1. Longwood University 201 High Street Farmville, VA 23901
Personal Finance
Bennie Waller
Longwood University 201 High Street Farmville, VA 23901

2. Big Ticket Purchases
Autos and Homes

3. 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

4. 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

5. Before you buy

6. 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

7. 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.

8. 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

9. 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

10. Transportation needs

11. Lease versus Purchase Decision

12. 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?

13. 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

14. 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=
PV =
FV = 0
N = 4x12=48
I = 3/12 = .25
Monthly Payment =
Total Payments = $24,436.30
Interest Payments = 1,436.30

15. 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

16. 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.

17. 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

18. 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.

19. 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.

20. 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

21. 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?

22. 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

23. 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

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

25. 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

26. Renting versus Buying

27. Rent/Buy Worksheet

28. 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

29. 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)

30. 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

31. 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

32. 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

33. 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

34. Maximum mortgage loan

35. Maximum mortgage loan

36. Maximum mortgage loan

37. Principal/Interest
30 year FRM at 6%

38. 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.

39. Length of mortgage

40. 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

41. 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

42. 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 -

43. 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.

44. Predatory Lending Practices

45. 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.

46. 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.

47. 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.

48. 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 or registered letter to ensure you have a record.
File a complaint with regulating authorities or organizations such as the BBB.
Lawsuit

49. Thank You