Learning Objectives part 1 of 2

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Chapter 9
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Learning Objectives (part 1 of 2)

• Explain the advantages of pre-qualification
• Describe the different types of mortgages
  available
• Ascertain how much you could afford to pay for a
  house
• Decide how much of a down payment you would like
  to make

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Learning Objectives (part 2 of 2)

• Estimate your closing costs
• Evaluate whether it would be profitable to
  refinance your current mortgage
• Describe the process by which property taxes are
  determined
• Evaluate automobile financing choices
• Analyze an auto lease proposal.

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Advantages of Pre-qualification

• Identifies maximum mortgage one would be able to
  obtain
• Reduces uncertainty about qualifying for a
  mortgage
• Adds creditability to a bid (if two bids are
  otherwise equal, the one with the prequal. letter
  should be chosen

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Different types of mortgages (1 of 2)

• fixed rate mortgage
• 15-year
• 30-year
• Adjustable rate mortgage (ARM)
• 1/1, 3/1, 5/1, 7/1, 10/1
• 5/25, 7/23

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Different types of mortgages (1 of 2)

• Conventional mortgage
• FHA-insured mortgage
• VA-guaranteed mortgage
• Jumbo mortgage
• Reverse annuity mortgage (RAM)

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Elements of an ARM

• Teaser rate
• Convertibility
• Margin
• Index tied to, availability of index
• Caps
• Per each change
• Lifetime

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Obtaining a mortgage

• Get as many quotes as possible
• Lock period application fees
• Miscellaneous fees

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Maximum size of mortgage

• Ultimately, lenders choice, but they all follow
  certain rules
• PITI not exceed 28 of gross income
• PITI and other monthly debt payments not exceed
  36 of gross income

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Selection of down payment (1 of 2)

• Standard is 20 of purchase price
• If less, then will need some form of default
  insurance
• Any form of insurance is expensive
• If income constraints are a problem then a larger
  down payment may make it easier to get a mortgage

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Selection of down payment (2 of 2)

• Putting more down is equivalent to investing
  money risk-free at the mortgage rate
• Putting more down may create a liquidity problem
  later, that could only be solved with a home
  equity loan or through refinancing

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Closing Costs

• Prepaid interest (for first month)
• Title insurance
• Start escrow account
• Tax Stamps
• Credit report
• Survey
• Potentially many more

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Choosing a mortgage (1 of 2)

• Fixed vs. ARM depends on risk tolerance, income
  constraints, expected period of occupancy
• 15-year vs. 30-year depends on reduction in
  interest rate vs. opportunity cost of money

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Choosing a mortgage (2 of 2)

• Paying points to get a lower rate
• Great if paid by employer
• Foolish if occupancy less than five years
  (typically)
• Depends on opportunity rate of return
• Reduces the value of refinancing the mortgage
  should interest rates drop

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Refinancing a mortgage

• Sometimes done to get at equity in the house
• Popular rule of thumb of 2 reduction vastly
  overstates when it can be profitably done
• Depends on closing costs and the magnitude of
  reduction in the monthly payment

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Appraised vs assessed value

• Appraised value what an appraiser thinks a home
  would sell for
• Required by all lenders before a mortgage is
  closed
• Required for any home-equity loan or HELOC
• Assessed value an arbitrary value assigned to a
  home to set property taxes. Unrelated to
  appraised value.

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Property Taxes

• Assessed valuation established
• Each taxing authority establishes a millage rate
  (property tax per 1,000 assessed valuation
• Some states establish state equilization factors

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Financing a Car

• Rebate or below market interest rate both are
  built in price adjustments, and true value of
  BMIR needs to be estimated
• Amount of down payment
• Opportunity cost of money
• Reduction in liquidity
• May affect ability to obtain a loan

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Factors in a lease rate

• Selling price of vehicle
• Expected value of vehicle at end of lease
• Money factor (interest rate)
• Monthly depreciation charge
• Other taxes and fees

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Down payment on a lease

• Destination charge
• Acquisition fee
• Security deposit
• refundable

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Borrow buy vs. lease decision

• Monthly down payments lower with a lease
• Leases usually require less out of pocket cash
• Time Value of Money analysis usually favors a
  purchase