PFIN 5 4 Making Automobile and Housing Decisions GITMAN/ JOEHNK/ BILLINGSLEY PFIN 4 5 Making Automobile and Housing Decisions Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

LEARNING OUTCOMES 1 Design a plan to research and select a new or used automobile 2 Decide whether to buy or lease a car 3 Identify housing alternatives, assess the rental option, and perform a rent-or-buy analysis 4 Evaluate the benefits and costs or homeownership and estimate how much you can afford to pay for a home 5 Describe the home-buying process 6 Choose mortgage financing that meets your needs PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Guidelines for Purchasing Decisions Research purchase thoroughly considering the market and the personal needs Base the selection on the needs Negotiate the best price and arrange financing on favorable terms Understand all the terms of the sale before signing the contract Maintain the purchase and make necessary changes promptly PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Factors That Affect Affordability Amount of down payment Size of the monthly loan payment Operating costs Type of vehicle Gas, diesel, or hybrid New or used Size, body style, and features Other considerations Trading in/selling, fuel economy, safety measures PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Purchase Transactions Negotiating price Sticker price - Manufacturer’s suggested retail price Key to negotiating a good price is knowing the dealer’s cost for the car Closing the deal Sales contract: Agreement to purchase an automobile that states the offering price and all conditions of offer When signed by the buyer and seller, the contract legally binds them to its terms PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Lease Arrangement in which the lessee receives the use of an asset in exchange for monthly payment Closed-end lease Open-end lease PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Variables Affecting Monthly Lease Payment Price of a car that is being leased Capitalized cost Remaining value of a leased car at the end of the lease term Residual value Financing rate on a lease Money factor Lease period as mentioned in the contract Lease term PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Lease versus Purchase Analysis Performed to compare the differences between the total costs When the lease ends, the lessee can: Return the car Purchase the car PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Housing Prices and the Recent Financial Crisis Analyze the history of housing prices Foreclosures: Lenders attempt to recover loan balances from borrowers who have quit making payments by forcing the sale of the home pledged as collateral PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Types of Housing Units Capitalized cost Price of a car that is being leased Capitalized cost Remaining value of a leased car at the end of the lease term Residual value Financing rate on a lease Money factor Lease period as mentioned in the contract Lease term PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Types of Housing Units Cooperative apartment (co-op) Apartment in a building in which each tenant owns a share of the nonprofit corporation that owns the building Cooperative apartment (co-op) Range from duplexes, fourplexes, and single-family homes to large, high-rise apartment complexes containing several hundred units Rental units PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Security and peace of mind Benefits of Owning a Home Security and peace of mind Tax shelter Inflation hedge PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Types of Costs to be Considered Down payment: Portion of the full purchase price provided by the purchaser when a house or other major asset is purchased Loan-to-value ratio: Maximum percentage of the value of a property that the lender is willing to loan Private mortgage insurance (PMI): Policy that protects the mortgage lender from loss in the event the borrower defaults on the loan PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Types of Costs to be Considered Mortgage points: Fees charged by lenders at the time they grant a mortgage loan Closing costs: Expenses that borrowers pay when a mortgage loan is closed and they receive title to the purchased property Mortgage payments PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Types of Costs to be Considered Property taxes: Levied by local governments on the assessed value of real estate for the purpose of: Funding schools Law enforcement Local services Homeowner’s insurance Required by mortgage lenders and covers the replacement value of a home and its contents Maintenance and operating expenses PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Home Buying Process Real estate short sale Sale of real estate property in which the proceeds are less than the balance owed on a loan secured by the property sold Real estate short sale Comprehensive listing of properties for sale in a given community or metropolitan area Multiple Listing Service (MLS) PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Home Buying Process Makes the agreement conditional on factors such as the availability of financing, property inspections, or obtaining expert advice Contingency clause Requires lenders to give potential borrowers a government publication describing the closing process Requires lenders to provide clear, advance disclosure of all closing costs to home buyers Real Estate Settlement Procedures Act (RESPA) PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Sources of Mortgage Loans Secured by the property Mortgage bankers Firm that solicits borrowers, originates primarily government-insured and government-guaranteed loans, and places them with mortgage lenders Mortgage brokers Firm that solicits borrowers, originates conventional loans, and places them with mortgage lenders PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Types of Mortgage Loans Rate of interest and the monthly mortgage payment are fixed over the full term of the loan Fixed-rate mortgage Rate of interest is adjusted based on market interest rate movements Adjustable-rate mortgage (ARM) PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Features of ARM Adjustment period Index rate Margin Period of time between rate or payment changes Index rate Baseline index rate that captures interest rate movements Margin Percentage points a lender adds to the index rate to determine the rate of interest PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Features of ARM Interest rate cap Payment cap Limit on the amount that the interest rate can increase each adjustment period and over the life of the loan Payment cap Limit on the monthly payment increase that may result from a rate adjustment PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Negative amortization ARM Negative amortization Principal balance on a mortgage loan increases because the monthly loan payment is lower than the amount of monthly interest being charged Convertible ARM Allows borrowers to convert from an adjustable-rate to a fixed-rate loan Two-step ARM Have two interest rates - one for the first 5 to 7 years of the loan, and another for the remaining term of the loan PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Mortgage Payments Options Requires the borrower to pay only interest Interest-only mortgage Starts with unusually low payments that rise over years to a fixed payment Graduated-payment mortgage Fixed-rate mortgage with payments that increase over a specific period Extra funds are applied to the principal so that the loan is paid off quickly Growing-equity mortgage PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Mortgage Payments Options Payments equal to half the regular monthly payment that are made every two weeks Biweekly mortgage Financing made available by a builder or seller to a potential new-home buyer at well below market interest rates Buydown PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Conventional, Insured, and Guaranteed Loans Offered by a lender who assumes all the risk of loss Conventional mortgage Offers lenders mortgage insurance on loans having a high loan-to-value ratio Intent is to encourage loans to home buyers who have very little money available for a down payment and closing costs Federal Housing Administration (FHA) mortgage insurance Offered by the U.S. Veterans Administration to lenders who make qualified mortgage loans to eligible veterans of the U.S. Armed Forces and their unmarried surviving spouses VA loan guarantee PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

If the interest rates drop, consider refinancing the mortgage Refinancing Mortgage If the interest rates drop, consider refinancing the mortgage Should be refinanced after comparing and analyzing the terms of old and new mortgages PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

KEY TERMS Foreclosures Depreciation condominium (condo) Anchoring Sales contract Lease Closed-end lease Open-end (or finance) lease Residual value Capitalized cost Money factor Purchase option Foreclosures condominium (condo) Cooperative apartment (co-op) Rent ratio Down payment Loan-to-value ratio Private mortgage insurance (PMI) Mortgage points Closing costs PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

KEY TERMS Homeowner’s insurance Real estate short sale Multiple Listing Service Prequalification Earnest money deposit Contingency clause Real Estate Settlement Procedures Act Mortgage loan Mortgage banker Mortgage broker Fixed-rate mortgage Adjustable-rate mortgage Adjustment period Index rate Margin Interest rate cap Payment cap Negative amortization PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Guidelines for purchase decisions SUMMARY Guidelines for purchase decisions Research the purchase Select the best item based on the needs Buy the item after negotiating Maintain the purchase and make necessary repairs Leasing is an arrangement in which the lessee receives the use of an asset in exchange for making monthly lease payments over a specified period PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

SUMMARY Bubble in real estate prices encouraged increase in construction and extraction of a lot of home equity through home equity loans and refinancing Home buying process Shop the market Use an agent Apply for a mortgage Enter into a sales contract Close the deal PFIN4 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.