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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