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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 CarFactors 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

5-4

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.

5-5

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.

5-11Cooperative Apartment

– Fees cover service, maintenance, taxes, and mortgage on entire building.

– Usually costs less than renting similar 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.

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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

Contract specifies– Monthly payment and due date– Penalties for late payment– Length of lease agreement– Deposit requirement– Renewal options, restrictions, etc.

A rental contract protects both the lessor (owner) and lessee (one who leases). Understand your rights and responsibilities BEFORE signing!

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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

5-17 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!).

5-182. 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).

5-19. . . and Closing Costs: 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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Composed of 4 parts:

P — Principal

I — Interest

T — Taxes

I — Insurance

Go to lender to repay mortgage

Collected by lender and held in escrow account

3. The Mortgage Payment (PITI):

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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.

Lenders' guidelines determine your maximum monthly mortgage payment.

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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

5-244. Property Taxes & Insurance: 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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Example:

What will the monthly mortgage payments be (PI only) on a

$100,000, 30-year, 7% mortgage?

Calculating the Mortgage Payment:

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Set on 12 P/YR

and END mode:

100000 +/- PV

7 I/YR

360 N

PMT $665.30

Use the financial calculator:

Set on 1 P/YR

and END mode:

100000 +/- PV

7/12 I/YR

360 N

PMT $665.30

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The Mortgage Payment— Mostly Interest

0

100

200

300

400

500

600

700

0 5 10 15 20 25 30Years

Monthlypayment$665.30INTEREST

($139,508 total)

Note that most of the mortgage payment will go toward interest until after year 20!

PRINCIPAL($100,000)

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Over the 30-year life of the loan, the buyer will pay:

$665.30 x 360 = $239,508

Loan amount = –100,000

Interest paid = $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.

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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.

Prequalify and apply for a mortgage.

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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

5-33

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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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

Adjustable Rate Mortgage (ARM)

5-35 Conventional mortgage—lender

assumes all risk of loss. May require larger down payment and PMI.

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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– But you will probably have to pay closing costs on the new loan!

Refinancing your mortgage– Can reduce your monthly

payment if new rate is lower;

– Can reduce the total borrowing costs in financing the home;