8-1 Chapters 8 and 10 The Home and Automobile Decision

8-2 Introduction Buying a home is the single biggest investment most people will make. Buying a car is another major purchasing decision. Must fit lifestyle and wallet. Probably need a loan making dramatic impact on personal finances.

8-3 Smart Buying Step 1: Differentiate want from need Step 2: Do your homework Step 3: Make your purchase Step 4: Maintain your purchase

8-4 Smart Buying in Action: Buying a Vehicle Choices to consider: –Buying –Leasing

8-5 Smart Buying in Action: Buying a Vehicle Step 1: Differentiate Want From Need Features and qualities wanted Features and qualities needed

8-6 Smart Buying in Action: Buying a Vehicle Step 2: Do Your Homework How much can you afford? –Downpayment? –36 month installment loan for $15,000 at 10%. How much would your monthly payments be? Which vehicle is right for you?

8-7 Smart Buying in Action: Buying a Vehicle Step 3: Make Your Purchase Get a fair price: –Know the dealer cost or invoice price –Rebates? –Approach dealers and get quotes –Negotiate

8-8 Smart Buying in Action: Buying a Vehicle Step 3: Make Your Purchase Financing Alternatives: –Cheapest— pay cash –Investigate all financing options before buying. –Keep financing out of the negotiations. –The shorter the term, the higher the monthly payments. (borrowing $15,000 at 9% for 24 months vs. same for 48 months???) –Open end lease – possibility of paying in the end –Closed end lease – at the end, walk away or purchase

8-9 Smart Buying in Action: Buying a Vehicle Step 4: Maintain Your Purchase Keep vehicle in best running condition. Don’t ignore signs of trouble. Your first line of protection is the warranty. Know your rights under the Lemon laws.

8-10 Smart Buying in Action: Housing Many people equate home ownership with financial success. Housing costs can take up over 25% of after-tax income. Home ownership is also an investment—biggest investment you will ever make. Use smart-buying approach.

8-11 Your Housing Options A House: –Most potential for capital appreciation. Condominiums: –Homeowner’s fee –Planned unit developments Apartments and other rental housing

8-12 Smart Buying in Action: Housing Step 1: Differentiate Want From Need What about the house is important? Know what you want before you look. Affordability, location, neighborhood, conveniences, schools

8-13 Smart Buying in Action: Housing Step 2: Do Your Homework Investigate the potential home and all that goes along with it: –Neighborhood, community lifestyle, satisfy needs. How much you can afford to pay?

8-14 Smart Buying in Action: Housing One-time Costs: Down payment Closing/settlement costs – page 248 –Points –Loan origination fee –Application fee –Appraisal fee –Title search fee

8-15 Smart Buying in Action: Housing Recurring Costs –Monthly mortgage payments –PITI – principal, interest, taxes and insurance –$130,000 home with a 15 year 6% vs. $130,000 home with a 30 year 6%?? Maintenance and Operating Costs: –repairs, renovations, upgrades, landscaping

8-16 Renting Versus Buying Decision based on lifestyle Renting advantages: –Financial and lifestyle flexibility Compare costs for each alternative Buying advantages: –Longer stay and appreciation, itemized taxes, forced savings

8-17 Determining What You Can Afford What is the maximum amount the bank will lend me? –Financial history –Ability to pay –Appraised home value How big a down payment can I afford?

8-18 Financing the Purchase—The Mortgage Sources of mortgages: S&Ls and commercial banks Credit unions, mutual savings banks Mortgage bankers—originate mortgage loans, sell to banks, pension funds, insurance companies and collect payments Mortgage brokers—middlemen comparison shop for a fee to secure mortgage loans for borrowers but do not originate the loans

8-19 Conventional and Government- Backed Mortgages Conventional loans—from a bank or S&L secured by the property. Government-backed loans—loan from traditional lender but insured by government—FHA and VA loans: –lower interest rate, smaller down payment, less strict financial requirements –more paperwork, higher closing costs, limited funding

8-20 Adjustable-Rate Versus Fixed-Rate Mortgages ARMs: low interest rate in early years. can get larger loan because PITI is lower. reset interest rates push ARM payments upward Fixed-rate mortgages: In general, fixed-rate better than ARM. Payments never change. Allows for control and planning.

8-21 Figure 8.10 The Portion of Each Payment That Goes Toward the Principal and Interest on a 30-Year, 8% Fixed-Rate Mortgage for $80,000

8-22 Table 8.2 Impact of the Loan Term on the Total Interest Paid and Monthly Payment for an $80,000 Fixed-Rate Mortgage at 8%

8-23 Smart Buying in Action: Housing Make Your Purchase Comparison shop Traditional real estate agent Get it inspected Make an offer and haggle

8-24 Homeowner’s Insurance Dwelling – fair market value or appraisal value Other structures – 10% of insurance on house Personal Property – 50% of insurance on house Supplemental coverage –Floaters –Earthquake and flood –Umbrella policy

8-25 Discounts on Homeowner’s Insurance High deductible Security system Multiple policies Annual payments

8-26 Section II: Personal Liability Coverage Protects policyholder and family from financial loss if someone is injured on their property or as a result of their actions. Protects against liability suits Also covers medical expenses of anyone hurt by policyholder, their family, or pet

8-27 Supplemental Coverage Endorsement—written attachment to an insurance policy to add or delete coverage. Personal articles floaters Earthquake coverage Flood protection

8-28 Keeping Your Costs Down – Insurance Credit Scoring Insurance credit score—based on the same information as your traditional credit score, used in determining what your home and auto insurance rates will be The lower your insurance credit score, the higher your rates will be. Managed your insurance credit score to keep your costs of insurance down.

8-29 Keeping Your Costs Down – Discounts and Savings Location of your home Type of structure Level of coverage and policy type Keep costs down by selecting a financially sound insurer with low comparative rates.

8-30 Automobile Insurance Personal Automobile Policy (PAP)— standardized for an individual or family Part A: Liability Coverage (25/50/10 minimum in Kentucky) Part B: Medical Expense Coverage Part C: Uninsured Motorist’s Protection Coverage Part D: Damage to Your Automobile Coverage – Collision and Comprehensive

8-31 No-Fault Insurance Type of auto insurance in which your insurance company protects you in the case of an accident regardless of who is at fault. Over half the states have no-fault system. Imposes limits on medical expenses and other claims which may not be enough to cover all medical expenses.

8-32 Determinants of the Cost of Automobile Insurance Type of automobile Use of automobile Driver’s personal characteristics Driver’s driving record Where you live Discounts that you qualify for Insurance credit score Deductibles