Pequannock Township High School Unit Six Renting vs. Owning

Define Key terms Do now using Financing book 2 Loan Credit report Credit rating Annual percentage rate/APR Fixed interest rate Variable interest rate Truth in Lending Act Loan Shark Payday loan Equity Down payment Read Pages 1-5 Mortgage Principal Interest/Interest rate Lifetime cap Equity Amortization schedule Closing costs Pre-payment penalties Escrow Refinancing Deliquent Workout Foreclosure pgs 7-12 Slide 2

Loan An amount of money borrowed and repaid with interest –Borrower needs to show you have means to repay by presenting evidence that your income can support the loan payment. –Lender will also check your credit report and receive your credit rating. Slide 3

Slide 4 Renting vs. Owning a Home The decision you make as to where you will live is one of the BIGGEST in your life. Most people don’t understand that a home can be an INVESTMENT If you RENT a house, each monthly rent payment is “out the door” If you BUY a home, each monthly payment increases your Equity Defn. Equity- a home’s market value less the outstanding mortgage balance 1-1 Personal Financial Decisions

Credit report and credit rating A credit report details an individuals credit history including payments related to bills, loans, credit accounts and bankruptcies. –It determines your credit worthiness A credit rating is a ranking expressed as a number or letter based on your credit history used by the financial institution for the loan or credit approval –The higher (lower) the credit rating the better chance you have of getting a loan (of getting rejected) and having a low interest rate (high rate of interest). Slide 5

The Investment Advantage Mortgage – is a loan for a home and is a very expensive purchase At first, most of your payment will go towards interest –But over time, more of your payment will pay off the debt Down payment (3.5% to 20%) Loan length (15 or 30 years) Slide 6

Increasing Your Wealth As you pay off the debt, your equity increases, earning you more wealth –If your property value increases, that also earns you more wealth –Let’s check out some property values! With a house, you will own something that is going up in value, or appreciating. Slide 7

APR Annual Percentage rate Yearly rate if interest calculated by multiplying the monthly interest rate by 12 (number of months in a year) Slide 8

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Market Value Market value is the highest price that property will bring on the open market. Slide 10

Tax Advantages The government promotes home ownership through the tax law –Every year, you can reduce your taxes by deducting the following The interest you pay on your mortgage The taxes you pay from owning your home (property taxes, etc) –Because these will save you money every year on your taxes, it makes owning a better option than renting! Slide 11

Affording a House How much house can you afford? –The general rule of thumb is that you spend NO MORE THAN 30% of your monthly income on housing Because you need to save money for food, insurance, emergencies, and all the other things that happen in life! –If you made $24,000 per year, how much per month could you afford? Slide 12

Down Payments Banks don’t just loan money to any person that walks in off the street –A down payment is the amount of money that you pay at the closing (time of the sale) from your own funds. –It is usually 20% of the purchase price –This helps the bank understand that you are serious about repaying your mortgage over time Slide 13

Cost of Mortgages (pg. 8) Slide 14

Transaction Costs of Purchasing a Home Closing costs –Loan application fee—from $100–$500 –Points: a fee charged by the lender when a mortgage loan is provided; stated as a percentage of the purchase price –Loan origination fee—about 1% of the mortgage amount –Appraisal fee—from $200–$500 –Title search and insurance –Pre-payment penalties Slide 15

Types of Mortgages Fixed Rate Mortgage –Interest rate and monthly payment will not change. You are locked in over the life of the loan Adjustable/Variable Rate Mortgage –Interest rate changes every 12 months or over the course of the loan Balloon Mortgages –Low interest rates for about 5 to 7 years, culminating in a large final payment Slide 16

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Auto Loans Do now define key terms Trade-in value Book value Incentives Lease Purchase Pg Slide 18

Auto Loans Purchasing a vehicle – Very large purchase for most people ranking second only to the cost of housing Slide 19

Options are to Purchase/Loan or Lease Purchase/Loan - vehicle is yours after all payments of the purchase price Lease -monthly payments for approximately 2 to 3 years as you use the vehicle –Mileage restrictions (usually 12,000 to 15,000 a year) –new car every few years – usually little or no down payment required –vehicle is returned to the dealer at the conclusion of the lease Slide 20

Dealer Incentives Discounts Credits Reduced interest rates Reduced down payment (Toyota or Ford.com) Choose a car of your choice What is the current promotion (incentive) the dealer is running? Slide 21

Trade in value/book value Amount the dealer gives you for the car you’re providing as partial payment for the car you wish to purchase Book value how much a particular car is worth based on its condition, mileage and other factor Kelley Blue Book –Find the fair market value of a new vehicle of your choice and the fair purchase price of a used vehicle of your choice Slide 22

Pro/con’s to purchasing a Used car vs. New car Used/Pre-owned car Less expensive Less features you are seeking May not be in the best shape Have high mileage Limited warranty items History of repairs or problems New car Latest technology Warranty Cost more Depreciate or lose value as soon as they leave the lot Incentives such as finance rates, rebates or other offers to encourage people to buy Slide 23

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Hidden costs aka Upkeep costs Insurance Maintenance Repair Gas Licensing and fees Slide 25

shopping for a used car before you begin shopping: Decide how much you can afford to spend. Decide which car models and options interest you. Research the reliability of the model of car you want. Find out where the nearest repair facility is that works on the type of car you want. Find out whether parts are readily available for the type of car you want. Find recent prices in used-car “blue books” in the library, on the Internet, in newspaper ads, consumer magazines, etc. Shop for financing. Factor in the costs of the loan and the cost of maintenance. Know how to read a “Buyer’s Guide” sticker. as you shop: Find out the reputation of the dealer. Find out what type of warranty comes with the car. Find out what type of service contract comes with the car. teens – lesson 9 - slide 9-D

sources of used cars teens – lesson 9 - slide 9-E new-car dealers provide quality used vehicles; service department available; higher prices than other sources used-car dealers specialize in previously owned vehicles; limited warranty (if any); vehicles may be in poor condition private parties may be a good buy if vehicle was well maintained; few consumer protection regulations apply to private party sales other sources such as auctions or sales by government agencies, auto rental companies, and on the Internet; most of these vehicles have been driven many miles

consumer decision making deciding to spend your money: Do I really need this item? Is it worth the time I spend making the money to buy it? Is there a better use for my money right now? deciding on the right purchase: What level of quality do I want (low, medium, or high)? What level of quality do I need? What types of services and repairs does the dealer offer? Should I wait until there is a sale on the type of car I want? Should I buy a new or a used car? If I buy a used car, should I buy it from a dealer or from a private party? Should I choose a car with a well-known name even if it costs more? Do I know anyone who owns the type of car I want? Are the warranty and the service contracts on the car comparable with warranties and service contracts on similar cars? What do consumer magazines say about the type of car I want? teens – lesson 9 - slide 9-C

What conclusions can you make? If you buy a $35,000 car and take a six- year loan at a rate of 7.9%, you will end up paying over $9,000 in interest on the car, making the total cost of the car $44,000. Slide 29

Auto Loans: Lease vs. Purchase Handout Scenario 1 Scenario 1 You want to buy a car that costs $25,000. You will take a 48-month loan. You have $2,000 saved for a down payment. The dealer is also offering a $6,000 rebate as an incentive. You do not have a car to trade in. You also qualify for a first-time buyer incentive of $500. Your interest rate on the loan will be 6.5%. You will have to pay 7.5% sales tax on the car when you purchase it, and it will cost you $25 per year to license the car. You will pay property tax of $480 on the car each year. Your monthly insurance premium on the car is $56 per month. Slide 30

Questions and answers 1. What is the total cost of the car over four years including all principal, interest, taxes, insurance and fees? $26, (based on auto loan calculator at calculator.html) Down Payment = $2, Principal = $16, Interest = $2, Sales tax = $1, ($18,500 x 7.5% ) Property tax = $1,920 ($480 x 4 years) Insurance = $2,688 ($56 x 48 months) Fees (licensing) = $100 ($25 x 4 years) Slide 31

Questions and answers 2. What is your monthly loan payment for the car including principal and interest? $ (financed $16,500 at 6.5% for 48 months) 3. After you have repaid the loan, what will you pay annually for taxes, insurance and fees? $1,177 ($480 for property taxes + $56 x 12 = $672 for insurance + $25 for licensing) 4. If you keep the car for seven years, how much money will you have spent in principal, interest, taxes, insurance and fees? $30, (Answer to question 1 above + answer to question 3 above x 3) Slide 32

Auto Loans: Lease vs. Purchase Handout Scenario 2 You want to lease a $25,000 car for 48 months. You will not make a down payment. You must pay a $500 security deposit on the car before you leave the dealership. There is an additional fee of $250 for the cost of completing the dealer lease paperwork. Your total monthly lease payment is $383 per month. In your lease agreement, it has been determined that the value of the car will be $14,000 at the end of the lease term. You are allowed 12,000 miles per year for the car, and the mileage fee for overages is $.25 per mile. You pay $68 per month for insurance, and it costs you $25 per year to license the car. There is a $1,500 early termination fee on the lease. There is a $500 penalty if you turn the car in with “excess wear and tear.” Slide 33

Questions and answers 1. What is the total cost of the car over four years including all payments, insurance and fees? $22,498 Payments = $18,384 ($383 x 48 months) Insurance = $3,264 ($68 x 48 months) Licensing = $100 ($25 x 4 years) Fees = $750 (security deposit and paperwork) Slide 34

Questions and answers 2. You are in a car accident during the last year of the lease and the car is a total loss, thus ending the lease early. How will this affect you? You will potentially have to pay the $1,500 for early lease termination along with the $500 for “excess wear and tear.” Slide 35

Questions and answers Slide At the end of your 48-month lease, you go to the dealer to trade the car in for another. Upon reviewing the odometer, the dealer notices that it reads 59,825 miles. What will happen? You will have to pay a mileage overage charge of $2, because you exceeded the 48,000 miles you were allowed (12,000 x 4 years) by 11,825 miles (59,825 – 48,000) and the cost per mile is $.25 (11,825 x.25)

Questions and answers 4. When you go to return the car, you decide you like it and want to purchase it. How much will this cost you? The car will be worth $14,000 at that time, so you will have to finance $13,500 at the current rate and for a period of time that you select. (This is $14,000 less the refundable $500 security deposit.) Slide 37

Slide 38 Get some wheels activity

Chapter 4 Insurance Terms Insurance Insurer Insurance policy Policyholder Premium Claim Deductible Life insurance Risk Estate Rd. pgs Health Insurance Coverage Benefits Co-pay Co-insurance Flexible Spending Account/FSA Cobra Auto Insurance Homeowner’s and renter’s insurance Slide 39

Insurance terms Insurance: promised payment for specific future losses should they occur in exchange for a payment called a premium Insurer: a company that pays to compensate the policyholder for losses or damages as described in an insurance policy as long as the premium is paid Insurance policy: a written contract between an insurer and a customer (the policyholder) describing the term of the insurance, what is covered, the cost of the premium and the deductible amount Policyholder: the owner(s) of an insurance policy Premium: the periodic payment for an insurance policy Slide 40

Insurance terms continued Claim: a policyholder’s official notification to the insurance company requesting payment of an amount due for a covered loss Deductible: a dollar amount a policyholder pays before the insurer starts to make payments for a covered loss Slide 41

Life Insurance Money paid to a designated person/group of people when you die Risk the probability that something negative may happen Beneficiary- someone you designate as the person who will receive the insurance payout in the even that you die Estate-wealth and possessions left by someone to be divided after they die Slide 42

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Health Insurance Provides coverage for medication, doctor, and emergency room visits, hospital stays, medical equipment and other medical expenses Coverage-what the insurance company includes as part of the insurance policy Benefits- specific services the insured is entitled to under the policy and can vary widely Co-pay a form of cost-sharing that requires the insured to pay a fixed dollar amount for a medical service or prescription Slide 44

Health insurance continued Co-insurance- a form of cost-sharing that requires the insured to pay a set percentage of medical expenses after the deductible has been met Flexible spending accounts-FSA allows people to put a set amount of wages in a special account without paying taxes on those wages; money in this account can be used to pay for uncovered medical expenses, copays, deductibles, etc. COBRA- allows a person to continue to be covered under a company even after they no longer work for the company. You pay for it. Slide 45

Auto Insurance REQUIRED BY NEARLY EVERY STATE A mean’s of protecting you and others in the event of an accident, theft, etc. –As a young driver your premium (amount you pay) will be higher because of your age –Provide discounts for taking certified courses and maintaining good grades in school Slide 46

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Homeowner’s and renter’s Insurance Protects you from financial loss if your home is damaged or destroyed, a theft occurs, or you face certain types of medical or liability claims Deductible amount also affects the insurance premium you pay in terms of all types of insurance –Choosing a higher deductible decreases the premium –More policies with one company will allow you to bundle and receive discounts. Renter’s Insurance will pay for losses incurred while you are living in a rented residence by providing you with cash payments to replace the items lost or damaged. Slide 48