Buying an Automobile • Research purchase thoroughly, considering the market and your needs. • Select the item most suitable. • Negotiate the best price. • Arrange favorable financing. • Understand terms of sale before you buy. • Maintain and repair after you buy.
Choosing a Car Factors to Consider: • Affordability • Operating costs • New or used? • Size, body style, and features • Reliability and warranties • What to do with present car • Mileage ratings and safety features • Insurance costs
The Purchase Transaction • Comparison shop. • Discuss price first, not financing or trade-in. • Don’t pay the sticker price. • Find out the dealer’s cost. • Check for special buyer’s incentives. • Negotiate for the best deal. • Be able to walk away.
Refinancing an existing auto loan: • Do you have enough equity in your car to serve as collateral? • Credit unions or online banks may be more interested in providing used car loans. • Homeowners can possibly use an equity line of credit to pay off auto loan.
Leasing Your Car • When leasing a car, you are paying for its use during a specified period of time. • At the end of the time, you have nothing. Leasing usually offers: • Lower monthly payments • More expensive car for same payments • Lower down payment
The Leasing Process • Closed-end lease • When the lease is over, you “walk away” from the car. • Most customers choose this type. • Open-end lease • The car’s residual value is used to determine the payment. • If you return the car and it is worth less than estimated, you pay the difference.
Lease payment calculation based on: 1. Capitalized cost (price) of the car 2. Estimated residual value at end of lease 3. Money factor (financing rate) on lease 4. Term or length of lease (typically 2 to 5 years)
Meeting Housing Needs • Single family home • Most popular type. • Offers more privacy and property control. • Cost has increased dramatically in recent years.
Condominium • Can be apartment, townhouse, or cluster housing. • Buyer receives title to an individual unit and jointly owns common areas. • Owner usually pays monthly homeowner’s fee in addition to mortgage payments. • Generally costs less than single family home.
Cooperative Apartment • Tenants own shares of the corporation that owns the apartment building. • Tenants lease units from corporation. • Tenants are assessed fees based on amount of space they occupy. • Fees cover service, maintenance, taxes, and mortgage on entire building. • Usually costs less than renting similar apartment.
Rental Unit Appropriate for: • Those who do not have enough cash for a down payment. • Those who are unsettled in their job or family status. • Those who do not want responsibilities of home ownership. • Those who feel current conditions for home ownership are unattractive.
The Rental Option A rental contract protects both the lessor (owner) and lessee (one who leases). Understand your rights and responsibilities BEFORE signing! • Contract specifies • Monthly payment and due date • Penalties for late payment • Length of lease agreement • Deposit requirement • Renewal options, restrictions, etc.
How Much Housing Can You Afford? • Benefits of owning a home • Provides personal satisfaction • Offers tax shelter • Acts as inflation hedge
The costs of home ownership: 1. Down payment 2. Points and closing costs 3. Mortgage payments 4. Property taxes and insurance 5. Maintenance and operating expenses
1. Down payment: • Represents the buyer’s equity. • Must be paid at time of closing. • Anywhere from 5% to 20% of the purchase price of the house, depending on lender's Loan to Value Ratio
Private Mortgage Insurance (PMI) • Buyer is seen as more risky—has little equity in the home. • Usually adds $40-$70 to monthly payment. • Protects the lender from the buyer defaulting on the loan (does not protect you!). • If down payment is less than 20%, lender usually requires
2. Points . . . • One-time fee charged by lender which increases effective rate of interest. • Represent a premium paid for obtaining a lower mortgage rate (pay more up front at closing for slightly lower payments). • Usually 0–3 points assessed on a mortgage; paying points does not lower the amount borrowed. • One point = 1%of the loan amount (not the purchase price).
. . . and Closing Costs: • Expenses paid by borrower to close on the purchase of a home. • Can be 50% or more of down payment costs and may include: • Loan application and origination fees • Points, if any • Title search and insurance • Attorney fees • Appraisal fees • Other costs, such as inspections, credit report, survey of property, filing fees, etc.
P — Principal I — Interest T — Taxes I — Insurance Go to lender to repay mortgage Collected by lender and held in escrow account 3. The Mortgage Payment (PITI): Composed of 4 parts:
Lenders' guidelines determine your maximum monthly mortgage payment. • Typical Affordability Ratios: • Monthly mortgage payment less than 25–30% of monthly gross income. • Total of all monthly installment loan payments less than 33–38% of monthly gross income.
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?
Mortgage payment should not exceed: $4,500 x .25 = $1,125 • Total installment payments should not exceed: $4,500 x .33 = $1,485
4. Property Taxes & Insurance: • Typically, each month the lender collects 1/12 of yearly amount and places in escrow account. • Lender then pays these expenses on homeowner's behalf when they come due. • It is possible for the homeowner to pay these expenses directly; requires discipline to have the money when needed, but gives more flexibility and the opportunity to earn interest.
5. Maintenance & Operating Expenses: May be greater for larger or older homes • Consider upkeep expenses: • Painting • Repairs • Lawn maintenance • Consider operating expenses: • Utilities
Calculating the Mortgage Payment: Example: What will the monthly mortgage payments be (PI only) on a $100,000, 30-year, 7% mortgage?
Use the financial calculator: Set on 1 P/YR and END mode: 100000 +/- PV 7/12 I/YR 360 N PMT $665.30 Set on 12 P/YR and END mode: 100000 +/- PV 7 I/YR 360 N PMT $665.30
The Mortgage Payment— Mostly Interest Monthly payment $665.30 INTEREST ($139,508 total) PRINCIPAL ($100,000) Note that most of the mortgage payment will go toward interest until after year 20!
Over the 30-year life of the loan, the buyer will pay: $665.30 x 360 = $239,508 Loan amount = –100,000 Interest paid = $139,508
The Home-Buying Process • Shop the market and decide whether to use an agent. • Most realtors belong to Multiple Listing Service (MLS) and have access to a large part of the market. • Agents typically are employed by seller and are paid only if they make a sale. • Commissions range from 5-7% of sales price.
Prequalify and apply for a mortgage. • Present a sales contract and an earnest money deposit. • Go through the closing process; governed by Real Estate Settlement Procedures Act (RESPA). • Title check necessary to make sure title is clear and free of liens. • Closing statement provides details of costs for both buyer and seller.
Financing the Transaction • Shop various lenders for mortgage • Commercial banks • Savings & loans • Credit unions • Mortgage banks • Mortgage brokers • Online mortgage resources
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 house payment (PITI) can increase! • Balloon-payment mortgages are a type of fixed rate mortgage with large final payment.
Adjustable Rate Mortgage (ARM) Interest rate varies, causing monthly payments (PI) to vary. May cause negative amortization! Features of ARMs: • Adjustment period • Index rate • Margin • Interest rate caps • Payment caps
Conventional mortgage—lender assumes all risk of loss. May require larger down payment and PMI. • FHA mortgage—payments insured by Federal Housing Administration. Feature lower down payments, interest rates and closing costs. • VA loan—payments guaranteed by Veterans Administration. One-time loan with no down payment for veterans.
Refinancingyour mortgage • Can reduce your monthly payment if new rate is lower; • Can reduce the total borrowing costs in financing the home; • But you will probably have to pay closing costs on the new loan!