Post on 30-Mar-2015
transcript
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Making Automobile and Housing Decisions
#5
04/10/23
Buying an Automobile
• Research thoroughly• Select car based on needs• Negotiate price
– Arrange favorable financing– Understand terms of sale before purchase
• Maintain and repair after purchase
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Choosing a Car
Factors to Consider:• Affordability • Operating costs• Gas, diesel, or hybrid• New, used, or “nearly new”• Size, body style, and features
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Choosing a Car
Other Considerations • Trading in or selling
present car• Fuel economy• Safety features Don’t forget about
insurance costs!
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The Purchase Transaction
• Negotiating price– Sticker price
versus dealer’s cost
• Closing the deal
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Leasing A Car
Leasing usually offers:• Lower monthly payments• More expensive car for same payments• Lower down payment
When leasing a car, you pay for its use during a specified period of time
At the end of lease, you have nothing
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The Leasing Process
Closed-end lease• “walk away”
from car when lease is over
• most popular
Open-end lease• payment based
on car’s residual value
• upon return, pay difference if car’s worth is less than estimated
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Leasing a Car
Lease Payment Calculation Based on 4 Variables
1. Capitalized cost (price) of the car
2. Forecasted residual value at end of lease
3. Money factor (financing rate) on lease
4. Lease term
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Lease versus Purchase Analysis
• More or less costly to lease?
• When the lease ends– Return the car?– Buy the car?
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Meeting Housing Needs
Single family home
• Most popular type• Offers more privacy and
property control
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Condominium
• Form of ownership for apartments, townhouses, or cluster housing
• Title to unit and jointly own common areas
• Monthly homeowner’s fee in addition to mortgage payments
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Cooperative Apartment “Co-op”
• Tenants own shares in nonprofit corporation that owns building
- lease units from corporation
• Assessed fees based on space occupied - Covers service, maintenance, taxes, and
mortgage on entire building
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Rental Unit
Appropriate for those: • without a down payment• unsettled in job or family status• who do not want home ownership
responsibilities• who feel current conditions are
unattractive for home ownership
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The Rental Option
Contract Protects• lessor = owner • lessee = one
who leases
Contract Specifies• Monthly rent and
due date• penalties for late
payment• length of lease
agreement• deposit
requirement• renewal options
Know your rights
and responsibilities
before signing!
Rent or Buy Analysis
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Benefits of Owning a Home
• Personal satisfaction• Tax shelter• Inflation hedge
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The Cost of Home Ownership
• Down payment• Points and closing costs• Mortgage payments• Property taxes and
insurance• Maintenance and
operating expenses
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Down Payment
• Represents buyer’s equity• Paid at time of closing
– Typically 5% to 20% of purchase price depending on lender's
– If less than 20%, lender may require private mortgage insurance (PMI)
• Protects lender of buyer defaults
Loan to Value Ratio
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Points…
• Premium paid for obtaining lower mortgage rate – pay at closing
• One-time fee charged by lender – increases effective rate of interest
• From 0–3 points assessed on mortgage
1 point = 1% of
the loan amount
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…and Closing Costs
Expenses to close on a home may include
• Loan application, origination fees• Points• Title search, insurance• Attorney fees• Appraisal fees• Costs, such as inspections,
credit report, property survey, filing fees
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P = Principal
I = Interest
T = Taxes
I = Insurance
Go to lender to repay mortgage
Collected by lender and held in escrow account
The Mortgage Payment (PITI)
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Lender determines maximum monthly payment
Typical Affordability Ratios
The Mortgage Payment (PITI)
Monthly mortgage payment < 25–30% of monthly gross income
Total of all monthly installment loan payments < 33–38% of monthly gross income
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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?
The Mortgage Payment (PITI)
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Mortgage payment should not exceed:
$4,500 x .25 = $1,125
Total installment payments should not exceed:
$4,500 x .33 = $1,485
The Mortgage Payment (PITI)
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Property Taxes & Insurance
• Each month lender collects 1/12 of annual amount and places in escrow account
• Homeowner may pay these directly– provides more flexibility and opportunity
to earn interest
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Maintenance & Operating Expenses
• Consider upkeep expenses– Painting– Repairs– Lawn maintenance
• Consider operating expenses– Utilities
Real Estate Short Sales
Foreclosure - borrower cannot make mortgage payments so lender repossesses property
Short sale - proceeds of the sale are less than balance owed on the mortgage
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Using an Agent
Most realtors belong to Multiple Listing Service (MLS) with access to a large part of the market• Agents, usually employed by seller, are
paid a commission if they make a sale• may range from 5-6% of sales price
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• Prequalify and apply• Present a sales contract• Provide an earnest money deposit• Contingency clause
The Home-Buying Process
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• Real Estate Settlement Procedures Act (RESPA)
– Title check necessary to ensure title is clear, free of liens
– Closing statement provides details of costs for both buyer and seller
Closing the Deal
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Financing the Transaction
Sources of mortgage loans• Commercial banks• Thrifts • Mortgage banks• Mortgage brokers
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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
payment (PITI) can increase
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Types of Mortgage Loans
Adjustable Rate Mortgage (ARM)• Interest rate varies, so monthly payments vary • May cause negative amortization
ARM Features • Adjustment
period• Index rate• Margin• Interest rate
caps• Payment caps
Negative Amortization
If monthly loan payment is lower than the monthly interest charged then principal balance will increase• could result in a larger
mortgage balance on the next loan anniversary than on previous one
Other Types of ARMs
Convertible ARMs
• allow borrowers to convert to fixed-rate loan
Two-step ARMs• have two interest
rates: – one for initial 5-7 years– Higher one for
remaining loan period
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• Interest-only• Graduated-payment• Growing-equity• Shared-appreciation• Biweekly• Buy-downs
Other Mortgage Payment Options
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Conventional mortgage - lender assumes all risk of loss
• Usually requires 20% down payment – If lower than 20% then PMI required
Types of Mortgage Loans
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Types of Mortgage Loans
FHA mortgage• payments insured
by Federal Housing Administration
• lower down payment, interest rates, closing costs
VA loan• payments
guaranteed by Veterans Administration
• one-time loan with no down payment
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Refinancing
• New lower rate can reduce monthly payment
• Can reduce total borrowing costs in home financing
May pay closing costs on new loan!
Mortgage Refinancing Analysis