Personal Finance: Loans TSWBAT: Explain the car-buying process and all financial components Discuss steps & considerations in obtaining a home mortgage

Car: Usually Your First Big Purchase Buying a car is an investment Cars depreciate in value It is very easy to over pay for a vehicle!! If you are buying a used car, KBB is your best friend! (Kbb.com) SC Standard 4: Personal Finance

Kelly Blue Book (kbb.com) Compare new & used cars Estimate payments Reviews “10 steps” to buying new or used cars EXAMPLE: Honda Civic DX SC Standard 4: Personal Finance

Secondary Considerations Color Options Coolness SC Standard 4: Personal Finance

Buying a Car: Things to consider first Down payment/amount to spend Length of loan Reliability Insurance costs Annual Costs (oil changes, brakes, tires) Weekly costs (gas, washing) SC Standard 4: Personal Finance

Selection: Do your homework! If you have a car in mind, research it before going to a dealership! Think about: Crash testing (safercar.gov) Gas mileage (fueleconomy.gov) Repair costs Warranty costs Depreciation (kbb.com) SC Standard 4: Personal Finance

SC Standard 4: Personal Finance Down Payment The more $ you put down, the lower your monthly payment Your DP decreases the amount of money you pay interest on Saving for a DP is very important when buying an expensive car SC Standard 4: Personal Finance

SC Standard 4: Personal Finance Length of Loan New Cars: generally 66-72 months The longer you have a loan, the more interest you pay Be careful buying a car over 66 months of payment time!! Don’t fall for the long loan trick! SC Standard 4: Personal Finance

How do we determine Payments? SC Standard 4: Personal Finance

SC Standard 4: Personal Finance 3 Manipulations Length of loan- the longer it is the more interest you pay and the lower your monthly payment Interest rate- the higher it is the more you pay Trade in value of your car- know the value of your car BEFORE entering the dealership! SC Standard 4: Personal Finance

Insurance: Do your Homework! Before purchasing a car, find out how much it will cost to insure it annually Monthly payments will cost you more!!! Call at least 3 Companies- they will all charge different amounts! SC Standard 4: Personal Finance

Buying a Home: A HUGE Investment The biggest purchase of your life will probably be a home SC Standard 4: Personal Finance

Advantages & Disadvantages Freedom of use Pride in ownership Privacy Investment that appreciates Equity Good credit rating Can use property as collateral Less mobility Large outlay of money in down payment (20%) Maintenance costs Mortgage payments are usually higher than rent SC Standard 4: Personal Finance

Costs (in addition to purchase price) Down payment Closing costs (sometimes seller pays) Points: fees paid to a lender computed as a percentage of the loan Lenders charge points when they feel the interest rate is too low to cover their expenses SC Standard 4: Personal Finance

Factors for Getting a Loan Credit Score/Credit Report Down payment Should be at least 20% Employment Steady employment for at least 2 years Usually this is enough for “pre-approval” SC Standard 4: Personal Finance

SC Standard 4: Personal Finance 3 Rules of Lending Purchase price should be no more than double your annual income Mortgage payment can only be 1/3 of your monthly take home salary Loan amount has to be 80% or less of appraised value *Rest has to be down payment SC Standard 4: Personal Finance

2 Major Types of Mortgages Fixed Rate: interest rate and monthly payments remain the same over the life of the mortgage (15-30 years) Adjustable Rate: (ARM) With most ARMs, the interest rate and monthly payment change every year, every three years, or every five years. However, some ARMs have more frequent rate and payment changes. SC Standard 4: Personal Finance

SC Standard 4: Personal Finance Payment Shock w/ ARMs People sign for ARMs because of the low initial payment for first adjustment period. ARM Interest        Rate Monthly Payment 1st year (w/discount) @ 8% $476.95   2nd year @ 12% $665.43 SC Standard 4: Personal Finance

SC Standard 4: Personal Finance ARM Caps Many ARMs have caps on the amount the interest rate can increase Can be per year or over life of the loan (ie: could increase 1% every year or have a cap of 5% over 30yrs) The ARM can also have a payment cap of a specific amount BOTTOM Line: ARMs are scary! SC Standard 4: Personal Finance

SC Standard 4: Personal Finance Mortgage Checklist The mortgage process involves lots of information gathering You must provide the lender with tons of personal information SC Standard 4: Personal Finance