Chapter 8

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Chapter 8 Homes and Cars

• Theme get most for money with well thought-out
  spending decisions
• Do homework separate wants and needs
• Make selection compare alternatives, quality,
  features and price tradeoffs
• Base on choice within budget
• Maintain purchase see complaints section

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Vehicles

• Narrow choices needs, wants, affordability
• Selection test drive, compare operating cost
• Invoice price isn't whole story rebates? 0?
• Financing find lowest cost source
• Negotiate price first, financing is separate
• Dealer may offer low rate compare with rebate
• Credit union probably the best source

3
Car Financing

• Loans and leases
• Sources credit unions, bank, car finance
  companies
• Loan/Rebate tradeoff
• One or the other
• Is the rebate worth more than the interest
  savings?

4
Car Leases

• Leasing lessor owns and rents to you
• Pricing vehicle interest - residual value /-
  other
• Closed-end (walkaway) lessor has risk on
  residual
• Open-end if market value less than estimated,
  you pay difference

5
Auto Loan Discrimination

• How financing system works
• Dealer sends credit info to finance company.
• Loan approved at minimum rate say 8
• Dealer may add up to 3
• Finance company buys loan at 8, dealer keeps 3
• Allegations markup varies by ethnicity even with
  comparable credit records

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Other Dirty Tricks

• www.autodealerscam.org
• Looks at unfair tactics used by dealers to
  manipulate customers
• Lists and explains 13 watchouts and other advice
• Other sites provide tips to buyers

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Car Summary

• Purchase and financing are separate issues.
• Choose whats affordable
• New cars know dealers costs and rebates
• Typical margin about 6
• Use Consumer Reports and online dealers
• Trade-ins get history and have inspected

8
Housing

• Probably your largest investment and largest
  monthly outlay
• On average, 26 of after-tax income
• Balance needs, wants and affordability
• Price/quality tradeoffs
• Decide where/how to finance
• Post purchase costs maintenance, taxes,
  insurance

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Ownership Costs

• One-time down payment, points, closing costs
• Mortgage amount not covered by equity
• Lenders like large equity 20 down
• Recurring mortgage, taxes, insurance
• Maintenance varies by age of house

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Closing or Settlement Costs

• Associated with ownership transfer 5 to 7
• Purpose is for lender to recoup costs and
  increase return
• Text lists about 11 general types

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Points

• One-time, nonrefundable interest charge at
  closing to increase lenders return
• 1 point 1 of mortgage 3,000 on 300,000
• Lowers nominal rate, not APR
• 6.62 0 ? 6.50 1 point
• Analyze tradeoff how long to recover the points
  through the lower rate?

14
Rent versus Buy

• Rent flexibility Buy financial benefits,
  personal freedom (and some headaches)
• Buying complexities increasing equity from loan
  repayment and inflation plus tax savings
• Offsets maintenance and selling costs
• Ownership not desirable if stay less than three
  years but tax benefits if itemize

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Renting versus Buying
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Affordability Questions

• Down payment what can you afford?
• Maximum amount you can borrow
• Are you comfortable with payments?

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Credit Factors

• Financial history income, job stability, assets
  and credit rating
• Monthly payment of Principal, Interest, Taxes and
  Insurance called PITI
• PITI lt 28 of gross income
• PITI other debt lt 36 of gross income
• Appraised value gt 80 of mortgage

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Reducing the Down Payment

• Government backed mortgage 5 to 10 down
• Private mortgage insurance (PMI) - 0.3 to 2.0
  of loan amount
• IRA first time buyers may withdraw without
  penalty

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Real Estate Agents

• Wealth of information
• Possible conflicts who do they represent?
• Probably themselves (get commission quickly)
• Consider
• Experience, honesty, knowledge of mortgage
  market, familiarity with your area, diplomacy,
  understanding your views

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Making the Purchase

• Listed at asking price
• Is it negotiable? Risk of being outbid?
• Contract price, method of payment, closing date,
  free and clear title, pro-rations
• Contingencies hurt prequals help buyer
• Escrow agent exchanges funds and provides
  flow-of-funds statement

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Mortgages

• Sources SL's, banks, credit unions
• Mortgage bankers and brokers
• Conventional loans from traditional sources
  with standard ratios
• Subprime loans
• Government backed FHA, VA, others
• Advantage rates, down payments, standards
• Disadvantage paperwork, default insurance

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Fixed Rate Mortgages

• Monthly payment doesn't change regardless of
  interest rate changes
• 10 to 30 years
• May be assumable
• Prepayment penalty or no penalty?

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Median Home Prices

• Metro area (000) 3 yr change
• R-side- San Bernd 227 64.5
• Los Angeles 362 64.3
• San Diego 429 60.0
• Orange County 499 58.0

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Adjustable Rates (ARM's)

• Rates fluctuate with current rates
• Borrower benefits if rates fall hurt if rise
• Teasers low initial rate
• Index rate mortgage's rate tied to
• Index plus margin ARM's rate
• Adjustment interval
• Rate and payment caps

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Innovations

• ARM's usually lower than fixed
• Lender can re-price if rates rise
• May qualify for larger loan if payment lowered
• ARM's may be convertible to fixed rate
• Term 10, 15, 20 or 30 year payoffs
• Pros lower rate and good if rates drop
• Cons bad if rates rise

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Home Equity Loans

• Home equity loan amortizing loan secured by
  second mortgage
• Home equity line revolving loan (repaid,
  reborrowed, repaid like credit card)- also
  secured
• Advantages lower rate than credit card interest
  may be tax deductible