The Home and Automobile Decision

8-2 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Learning Objectives 1. Make good buying decisions. 2. Choose a vehicle that suits your needs and budget. 3. Choose housing that meets your needs.

8-3 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Learning Objectives 4. Decide whether to rent or buy housing. 5. Calculate the costs of buying a home. 6. Get the most out of your mortgage.

8-4 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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.

8-5 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Smart Buying Step 1: Differentiate Want From Need Step 2: Do Your Homework Step 3: Make Your Purchase Step 4: Maintain Your Purchase

8-6 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Checklist 8.1

8-7 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Checklist 8.2

8-8 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 8.1

8-9 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Smart Buying in Action: Buying a Vehicle Choices to consider: Buy new Buy used Leasing

8-10 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Smart Buying in Action: Buying a Vehicle Step 1: Differentiate Want From Need Features and qualities wanted Features and qualities needed

8-11 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Smart Buying in Action: Buying a Vehicle Step 2: Do Your Homework How much can you afford? Down payment Monthly payment Which vehicle is right for you? Comparison shop—price and attributes Operating and insurance costs, and warranty.

8-12 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Smart Buying in Action: Buying a Vehicle Step 3: Make Your Purchase Get a fair price: Know the dealer cost or invoice price. Dealer holdback—2 to 3% that manufacture gives the dealer on the sale of an automobile Approach dealers and get quotes Negotiate

8-13 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Checklist 8.3

8-14 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Checklist 8.4

8-15 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Smart Buying in Action: Buying a Vehicle Step 3: Make Your Purchase 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.

8-16 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Smart Buying in Action: Buying a Vehicle Step 3: Make Your Purchase 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

8-17 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Checklist 8.5

8-18 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Smart Buying in Action: Buying a Vehicle Step 3: Make Your Purchase Keys to getting a good lease: Negotiate value for car before signing lease Minimum down payment Warranty—define “normal wear and tear” Termination fee Depreciation factor Rent or finance charge

8-19 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 8.2

8-20 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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.

8-21 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 8.3

8-22 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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.

8-23 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Your Housing Options A House: Most potential for capital appreciation. Cooperatives and Condominiums: Homeowner’s fee Planned unit developments Apartments and other rental housing

8-24 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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

8-25 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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?

8-26 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Smart Buying in Action: Housing One-time Costs: Down payment Closing/settlement costs Points Loan origination fee Application fee Appraisal fee Title search fee

8-27 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 8.4

8-28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Smart Buying in Action: Housing Recurring Costs Monthly mortgage payments PITI Maintenance and Operating Costs: repairs, renovations, upgrades, landscaping

8-29 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Table 8.1

8-30 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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

8-31 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 8.5

8-32 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 8.6

8-33 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Determining What You Can Afford 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?

8-34 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 8.7 Worksheet for calculating the maximum size mortgage loan you qualify for

8-35 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

8-36 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

8-37 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

8-38 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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

8-39 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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

8-40 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Fixed-Rate Mortgages Monthly payment doesn’t change regardless of market interest rate changes. Can lock in low rates for the life of the loan. An assumable loan can be transferred to a new buyer. Prepayment privilege allows early cash payments to be applied to principal.

8-41 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Adjustable-Rate Mortgages (ARM) Interest rate of ARM fluctuates with level of current interest rates. Initial Rate—”teaser rate”—low for only a short time period then adjusted upward. Interest rate index—rates on ARMs are tied to an index not controlled by the lender, such as 6- or 12-month U.S. Treasuries.

8-42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Adjustable-Rate Mortgages Margin – the amount over the index rate that the ARM is set. Adjustment Interval – how frequently the rate can be reset.

8-43 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Adjustable-Rate Mortgages Payment Cap – sets dollar limit on how much the monthly payment can increase during any adjustment period. If interest rates go up, the monthly payment may be too small to cover the interest due—negative amortization. Unpaid interest is added to the unpaid loan balance, increasing its size.

8-44 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Adjustable-Rate Mortgages ARM Innovations: Convertible ARM—to fixed-rate loan Reduction-option ARM—one time opportunity to adjust interest rate. Two-step ARM—combined aspects of fixed- rate and ARM.

8-45 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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.

8-46 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Specialty Mortgage Loan Options Balloon Payment Mortgage Loan – small monthly payments for 5-7 years, then entire loan due. Graduated Payment Mortgage – payments set in advance, rising for 5-10 years, then level off. Growing Equity Mortgage – designed to let homebuyer pay off mortgage early.

8-47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Shared Appreciation Mortgage – borrower receives below-market interest rate, lender receives a portion of future appreciation. Interest Only Mortgage – interest only payment for initial set period, then pay both interest and principal for remainder of loan. Specialty Mortgage Loan Options

8-48 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Option Payment ARM Mortgages – can make different types of mortgage payments each month Options include: Amount less than interest due Interest only Payment amount of 150- or 30-year fixed-rate loan Specialty Mortgage Loan Options

8-49 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Big jump in monthly payments if interest rates rise Read fine print. Know how much your monthly payment could increase, when, and whether you could afford them Penalties Risks Associated with Specialty Mortgages

8-50 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Beware of Subprime Mortgages and Predatory Lending 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.

8-51 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 8.8 Common Predatory Mortgage Lending Practices

8-52 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Mortgage Decisions: Length or Term of the Loan 15- or 30-year maturity on mortgage? Prepayment opportunities Size of monthly payment Interest rate

8-53 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 8.9 The Portion of Each Payment That Goes Toward the Principal and Interest on a 30-Year, 8% Fixed-Rate Mortgage for $80,000

8-54 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Table 8.2

8-55 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 8.10 Comparing a Shorter- Versus Longer- Term Loan

8-56 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Smart Buying in Action: Housing Coming up with the down payment Save, gifts from family and friends At least 5% of closing costs have to come from homebuyer “Gift letter” Private Mortgage Insurance Prequalifying—have maximum amount you’ll qualify for confirmed by a lender

8-57 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Smart Buying in Action: Housing Step 3:Make Your Purchase Comparison shop Traditional real estate agent Independent or exclusive buyer-broker Get it inspected Make an offer and haggle

8-58 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Smart Buying in Action: Housing Contract Earnest money Closing Settlement or closing statement Step 4: Maintain Your Purchase Refinancing

8-59 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 8.11 Worksheet for Refinancing Analysis

8-60 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Summary Separate needs from wants, compare products, negotiate, maintain product, and resolve complaints. Lease or buy a vehicle that fits both your personal and financial needs. Choose housing that meets your needs, preshop, comparison shop home and financing, and maintain if your purchase. Get the most out of your mortgage.

8-61 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.