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© 2013 Pearson Education, Inc. All rights reserved.8-1 Chapter 8 The Home and Automobile Decision.
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Transcript of © 2013 Pearson Education, Inc. All rights reserved.8-1 Chapter 8 The Home and Automobile Decision.
© 2013 Pearson Education, Inc. All rights reserved. 8-1
Chapter 8
The Home and Automobile
Decision
© 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.
© 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
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Checklist 8.1
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Figure 8.1 Sample Complaint Letter
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Smart Buying in Action:Buying a Vehicle
• Choices to consider:
– Buy new
– Buy used
– Leasing
© 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
© 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.
© 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
© 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.
© 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
© 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
© 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.
© 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.
© 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
© 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
© 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?
© 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
© 2013 Pearson Education, Inc. All rights reserved. 8-19
Figure 8.4 Estimated Initial Costs of Buying a HomeThe 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
© 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
© 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
© 2013 Pearson Education, Inc. All rights reserved. 8-22
Figure 8.5 Renting Versus Buying
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Figure 8.6 Worksheet for the Rent-Versus-Buy Decision
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Determining What YouCan 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?
© 2013 Pearson Education, Inc. All rights reserved. 8-25
Figure 8.7 Worksheet for calculating the maximum size mortgage loan you qualify for
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Figure 8.7 Worksheet for calculating the maximum size mortgage loan you qualify for (cont.)
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Figure 8.7 Worksheet for calculating the maximum size mortgage loan you qualify for (cont.)
© 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
© 2013 Pearson Education, Inc. All rights reserved. 8-29
Figure 8.7 Worksheet for calculating the maximum size mortgage loan you qualify for (cont.)
© 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
© 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.
© 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.
© 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.
© 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.
© 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.
© 2013 Pearson Education, Inc. All rights reserved. 8-36
Adjustable-Rate VersusFixed-Rate Mortgages
ARMs:• low interest rate in early years.• can get larger loan because PITI is lower.• reset interest rates push ARM payments
upwardFixed-rate mortgages:• In general, fixed-rate better than ARM.• Payments never change.• Allows for control and planning.
© 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.
© 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.
© 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.
© 2013 Pearson Education, Inc. All rights reserved. 8-40
Figure 8.9 Common Predatory Mortgage Lending Practices
© 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
© 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
© 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
© 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
© 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
© 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.