1. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Making Automobile and Housing Decisions #5

2. Buying an Automobile Research thoroughly Select car based on needs Negotiate price –Arrange favorable financing –Understand terms of sale before purchase Maintain and repair after purchase

3. Choosing a Car Factors to Consider: Affordability Operating costs Gas, diesel, or hybrid New, used, or nearly new Size, body style, and features

4. Choosing a Car Other Considerations Trading in or selling present car Fuel economy Safety features Dont forget about insurance costs!

5. The Purchase Transaction Negotiating price –Sticker price versus dealers cost Closing the deal

6. Leasing A Car Leasing usually offers: Lower monthly payments More expensive car for same payments Lower down payment When leasing a car, you pay for its use during a specified period of time At the end of lease, you have nothing

7. The Leasing Process Closed-end lease walk away from car when lease is over most popular Open-end lease payment based on cars residual value upon return, pay difference if cars worth is less than estimated

8. Leasing a Car Lease Payment Calculation Based on 4 Variables 1. Capitalized cost (price) of the car 2. Forecasted residual value at end of lease 3. Money factor (financing rate) on lease 4. Lease term

9. Lease versus Purchase Analysis More or less costly to lease? When the lease ends –Return the car? –Buy the car?

10. Meeting Housing Needs Single family home Most popular type Offers more privacy and property control

11. Condominium Form of ownership for apartments, townhouses, or cluster housing Title to unit and jointly own common areas Monthly homeowners fee in addition to mortgage payments

12. Cooperative Apartment Co-op Tenants own shares in nonprofit corporation that owns building - lease units from corporation Assessed fees based on space occupied - Covers service, maintenance, taxes, and mortgage on entire building

13. Rental Unit Appropriate for those: without a down payment unsettled in job or family status who do not want home ownership responsibilities who feel current conditions are unattractive for home ownership

14. The Rental Option Contract Protects lessor = owner lessee = one who leases Contract Specifies Monthly rent and due date penalties for late payment length of lease agreement deposit requirement renewal options Know your rights and responsibilities before signing!

15. Rent or Buy Analysis

16. Benefits of Owning a Home Personal satisfaction Tax shelter Inflation hedge

17. The Cost of Home Ownership Down payment Points and closing costs Mortgage payments Property taxes and insurance Maintenance and operating expenses

18. Down Payment Represents buyers equity Paid at time of closing –Typically 5% to 20% of purchase price depending on lender's –If less than 20%, lender may require private mortgage insurance (PMI) Protects lender of buyer defaults Loan to Value Ratio

19. Points… Premium paid for obtaining lower mortgage rate –pay at closing One-time fee charged by lender –increases effective rate of interest From 0–3 points assessed on mortgage 1 point = 1% of the loan amount

20. …and Closing Costs Expenses to close on a home may include Loan application, origination fees Points Title search, insurance Attorney fees Appraisal fees Costs, such as inspections, credit report, property survey, filing fees

21. P = Principal I = Interest T = Taxes I = Insurance Go to lender to repay mortgage Collected by lender and held in escrow account The Mortgage Payment (PITI)

22. Lender determines maximum monthly payment Typical Affordability Ratios The Mortgage Payment (PITI) Monthly mortgage payment < 25–30% of monthly gross income Total of all monthly installment loan payments < 33–38% of monthly gross income

23. Example: If your monthly gross income is $4500, what would your maximum monthly mortgage payment be if the lender's affordability ratios stipulate that your mortgage payment not exceed 25% nor your total installment payments exceed 33% of your monthly gross income? The Mortgage Payment (PITI)

24. Mortgage payment should not exceed: $4,500 x.25 = $1,125 Total installment payments should not exceed: $4,500 x.33 = $1,485 The Mortgage Payment (PITI)

25. Property Taxes & Insurance Each month lender collects 1/12 of annual amount and places in escrow account Homeowner may pay these directly –provides more flexibility and opportunity to earn interest

26. Maintenance & Operating Expenses Consider upkeep expenses –Painting –Repairs –Lawn maintenance Consider operating expenses –Utilities

27. Real Estate Short Sales Foreclosure - borrower cannot make mortgage payments so lender repossesses property Short sale - proceeds of the sale are less than balance owed on the mortgage

28. Using an Agent Most realtors belong to Multiple Listing Service (MLS) with access to a large part of the market Agents, usually employed by seller, are paid a commission if they make a sale may range from 5-6% of sales price

29. Prequalify and apply Present a sales contract Provide an earnest money deposit Contingency clause The Home-Buying Process

30. Real Estate Settlement Procedures Act (RESPA) –Title check necessary to ensure title is clear, free of liens –Closing statement provides details of costs for both buyer and seller Closing the Deal

31. Financing the Transaction Sources of mortgage loans Commercial banks Thrifts Mortgage banks Mortgage brokers

32. Types of Mortgage Loans Fixed Rate Mortgage Interest rate and monthly payments (PI) fixed for life of loan Taxes and insurance not fixed, so total payment (PITI) can increase

33. Types of Mortgage Loans Adjustable Rate Mortgage (ARM) Interest rate varies, so monthly payments vary May cause negative amortization ARM Features Adjustment period Index rate Margin Interest rate caps Payment caps

34. Negative Amortization If monthly loan payment is lower than the monthly interest charged then principal balance will increase could result in a larger mortgage balance on the next loan anniversary than on previous one

35. Other Types of ARMs Convertible ARMs allow borrowers to convert to fixed-rate loan Two-step ARMs have two interest rates: –one for initial 5-7 years –Higher one for remaining loan period

36. Interest-only Graduated-payment Growing-equity Shared-appreciation Biweekly Buy-downs Other Mortgage Payment Options

37. Conventional mortgage - lender assumes all risk of loss Usually requires 20% down payment –If lower than 20% then PMI required Types of Mortgage Loans

38. FHA mortgage payments insured by Federal Housing Administration lower down payment, interest rates, closing costs VA loan payments guaranteed by Veterans Administration one-time loan with no down payment

39. Refinancing New lower rate can reduce monthly payment Can reduce total borrowing costs in home financing May pay closing costs on new loan!

40. Mortgage Refinancing Analysis