1. © 2013 Pearson Education, Inc. All rights reserved.8-1 Chapter 8 The Home and Automobile Decision

2. © 2013 Pearson Education, Inc. All rights reserved.8-2 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.

3. © 2013 Pearson Education, Inc. All rights reserved.8-3 Smart Buying Step 1: Differentiate Want From Need Step 2: Do Your Homework Step 3: Make Your Purchase Step 4: Maintain Your Purchase

4. © 2013 Pearson Education, Inc. All rights reserved.8-4 Checklist 8.1

5. © 2013 Pearson Education, Inc. All rights reserved.8-5 Figure 8.1 Sample Complaint Letter

6. © 2013 Pearson Education, Inc. All rights reserved.8-6 Smart Buying in Action: Buying a Vehicle Choices to consider: –Buy new –Buy used –Leasing

7. © 2013 Pearson Education, Inc. All rights reserved.8-7 Smart Buying in Action: Buying a Vehicle Step 1: Differentiate Want From Need Features and qualities wanted Features and qualities needed

8. © 2013 Pearson Education, Inc. All rights reserved.8-8 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.

9. © 2013 Pearson Education, Inc. All rights reserved.8-9 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

10. © 2013 Pearson Education, Inc. All rights reserved.8-10 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.

11. © 2013 Pearson Education, Inc. All rights reserved.8-11 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

12. © 2013 Pearson Education, Inc. All rights reserved.8-12 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

13. © 2013 Pearson Education, Inc. All rights reserved.8-13 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.

14. © 2013 Pearson Education, Inc. All rights reserved.8-14 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.

15. © 2013 Pearson Education, Inc. All rights reserved.8-15 Your Housing Options A House: –Most potential for capital appreciation. Cooperatives and Condominiums: –Homeowner’s fee –Planned unit developments Apartments and other rental housing

16. © 2013 Pearson Education, Inc. All rights reserved.8-16 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

17. © 2013 Pearson Education, Inc. All rights reserved.8-17 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?

18. © 2013 Pearson Education, Inc. All rights reserved.8-18 Smart Buying in Action: Housing One-time Costs: Down payment Closing/settlement costs –Points –Loan origination fee –Application fee –Appraisal fee –Title search fee

19. © 2013 Pearson Education, Inc. All rights reserved.8-19 Figure 8.4 Estimated Initial Costs of Buying a Home 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

20. © 2013 Pearson Education, Inc. All rights reserved.8-20 Smart Buying in Action: Housing Recurring Costs –Monthly mortgage payments –PITI Maintenance and Operating Costs: –repairs, renovations, upgrades, landscaping

21. © 2013 Pearson Education, Inc. All rights reserved.8-21 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

22. © 2013 Pearson Education, Inc. All rights reserved.8-22 Figure 8.5 Renting Versus Buying

23. © 2013 Pearson Education, Inc. All rights reserved.8-23 Figure 8.6 Worksheet for the Rent-Versus-Buy Decision

24. © 2013 Pearson Education, Inc. All rights reserved.8-24 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?

25. © 2013 Pearson Education, Inc. All rights reserved.8-25 Figure 8.7 Worksheet for calculating the maximum size mortgage loan you qualify for

26. © 2013 Pearson Education, Inc. All rights reserved.8-26 Figure 8.7 Worksheet for calculating the maximum size mortgage loan you qualify for (cont.)

27. © 2013 Pearson Education, Inc. All rights reserved.8-27 Figure 8.7 Worksheet for calculating the maximum size mortgage loan you qualify for (cont.)

28. © 2013 Pearson Education, Inc. All rights reserved.8-28 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

29. © 2013 Pearson Education, Inc. All rights reserved.8-29 Figure 8.7 Worksheet for calculating the maximum size mortgage loan you qualify for (cont.)

30. © 2013 Pearson Education, Inc. All rights reserved.8-30 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

31. © 2013 Pearson Education, Inc. All rights reserved.8-31 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.

32. © 2013 Pearson Education, Inc. All rights reserved.8-32 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.

33. © 2013 Pearson Education, Inc. All rights reserved.8-33 Adjustable-Rate Mortgages Margin—the amount over the index rate that the ARM is set. Adjustment Interval—how frequently the rate can be reset.

34. © 2013 Pearson Education, Inc. All rights reserved.8-34 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.

35. © 2013 Pearson Education, Inc. All rights reserved.8-35 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.

36. © 2013 Pearson Education, Inc. All rights reserved.8-36 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.

37. © 2013 Pearson Education, Inc. All rights reserved.8-37 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.

38. © 2013 Pearson Education, Inc. All rights reserved.8-38 Specialty Mortgage Loan Options 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.

39. © 2013 Pearson Education, Inc. All rights reserved.8-39 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.

40. © 2013 Pearson Education, Inc. All rights reserved.8-40 Figure 8.9 Common Predatory Mortgage Lending Practices

41. © 2013 Pearson Education, Inc. All rights reserved.8-41 Mortgage Decisions: Length or Term of the Loan 15- or 30-year maturity on mortgage? Prepayment opportunities Size of monthly payment Interest rate

42. © 2013 Pearson Education, Inc. All rights reserved.8-42 Figure 8.10 The Portion of Each Payment That Goes Toward the Principal and Interest on a 30-Year, 8% Fixed-Rate Mortgage for $80,000

43. © 2013 Pearson Education, Inc. All rights reserved.8-43 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

44. © 2013 Pearson Education, Inc. All rights reserved.8-44 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

45. © 2013 Pearson Education, Inc. All rights reserved.8-45 Smart Buying in Action: Housing Contract Earnest money Closing Settlement or closing statement Step 4: Maintain Your Purchase –Refinancing

46. © 2013 Pearson Education, Inc. All rights reserved.8-46 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.