1. Bennie D Waller, Longwood University Personal Finance Bennie Waller wallerbd@longwood.edu 434-395-2046 Longwood University 201 High Street Farmville, VA 23901

2. Bennie D Waller, Longwood University Big Ticket Purchases Autos and Homes

3. Bennie D Waller, Longwood University 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  Take your time, do research to determine what will work best for your situation

4. Bennie D Waller, Longwood University Before you buy

5. Bennie D Waller, Longwood University Determine your 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)

6. Bennie D Waller, Longwood University 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?

7. Bennie D Waller, Longwood University How much can you afford? PV = 9,861.30 FV = 0 N = 3 x 12 =36 I = 6/12=.50 PMT = 300 Let’s start by assuming that you can comfortably afford $300/month. Given this amount, what are your best options?

8. Bennie D Waller, Longwood University How much can you afford? PMT= 509.09 PV = -23000 FV = 0 N = 4x12=48 I = 3/12 =.25 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? Monthly Payment = 509.09 Total Payments = $24,436.30 Interest Payments = 1,436.30

9. Bennie D Waller, Longwood University 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

10. Bennie D Waller, Longwood University 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.

11. Bennie D Waller, Longwood University 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

12. Bennie D Waller, Longwood University 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.

13. Bennie D Waller, Longwood University Housing options  Housing is expensive  Many equate home ownership with financial success and stability  Home ownership is the single largest investment.  Housing options  Traditional single family home  Opportunity for appreciation; required upkeep and maintenance expenses  Condominiums/Cooperatives/Townhomes  Homeowner fees  Rental

14. Bennie D Waller, Longwood University Housing  Differentiate Wants from Need  What is important in a house?  Location – schools, conveniences, price  Do research  School districts, communities  How much can you afford?

15. Bennie D Waller, Longwood University Housing costs  If purchasing a home, you are likely to incur significant one- time costs such as  Down payment  Loan points  Application/credit/origination fee  Application fee  Appraisal, title, attorney, home inspection fee  Title insurance  Recurring costs  PITI  Maintenance  Repairs

16. Bennie D Waller, Longwood University 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

17. Bennie D Waller, Longwood University Renting versus Buying

18. Bennie D Waller, Longwood University Rent/Buy Worksheet

19. Bennie D Waller, Longwood University 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

20. Bennie D Waller, Longwood University If you decide to buy  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)

21. Bennie D Waller, Longwood University Borrowing ratio example Maximum loan amount 6% FRM with monthly amortization, 30 years 28% ratio36% ratio 36,000Annual Income36,000Annual Income 3,000Monthly Income3,000Monthly Income 840PITI (28%)1,080PITI and other debts (36%) 100Monthly taxes250Monthly car payment 100Monthly insurance100Monthly credit card payment 640Income for PI100Monthly student loan payment 630Income for PITI 100Monthly taxes 100Monthly insurance 430Gross income for PI $106,746.63Maximum amount of loan$71,720.39Maximum amount of loan

22. Bennie D Waller, Longwood University Down payment is a prohibitive factor Maximum home value Based on 80% LTV mortgage lending guidelines 28% ratio36% 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

23. Bennie D Waller, Longwood University Terms of mortgage  Factors to consider  Interest rate  Size of monthly payment  Term of mortgage Loan Amount100,000 Interest6.00% Years3015 Monthly Payments599.55843.86 Total Payments215,838.19303,788.46 Interest115,838.19203,788.46

24. Bennie D Waller, Longwood University Principal/Interest 30 year FRM at 6%

25. Bennie D Waller, Longwood University 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.

26. Bennie D Waller, Longwood University 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

27. Bennie D Waller, Longwood University 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

28. Bennie D Waller, Longwood University 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 -

29. Bennie D Waller, Longwood University 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.

30. Bennie D Waller, Longwood University 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.

31. Bennie D Waller, Longwood University 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.

32. Bennie D Waller, Longwood University 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 email or registered letter to ensure you have a record.  File a complaint with regulating authorities or organizations such as the BBB.  Lawsuit

33. Bennie D Waller, Longwood University Thank You