7-1: Buying a Home

1. 7-1: Buying a Home

2. Costs of Financing a home: • Purchase price = tag price • Downpayment = a percentage of the purchase price; between 0% and 30% • Interest = cost of borrowing money • Closing costs = fees and expenses paid by the buyer to complete purchase

3. FINANCING: • After the downpayment is paid, the balance is paid by taking a mortgage loan from a bank or other lender. Principal = Purchase price – downpayment (amount borrowed) • Interest is charged and is part of monthly payments.

4. CLOSING COSTS: • Include: legal fees, title insurance, loan origination fees, appraisal and inspection fees, land surveys, and taxes • 1% to 4% of purchase price http://c21westworld.com/homesearch.htm?scope=ALL&mls=0&hometypes%5B%5D=1&minprice=0&maxprice=1500000&bedrooms=0&bathrooms=0&city=long+beach&state=CA&zipcode=&radius=0&street=&county=&subdivision=&development=&garage=0&age=0&sqft=&acres=&association_fees=0&listing_status=&email=Enter+Your+Email+Address%21&autosearch_length=279&autosearch_period=7&autosearch_receive=0&autosearch_format=HTML&action=Search

5. MORTGAGE =part of principal+interest • Fixed Rate Mortgage: equal monthly payments. (use sample Amortization table on page 256) ex. Find monthly payment on: a. $40,000 mortgage taken for 30 years at 9% $321.85 b. $75,000 loan for 25 yrs @7%: $530.08 c. $65,000 loan at 9% for 30 yrs: $523.01

6. ex The Smiths are buying a house for $425,000. They are making a downpayment of 20%. The closing costs will be 3.5% of the purchase price. • How much is their downpayment? • How much are closing costs? • How much cash do they need to complete the sale? • How much are they borrowing?

7. DISCUSSION: • What are the benefits of buying a home? • What factors need to be considered in making the decision to buy a home?

8. How much interest do the homeowners end up paying?

9. 7.1 Day 2 2) Variable or Adjustable Rate Mortgage: • the interest rate is not guaranteed • Usually rate is lower than Fixed R.M. • However, lender can increase or decrease rate at specified intervals 3) Graduated Payment Mortgage (GPM): • Starts with low payments that rise gradually 4) Balloon payment mortgage: • Entire payment for first few years goes to interest only; the last years pay off the principal.

10. REFINANCING A MORTGAGE Why refinance? • Interest rates go down!!! Refinance = take out a NEW mortgage to pay off an OLD one. • Pay closing costs again, and sometimes prepayment penalty

11. Ex. The Rowes had a fixed rate mortgage at 16.25%. The monthly payment on the old mortgage was $845.86. They got a new mortgage at 13% and their new monthly payment is $585.79. To get the new mortgage, they had to pay closing costs of $935. They also had to pay a prepayment penalty of $500. a. How much did they save in the first year? b. How much did they save the second year?

12. 7-2: The Cost of Owning a Home

13. What are the ongoing expenses??? • Property taxes • Repairs • Maintenance • Insurance • Mortgage interest

14. CONS (of owning a home) • Depreciation=loss in value caused by aging and use. Ex. Lisa’s home cost her $70,000. She estimates that depreciation reduces the value of the home by 3% each year. Find the depreciation for 1 year. $70,000 x 0.03 = $2,100 • Loss of income on money invested=money you would have otherwise earned interest on!!!

15. PROS (of owning a home) • Tax deduction = a “break” on income tax • Equity=the difference between what is owed and the value of the house. RENT OR OWN??? Advantages of renting: no big downpayment, no maintenance costs Disadvantages: no income tax benefits, no equity earned

16. 7.3 Depreciating a Motor Vehicle

17. DISCUSSION: What do you think has more value: a 3-year-old car with 18,000 miles ORa 1-year-old car of the same make and model with 34,000 miles?

18. Depreciation= loss of value • The difference between a car’s original cost and its resale or trade-in value. • Resale value= market value • Find in Kelley Blue Book • Trade-in value = amount you get for your old car when you trade it in for a new car.

19. Ex. Alfonzo buys a car for $16,500 and 4 years later trades it in for $7,500. Find the total depreciation. $16,500 – 7,500 = $9,000

20. Finding Average Annual Depreciation Ex. A car that cost $14,800 has an estimated trade-in value of $5,900 at the end of 4 years. Find the average annual depreciation. ($14,800 – 5,900) = $8,900 $8,900 ÷ 4 = $2,225

21. Finding Rate of Depreciation Rate of Depreciation = (straight-line method) Average annual depreciation Original cost ex. Original cost = $14,500. At the end of 4 years, the resale value of a car is $5,600. Find rate of depreciation. ($14,500 – 5,600) ÷ 4 = $2,225 ~ average annual depreciation $2,225 ÷ $14,500 = 0.153 or 15%

22. 7-4 Cost of Operating a Motor Vehicle

23. Operating costs = sum of all the annual expenses: • Insurance • Gas, Oil, Inspection fees, tires, repairs • License • Garage rent, parking fees • Toll, taxes • General upkeep • Depreciation • Loss of interest on investment

24. Kay paid $14,200 for her car. Her annual payments for insurance, gas, oil, and other repairs total $1,900. The car depreciates 18% a year. Kay could have earned $568 interest on her investment in the car. What was her total annual cost of operating the car? $1,900 0.18 x $14,200 + 2,556 568 $5,024

25. Leasing a Motor Vehicle • Leasing = renting a car for a fixed amount of time • Leases usually run for 24, 36, or 48 months • The number of miles a car or truck can be driven is LIMITED. • There is a fee for excess mileage.