Longwood University 201 High Street Farmville, VA 23901 Personal Finance Bennie Waller wallerbd@longwood.edu 434-395-2046 Longwood University 201 High Street Farmville, VA 23901

Big Ticket Purchases Autos and Homes

Big Ticket Purchases Make good buying decisions. Choose a vehicle that suits your needs and budget. Choose housing that meets your needs Decide whether to rent or buy housing. Calculate the costs of buying a home. Get the most out of your mortgage

Big Ticket Purchases Big ticket purchases should be researched and must provide the utility while fitting in your lifestyle as well as your budget A house is the single largest investment Automobiles are also a significant cost. Both homes and autos will typically be financed. As you enter into “big ticket” purchases be sure to differentiate wants from needs as they must fit lifestyle and wallet Take your time, do research to determine what will work best for your situation

Before you buy

Transportation needs Differentiate Want from Need You may need transportation, but exactly what do you need in a vehicle? Do you have kids (or plan to have kids), dogs? Do you drive extensively (work, visits, vacations) Do your homework. How much can you afford? How much down payment? How much monthly payments? Comparison shop – price and attributes Operating and insurance costs

Transportation needs Make Your Purchase Get a fair price. Know dealer costs or invoice costs Dealer holdback – 2-3% manufacturer rebate Get quotes and negotiate Financing Alternatives: Cheapest—cash Investigate all financing options before buying. Keep financing out of the negotiations. The shorter the term, the higher the monthly payments.

Transportation needs Leasing: ideal for financially stable, want new car every few years, drive less than 15,000 miles annually, good credit, no down payment Closed-end or walk-away lease Purchase option Open-end lease

Transportation needs 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

Transportation needs

Lease versus Purchase Decision

What can you afford? Given your needs should you still have choices to make Vehicles are NOT cheap. What transaction works best for you? New – more expensive, warranty, sometimes promotional interest rates Lease – low payments, no equity Used – less expensive, higher interest rates, little or no warranties Will you need to take out a loan or will you use savings?

How much can you afford? PV = 9,861.30 FV = 0 N = 3 x 12 =36 Let’s start by assuming that you can comfortably afford $300/month. Given this amount, what are your best options? PV = 9,861.30 FV = 0 N = 3 x 12 =36 I = 6/12=.50 PMT = 300

How much can you afford? PMT= 509.09 PV = -23000 FV = 0 N = 4x12=48 Alternatively, assume that you can obtain a $23,000, 4 year loan from an auto company running a promotion at 3% for customers with excellent credit. What would your monthly payment? PMT= 509.09 PV = -23000 FV = 0 N = 4x12=48 I = 3/12 = .25 Monthly Payment = 509.09 Total Payments = $24,436.30 Interest Payments = 1,436.30

Other factors to consider Before making your purchase; Maintenance costs – more for used cars Operating costs - Insurance - much higher for a sports car Warranties Rebates and interest rate promotions Test drive the car Reconsider extended warranties and other add-ons Sources for information include Nada.com Kbb.com Consumerreports.org

Used car tips If buying a used car Always have car inspected by a mechanic. Know the Lemon laws Ask lot’s of questions Has the car been wrecked? Does it have water damage? Warranties? Negotiate!! Be willing to walk away.

Financing alternatives Cash Financing – Check with banks, credit unions and dealerships Know your credit score and shop for the best terms Lease – good option for those that Want a new vehicle every few years Drive less than 15,000 miles Take good care of car Little or no down payment Lease options Negotiate car value Negotiate fees and rates

Financing alternatives Lease options Closed-end or walk-away at end of term Purchase option Open-end – at lease expiration, current market value is compared to the stated residual value in lease contract. You are responsible for the difference if the market value is less than the residual value. Buy or lease comparison Compare the costs of each alternative over period of lease. For example, a two year lease would be compared with cost of buying for two years. Programs are readily available on the web.

Housing options Housing is expensive Many equate home ownership with financial success and stability Home ownership is the single largest investment and can be as much as 25% of after-tax income.

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

Housing Differentiate Wants from Need What is important in a house? Location Schools Conveniences Affordability Know (at least generally) what you want before starting Do research School districts, communities How much can you afford?

Housing costs Down payment If purchasing a home, you are likely to incur significant one-time costs such as Down payment Loan points Credit/origination fees Application fee Appraisal, title, attorney, home inspection fee Title search and insurance costs Recurring costs PITI Maintenance Repairs

Housing costs The Down Payment, Points, and Closing Costs on the Purchase of a $150,000 House, Borrowing $120,000, with 20% Down at a Rate of 6% with 2 Points

Monthly Mortgage Payments Required to Repay a $10,000 Loan with Different Interest Rates and Different Maturities

Rent versus Buy Decision based on Lifestyle Career Financial stability Advantages to renting Flexibility to relocate relatively easy No unexpected housing expenditures (broken AC) Advantages to owning Stable payments over time Tax advantages More freedom in personalizing property Capital appreciation

Renting versus Buying

Rent/Buy Worksheet

If you decide to buy Know your credit and shop for the best rates Get prequalified – it may give you an advantage when negotiating prices. Get referrals for brokers or real estate agents Ask lots of questions Be careful of dual agency relationships with brokers Get property inspected by licensed home inspector. Use the report to negotiate property price. Earnest money - sends signal of seriousness Get your own closing attorney to represent your interests

If you decide to buy What is the maximum amount the bank will lend me? Financial history Ability to pay Appraised home value Calculating your mortgage limit Should I borrow up to this maximum? How big a down payment can I afford? Ratios that you should be familiar Maximum PITI 28% of gross income Maximum debt including PITI 36% of gross income 20% down payment 80% Loan to Value (LTV)

If you decide to buy Comparison shop Traditional real estate agent Independent or exclusive buyer-broker Get it inspected Make an offer and haggle Contract Earnest money Closing Settlement or closing statement

Borrowing ratio example Maximum loan amount 6% FRM with monthly amortization, 30 years 28% ratio 36% ratio 36,000 Annual Income 3,000 Monthly Income 840 PITI (28%) 1,080 PITI and other debts (36%) 100 Monthly taxes 250 Monthly car payment Monthly insurance Monthly credit card payment 640 Income for PI Monthly student loan payment 630 Income for PITI 430 Gross income for PI $106,746.63 Maximum amount of loan $71,720.39

Down payment is a prohibitive factor Maximum home value Based on 80% LTV mortgage lending guidelines 28% ratio 36% ratio $106,746.63 $71,720.39 80% LTV $133,433.29 $89,650.49 20% PMT $26,686.66 $17,930.10 With 20% you will have to pay private mortgage insurance

Terms of mortgage Factors to consider Interest rate Size of monthly payment Term of mortgage Loan Amount 100,000 Interest 6.00% Years 30 15 Monthly Payments 599.55 843.86 Total Payments 215,838.19 303,788.46 115,838.19 203,788.46

Maximum mortgage loan

Maximum mortgage loan

Maximum mortgage loan

Principal/Interest 30 year FRM at 6%

Length of mortgage Mortgage terms will be influenced by a number of factors, such as interest rates, financial discipline, other financial goals, time value of money, and taxes. 30-year mortgage typically has lower rate and provides tax benefits for longer period of time. Interest rates should not be the only deciding factor when considering mortgage term.

Length of mortgage

Sources of mortgages As with all consumer loans, there are a multitude of sources. Banks, S&Ls, credit unions, mortgage companies, mortgage brokers. Government-backed loans are available (VA loans) As with any loan, know your ability Pull your credit and shop around. Ask many questions about rates, points, terms

Types of mortgages Fixed rate mortgage (FRM) Monthly payment does not change over term of loan Generally higher rate relative to ARM Allows for more stability in financial planning Adjustable rate mortgages (ARM) Interest rate tied to some benchmark and will fluctuate Initial “teaser” rate may be unreasonably low and then adjusted upward. ARM margin – the amount over the index rate that the ARM rate will be set (prime+5%) ARM interval (how often is rate adjusted) ARM caps – limit on amount rate can increase during any given period

Other mortgage options Balloon – payment typically amortized over a long period of time but with lump sum payment required at some point. Graduated payment – initial lower payments but increase over time before leveling level off Growing equity – designed to allow mortgage to be paid off early. Bridge (construction) loans -

Subprime Mortgages Subprime mortgages—mortgages taken out by borrowers with low credit scores. Predatory lenders take advantage of these lenders. Abusive loans—high-cost loans with little chance of paying off Avoid predatory loans with knowledge.

Predatory Lending Practices

Refinancing your existing mortgage Refinancing is when you pay off an existing mortgage with a new mortgage (can be with same institution). A rule of thumb as to whether refinancing is financially prudent is whether interest rates are at least two percentage points lower than the existing mortgage? Also you should plan on being in the property at least two years in order to be able to recoup the costs required for refinancing. Be careful not to squander the equity in your home.

Short sales A short sale is when the selling price will not cover the outstanding mortgage on the property. A seller attempting a short sell will need approval from the financial institution holding the existing mortgage. Short sales are used when real estate values have fallen and the bank deems it beneficial to accept the short sell rather than foreclose on the property owner. The seller may still be responsible for the difference between the selling price and mortgage balance.

If you decide to rent Before signing a lease or rental agreement, be sure to: Make sure you can afford the rent (a lease is a contract) Understand the terms of the lease and all restrictions. Get everything in writing. Make a list and take video/pictures of any items that are of concern. Provide a copy to landlord and get signature. Purchase renter’s insurance for personal property and liability protection.

Addressing problems Keep a record of all communications First contact the individual/firm from whom you purchased the asset. Next, contact the company. Larger companies have a department for such issues. If by phone, don’t be emotional. State the facts calmly. Don’t make threats. If in writing, send either an email or registered letter to ensure you have a record. File a complaint with regulating authorities or organizations such as the BBB. Lawsuit

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