Transcript CHAPTER 8: INSURING YOUR LIFE

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CHAPTER 5:
MAKING AUTOMOBILE &
HOUSING DECISIONS
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Buying an Automobile
 Research purchase thoroughly,
considering the market and your needs.
 Select the item most suitable.
 Negotiate the best price.
 Arrange favorable financing.
 Understand terms of sale before you
buy.
 Maintain and repair after you buy.
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Choosing a Car
Factors to Consider:
 Affordability
 Operating costs
 New or used?
 Size, body style, and features
 Reliability and warranties
 What to do with present car
 Mileage ratings and safety features
 Insurance costs
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The Purchase Transaction
 Comparison shop.
 Discuss price first, not financing or
trade-in.
 Don’t pay the sticker price.
 Find out the dealer’s cost.
 Check for special buyer’s incentives.
 Negotiate for the best deal.
 Be able to walk away.
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Refinancing an existing auto loan:
 Do you have enough equity in your
car to serve as collateral?
 Credit unions or online banks may
be more interested in providing used
car loans.
 Homeowners can possibly use an
equity line of credit to pay off auto
loan.
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Leasing Your Car
When leasing a car, you are paying for
its use during a specified period of time.
At the end of the time, you have nothing.
Leasing usually offers:
 Lower monthly payments
 More expensive car for same payments
 Lower down payment
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The Leasing Process
 Closed-end lease
– When the lease is over, you “walk away”
from the car.
– Most customers choose this type.
 Open-end lease
– The car’s residual value is used to
determine the payment.
– If you return the car and it is worth less
than estimated, you pay the difference.
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Lease payment calculation based on:
1. Capitalized cost (price) of the car
2. Estimated residual value at end of
lease
3. Money factor (financing rate) on
lease
4. Term or length of lease (typically 2 to
5 years)
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Meeting Housing Needs
Single family home
– Most popular type.
– Offers more privacy
and property control.
– Cost has increased
dramatically in recent
years.
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Condominium
– Can be apartment, townhouse, or cluster
housing.
– Buyer receives title to an individual unit
and jointly owns common areas.
– Owner usually pays monthly
homeowner’s fee in addition to
mortgage payments.
– Generally costs less than single family
home.
Cooperative Apartment
– Tenants own shares of the corporation
that owns the apartment building.
– Tenants lease units from corporation.
– Tenants are assessed fees based on
amount of space they occupy.
– Fees cover service,
maintenance, taxes, and
mortgage on entire building.
– Usually costs less than
renting similar apartment.
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Rental Unit
Appropriate for:
– Those who do not have enough cash for
a down payment.
– Those who are unsettled in their job or
family status.
– Those who do not want responsibilities
of home ownership.
– Those who feel current conditions for
home ownership are unattractive.
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The Rental Option
A rental contract protects both the lessor
(owner) and lessee (one who leases).
Understand your rights and responsibilities
BEFORE signing!
 Contract specifies
– Monthly payment and due date
– Penalties for late payment
– Length of lease agreement
– Deposit requirement
– Renewal options, restrictions, etc.
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How Much Housing
Can You Afford?
Benefits of owning a home
– Provides personal satisfaction
– Offers tax shelter
– Acts as inflation hedge
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The costs of home ownership:
1. Down payment
2. Points and closing costs
3. Mortgage payments
4. Property taxes and insurance
5. Maintenance and operating
expenses
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1. Down payment:
Represents the buyer’s equity.
Must be paid at time of closing.
Anywhere from 5% to 20% of the
purchase price of the house,
depending on lender's
Loan to Value Ratio
 If down payment is less than 20%,
lender usually requires
Private Mortgage Insurance (PMI)
– Buyer is seen as more risky—has
little equity in the home.
– Usually adds $40-$70 to monthly
payment.
– Protects the lender from the buyer
defaulting on the loan (does not
protect you!).
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2. Points . . .
 One-time fee charged by lender which
increases effective rate of interest.
 Represent a premium paid for obtaining
a lower mortgage rate (pay more up front
at closing for slightly lower payments).
 Usually 0–3 points assessed on a
mortgage; paying points does not lower
the amount borrowed.
 One point = 1%of the loan amount (not
the purchase price).
. . . and Closing Costs:
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 Expenses paid by borrower to close on
the purchase of a home.
 Can be 50% or more of down payment
costs and may include:
– Loan application and origination fees
– Points, if any
– Title search and insurance
– Attorney fees
– Appraisal fees
– Other costs, such as inspections, credit
report, survey of property, filing fees, etc.
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3. The Mortgage Payment (PITI):
Composed of 4 parts:
P
I
T
I
— Principal
— Interest
— Taxes
— Insurance
Go to lender to repay
mortgage
Collected by lender
and held in escrow
account
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Lenders' guidelines determine your
maximum monthly mortgage payment.
Typical Affordability Ratios:
– Monthly mortgage payment less
than 25–30% of monthly gross
income.
– Total of all monthly installment loan
payments less than 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?
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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
4. Property Taxes & Insurance:
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 Typically, each month the lender collects
1/12 of yearly amount and places in
escrow account.
 Lender then pays these expenses on
homeowner's behalf when they come
due.
 It is possible for the homeowner to pay
these expenses directly; requires
discipline to have the money when
needed, but gives more flexibility and the
opportunity to earn interest.
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5. Maintenance & Operating Expenses:
May be greater for larger or older homes
 Consider upkeep expenses:
– Painting
– Repairs
– Lawn maintenance
 Consider operating expenses:
– Utilities
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Calculating the Mortgage Payment:
Example:
What will the monthly mortgage
payments be (PI only) on a
$100,000, 30-year, 7% mortgage?
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Use the financial calculator:
Set on 12 P/YR
and END mode:
Set on 1 P/YR
and END mode:
100000 +/7
360
PMT
100000 +/7/12
360
PMT
PV
I/YR
N
$665.30
PV
I/YR
N
$665.30
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The Mortgage Payment
— Mostly Interest
700
600
Monthly
payment
$665.30
500
INTEREST
400
($139,508 total)
300
200
PRINCIPAL
100
($100,000)
0
0
5
10
15
20
25
30
Years
Note that most of the mortgage payment will go toward
interest until after year 20!
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Over the 30-year life of the loan,
the buyer will pay:
$665.30 x 360
Loan amount
Interest paid
=
=
=
$239,508
–100,000
$139,508
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The Home-Buying Process
 Shop the market and decide whether
to use an agent.
– Most realtors belong to Multiple
Listing Service (MLS) and have access
to a large part of the market.
– Agents typically are employed by
seller and are paid only if they make a
sale.
– Commissions range from 5-7% of
sales price.
 Prequalify and apply for a mortgage.
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 Present a sales contract and an
earnest money deposit.
 Go through the closing process;
governed by Real Estate Settlement
Procedures Act (RESPA).
– Title check necessary to make sure
title is clear and free of liens.
– Closing statement provides details
of costs for both buyer and seller.
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Financing the Transaction
 Shop various lenders for mortgage
– Commercial banks
– Savings & loans
– Credit unions
– Mortgage banks
 Mortgage brokers
Online mortgage resources
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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
house payment (PITI) can increase!
– Balloon-payment mortgages are a type
of fixed rate mortgage with large final
payment.
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Adjustable Rate Mortgage (ARM)
Interest rate varies, causing monthly
payments (PI) to vary. May cause negative
amortization!
Features of ARMs:
–Adjustment period
–Index rate
–Margin
–Interest rate caps
–Payment caps
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Other Mortgage Payment Options
–Graduated-payment mortgages
–Growing-equity mortgages
–Shared-appreciation mortgages
–Biweekly mortgages
–Buy-downs
 Conventional mortgage—lender
assumes all risk of loss. May require
larger down payment and PMI.
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 FHA mortgage—payments insured by
Federal Housing Administration.
Feature lower down payments, interest
rates and closing costs.
 VA loan—payments guaranteed by
Veterans Administration. One-time
loan with no down payment for
veterans.
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Refinancing your mortgage
– Can reduce your
monthly payment if
new rate is lower;
– Can reduce the total
borrowing costs in
financing the home;
– But you will probably have to pay
closing costs on the new loan!
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THE END!