The Home and Automobile Decision

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Chapter 8

• The Home and Automobile Decision

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Smart Buying Process

• Step 1 Do your homework
• Is the purchase a need or want?
• Consider alternative products and features.
• Does the purchase fit your budget?
• Step 2 Make your selection
• Comparison shop price, product features, and
  quality.
  
• Be informed check library and Web sources.

3
Smart Buying Process (contd)

• Step 3 Make your purchase
• Negotiate the price.
• Evaluate financing alternatives.
• Complete the purchase.
• Step 4 Maintain your purchase
• Resolve complaints keep good records.

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Transportation Needs

• Step 1 Narrowing your choice
• Step 2 Picking your vehicle
• Step 3 Making the purchase
• Step 4 The lease-versus-buy decision
• Step 5 Maintaining your purchase
• Step 6 Consumer protection and your car

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Step 1Narrowing Your Choice

• Consider your lifestyle and needs versus wants.
• Look at the alternatives.
• Fit your car into your budget calculate the
  payment.

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Step 2Picking Your Vehicle

• Do your comparison shopping via the internet or
  publications
  
• Compare price
• Compare features
• Compare quality
• Determine what is available in your price range.
• Test-drive the exact vehicle you are considering.

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Step 3Making the Purchase

• Take advantage of sales, but negotiate the
  price
  
• Know the dealers cost of the vehicle and any
  holdback.
  
• Understand the various dealer markups.
• Be aware of any rebate(s) that may apply.

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Step 3Making the Purchase (contd)

• Evaluate financing alternatives
• Determine the length of financing.
• Shop around to find the best interest rate.
• Choose a financing period and rate to give you an
  affordable monthly payment.
  
• Consider a lease
• Negotiate a fair vehicle value and a low rent or
  finance charge.
  
• Choose a vehicle with slow depreciation.

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Step 4 The Lease-Versus-Buy Decision

• Closed-end leases, or walk-away leases
• Normally offer a purchase option
• Require the dealer to be responsible for resale
• Account for about 80 of all leases
• Open-end leases
• Compare the market value to the leases residual
  value of the vehicle
  
• Are to be avoided because you pay the difference

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When is Leasing a Good Option?

• If you are financially stable
• If you drive less than 15,000 miles annually
• If you take good care of your vehicles
• If you use your vehicles for business travel
• If you do not modify your vehicles
• If the vehicle you are considering doesnt
  depreciate too quickly

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Calculating Your Monthly Lease Payment

• Your lease payment depends on the following
  factors
  
• Agreed-upon price
• Up-front fees
• Down payment or trade allowance
• Residual value
• Rent or finance charge
• Length of the lease

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Step 5Maintaining Your Purchase

• Read the owners manual and perform regular
  maintenance.
  
• Dont ignore warning signals.
• Choose a good garage check training and
  experience.

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Step 6Consumer Protection and Your Car

• Know and use your warranty.
• Use the lemon laws, if necessary, to get a
  refund
  
• Made 4 attempts to fix the problem
• Car out of service at least 30 days during the 12
  months after purchase or the first 12,000 miles

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Comparing Options for Housing

• Houses typically single-family, free-standing
  dwellings
  
• Cooperatives multi-unit dwellings
• Condominiums multi-unit dwellings
• Planned unit developments (PUDs) planned
  development with common land
  
• Apartments and other housing multi-unit
  dwellings

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Housing OptionsHouses

• Advantages
• More space
• Greater privacy
• Builds equity
• Disadvantages
• Maintenance time and costs
• Repair costs
• Resale hassles

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Housing OptionsCooperatives

• Corporate-owned dwellings in which the residents,
  as shareholders, own stock representative of the
  value of their unit. Monthly homeowners fee.

• Advantages
• Low maintenance
• More amenities
• Higher security
• Disadvantages
• Lower capital appreciation
• Difficult to sell
• Less privacy
• Harder to finance

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Housing OptionsCondominiums

• Residents have sole ownership of the living space
  but joint ownership of the land and common areas.
  Monthly maintenance fee.

• Advantages
• Low maintenance
• More amenities
• Higher security
• Disadvantages
• Lower capital appreciation
• Difficult to sell
• Less privacy

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Housing OptionsPlanned Unit Developments (PUDs)

• Own home and land it sits on as well as shared
  ownership of the development
  
• Monthly homeowners fee for maintenance and
  common expenses
  
• Most popular on West Coast

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Housing OptionsApartments and Other Housing

• Advantages
• Lower cost
• Ease of moving (no house to sell)
• Little upkeep
• Disadvantages
• Limited remodeling ability
• Limited lifestyle choices (e.g., pet)
• Less privacy

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Addressing Your Housing Needs

• Housing Step 1 Homework
• Housing Step 2 Selection
• Housing Step 3 Making the purchase
• Housing Step 4 Postpurchase activities

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Housing Step 1 Homework

• Compare your needs versus wants for housing.
• Compare your options for housing and the costs of
  each.
  
• Weigh your alternatives of renting versus buying.

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Housing Step 1 Homework (contd)

• Determine whats most affordable
• Lending standards
• Your financial history
• Your ability to pay
• The appraised value of the home
• Maximum mortgage
• The down payment
• Prequalifying

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Comparing Needs Versus Wants

• Decide on the fundamentals such as bathrooms,
  bedrooms, and closet space.
  
• Decide on property size.
• Compare other considerations like school systems,
  proximity to shopping centers, or safety.
  
• Consider the future such as additional family
  members.

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Costs of Housing Whats Involved in Ownership

• One-time or initial costs
• Recurring costs
• Maintenance and operating costs

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Costs of Housing One-Time or Initial Costs

• Down payment
• Closing or settlement costs
• Discount points
• Loan origination fees
• Loan application fee
• Appraisal fee
• Other fees and costs

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Costs of Housing Recurring Costs

• Monthly mortgage payments (PITI)
• Maintenance and operating expenses

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Costs of Housing Monthly Mortgage Payments
(PITI)

• Principal what you borrowed
• Interest the cost of borrowing
• Taxes support of government
• Insurance protection of your dwelling and
  contents
  
• Note T I are held in an escrow account.

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Costs of Housing Maintenance and Operating Costs

• Repairs to the structure
• Replacing an appliance
• Landscaping

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Weighing the Alternatives of Renting Versus Buying

• Personal and lifestyle considerations
• Financial considerations
• Appreciation with time
• Tax considerations

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Advantages of Renting

• Mobility
• No down payment
• Can be less expensive
• Protection from declining housing values
• More extensive amenities
• No home repair or maintenance
• No groundskeeping responsibilities
• No property taxes

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Advantages of Buying

• Build equity in your home
• Allows for capital appreciation
• Greater personal freedom
• Tax advantages
• Protection from rising rent costs
• Potential source of cash with home equity loan

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Determining Whats Affordable Lending Standards

• 1. Financial history
• Income stability
• Credit history
• 2. Ability to pay
• Housing cost ratio at a maximum of 28 of gross
  income
  
• Housing and other long-term debt ratio at a
  maximum of 36 of gross income
  
• 3. Appraised home value

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Determining Whats Affordable Other Factors

• Calculation of your mortgage limit
• 28 rule (front-end ratio)
• 36 rule (back-end ratio)
• 80 rule (home-equity rule)
• Prequalification, or knowing for sure what is
  affordable

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Determining Whats Affordable Other Factors
(contd)

• Accumulation of a down payment
• Down payment sources and gift letters
• FHA, VA, and FmHA federally-backed loans require
  a lower down payment
  
• Private mortgage insurance (PMI)
• IRA loan of up to 10,000 for first-time
  homebuyer
  

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Housing Step 2 Selection

• The search process
• Use a traditional real estate agent
• Use an independent or exclusive buyer-broker
• Use the Internet to learn about buying a home
• The inspection process
• Structural
• Mechanical

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Housing Step 3 Making the Purchase

• Guidelines for renting
• Negotiating a sales price
• Signing the sales contract
• Financing the purchase the mortgage

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Guidelines for Renting

• Determine what you can afford.
• Compare the location with shopping, employment,
  and schools.
  
• Understand the lease.
• Get every detail in writing.
• Research the reliability of the landlord.
• Acquire renters insurance.

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Negotiating a Sales Price

• Always haggle on the actual purchase price and
  counteroffers.
  
• Include all contingencies.
• Consider closing costs.
• Offer earnest money.
• Note You may never see the seller because often
  the real estate agents carry the offers between
  parties.

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Signing the Sales Contract

• Always have a fixed price.
• Do a title search.
• Perform a pest or other inspection.
• Make the contract contingent on receiving the
  proper financing.

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Signing the Contract (contd)

• Divide the utilities, insurance, taxes, and
  interest equitably with the seller.
  
• Stipulate the condition of the dwelling upon
  transfer.
  
• Include all other contingencies that may
  interfere with a satisfactory purchase.

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Financing the Purchase

• Shop for the lowest interest rate.
• Determine where you want to finance.
• Determine the length of the mortgage.
• Choose the type of mortgage.
• Note Make sure you understand every aspect of
  the mortgage before you sign. This could be your
  largest purchase ever.

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Sources of Mortgages

• Mortgage bankers
• Mortgage brokers

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Conventional or Government-Backed?

• Conventional
• Veterans Administration (VA) mortgages
• Federal Housing Administration (FHA) mortgages

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Government-Backed Mortgages

• Advantages
• Lower interest
• Smaller down payment requirement
• Less strict lending standards
• Disadvantages
• More paperwork to qualify
• Higher closing costs
• Maximum lending limits

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Types of Mortgages

• Fixed-rate mortgage loans
• Adjustable-rate mortgage (ARM) loans
• Other mortgage loan options

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Fixed-Rate Mortgage Loans

• Assumable loans allow for transfer of the
  mortgage with the home
  
• Prepayment privilege allows the payee to
  increase the monthly payment without a fee

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Adjustable-Rate Mortgage (ARM) Loans

• Initial rate the first rate on the mortgage,
  usually short-term
  
• Interest rate index determines annual rate
  adjustment
  
• Margin the difference between the index rate
  and the quoted rate
  
• Adjustment interval the length of time between
  adjustments

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Adjustable-Rate Mortgage (ARM) Loans (contd)

• Rate cap the maximum rate increase allowed
  either per year or over the life of the loan
  
• Payment cap the maximum allowable payment
  amount. Normally not a desired feature due to
  the risk of negative amortization.

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ARM Innovations

• Convertible
• Reduction-option

• Two-step
• Price level adjusted

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Other Mortgage Loan Options

• Balloon payment mortgage
• Graduated payment mortgage
• Growing equity mortgage
• Shared appreciation mortgage

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Adjustable-Rate Versus Fixed-Rate Mortgages

• Fixed-rate issues to consider
• Fixed payments
• Lower interest rate risk
• No risk of negative amortization
• Adjustable-rate issues to consider
• Lower initial interest rate
• May qualify for a larger loan due to lower
  monthly payments
  
• With rising rates, rising payments

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Mortgage DecisionsTerm of the Loan

• 15-year advantages
• Less total interest paid
• Faster equity accumulation and payoff
• Lower interest rate
• 30-year advantages
• Lower monthly payments increase affordability and
  financial flexibility
  
• Higher time value of money
• Greater tax advantages due to interest payment
  deductions

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Mortgage DecisionsTerm of the Loan (contd)

• Two other considerations
• Time value of money
• The effect of taxes

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Housing Step 4Postpurchase Activities

• Time and money for upkeep and maintenance
• Refinancing your mortgage
• 2 rule
• Closing costs

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Summary

• Smart buying Your automobile
• Step 1 Do your homework to narrow your car
  choice.
  
• Step 2 Make your selection.
• Step 3 Make your purchase.
• Step 4 Maintain your purchase.
• Step 5 Consider consumer protection and your car.

56
Summary (contd)

• Choosing a vehicle
• Consider your needs versus your wants.
• Look at the alternatives.
• Fit your car into your budget.
• Do your comparison shopping via the internet or
  publications.
  
• Determine what is available in your price range.
• Test-drive the exact vehicle you are considering.

57
Summary (contd)

• Deal negotiation
• Take advantage of sales, but always negotiate the
  price.
  
• Know the dealers cost of the vehicle.
• Understand the various dealer markups.
• Be aware of any rebate that may apply.
• Evaluate financing.
• Leasing alternatives
• Closed-end leases, or walk-away leases
• Open-end leases
• Alternatives

58
Summary (contd)

• Smart buying Your housing
• Step 1 Homework
• Step 2 Selection
• Step 3 Making the purchase
• Step 4 Postpurchase

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Summary (contd)

• Choosing a housing type
• Decide on the fundamentals such as bathrooms,
  bedrooms, and closet space.
  
• Decide on property size.
• Compare other considerations like school systems,
  or proximity to shopping centers.
  
• Buying versus renting
• Personal and lifestyle considerations
• Financial considerations
• Activities

60
Summary (contd)

• Types of mortgages
• Fixed-rate mortgage loans
• Adjustable-rate mortgage (ARM) loans
• Other mortgage loan options
• Sources of mortgages
• Mortgage bankers
• Mortgage brokers
• Conventional mortgages
• Government-backed mortgages