution Affordability Ratio $5,000 X.28 =$1, – Less taxes & Insurance ( ) – Principle & Interest $1, Installment Ratio $5,000 X.33 =$1, – Less Mortgage( 1,400.00) – Other Installment Loans $

How Large of a Mortgage Assuming Taylor qualifies for the maximum on a 30 year mortgage. How much will she be borrowing assuming a 6% rate? (page 167 Exhibit 5.9) Solution $1,100 will pay off 6% for 30 Years

Refinancing Zach purchase a home 4 years ago for $180,000, paying $1,250 per month on his $162,000, 8%, 25 year mortgage. The current loan balance is $152,401. Rates have fallen to 6%. Zach does not want more than a 21 year mortgage. The monthly payment on the new loan will be $1,065. Zach will have to pay $1,500 in closing cost, he is in the 15% tax bracket. Using the following worksheet should he refinance

1.Current monthly payment Terms: 2. New Monthly Payment Terms: 3. Monthly Savings (1 – 2)$ 4. Tax on Savings 3 x the tax rate$__________ 5. Monthly Saving (3-4)$ 6. Closing Cost$ 7. Months to break even 6÷5 ________

Solution 1.Current monthly payment Terms: 8%$ 1, New Monthly Payment Terms: 6%$ 1, Monthly Savings (1 – 2)$ Tax on Savings 3 x the tax rate$185 X 15% $ Monthly Saving (3-4)$ Closing Cost$1, Months to break even 6÷5 9.5 months