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Chapter 8

The Home and


Automobile
Decision

Learning Objectives
1. Make good buying decisions.
2. Choose a vehicle that suits your needs and
budget.
3. Choose housing that meets your needs.

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Learning Objectives
4. Decide whether to rent or buy housing.
5. Calculate the costs of buying a home.
6. Get the most out of your mortgage.

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Introduction
Buying a home is the single biggest
investment most people will make.
Buying a car is another major purchasing
decision.
Must fit lifestyle and wallet.
Probably need a loan making dramatic
impact on personal finances.
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Smart Buying
Step 1: Differentiate Want From Need
Step 2: Do Your Homework
Step 3: Make Your Purchase
Step 4: Maintain Your Purchase

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Smart Buying in Action:


Buying a Vehicle
Choices to consider:
Buy new
Buy used
Leasing

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Smart Buying in Action:


Buying a Vehicle
Step 1: Differentiate Want From Need
Features and qualities wanted
Features and qualities needed

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Smart Buying in Action:


Buying a Vehicle
Step 2: Do Your Homework
How much can you afford?
Down payment
Monthly payment

Which vehicle is right for you?


Comparison shopprice and attributes
Operating and insurance costs, and warranty.

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Smart Buying in Action:


Buying a Vehicle
Step 3: Make Your Purchase
Get a fair price:
Know the dealer cost or invoice price
Dealer holdback2 to 3% that manufacture
gives the dealer on the sale of an automobile
Approach dealers and get quotes
Negotiate

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Smart Buying in Action:


Buying a Vehicle
Step 3: Make Your Purchase
Financing Alternatives:

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Cheapestcash
Investigate all financing options before buying.
Keep financing out of the negotiations.
The shorter the term, the higher the monthly
payments.

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Smart Buying in Action:


Buying a Vehicle
Step 3: Make Your Purchase
Leasing: ideal for financially stable, want
new car every few years, drive less than
15,000 miles annually, good credit, no down
payment
Closed-end or walk-away lease
Purchase option
Open-end lease

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Smart Buying in Action:


Buying a Vehicle
Step 3: Make Your Purchase
Keys to getting a good lease:

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Negotiate value for car before signing lease


Minimum down payment
Warrantydefine normal wear and tear
Termination fee
Depreciation factor
Rent or finance charge

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Smart Buying in Action:


Buying a Vehicle
Step 4: Maintain Your Purchase
Keep vehicle in best running condition.
Dont ignore signs of trouble.
Your first line of protection is the warranty.
Know your rights under the Lemon laws.
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Smart Buying in Action:


Housing
Many people equate home ownership with
financial success.
Housing costs can take up over 25% of aftertax income.
Home ownership is also an investment
biggest investment you will ever make.
Use smart-buying approach.
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Your Housing Options


Houses:
Offers space and privacy
Most potential for capital appreciation
Responsible for maintenance, repair, and renovations

Cooperatives and Condominiums:


Homeowners fee
Planned unit developments

Apartments and other rental housing


Low maintenance
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Smart Buying in Action:


Housing
Step 1: Differentiate Want From Need
What about the house is important?
Know what you want before you look.
Affordability, location, neighborhood,
conveniences, schools

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Smart Buying in Action:


Housing
Step 2: Do Your Homework
Investigate the potential home and all that
goes along with it:
Neighborhood, community lifestyle, satisfy
needs.

How much you can afford to pay?

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Smart Buying in Action:


Housing
One-time Costs:
Down payment
Closing/settlement costs

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Points or discount points


Loan origination fee
Loan application fee
Appraisal fee
Title search fee

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Smart Buying in Action:


Housing
Recurring Costs
Monthly mortgage payments
PITI

Maintenance and Operating Costs:


repairs, renovations, upgrades, landscaping

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Renting Versus Buying


Decision based on lifestyle
Renting advantages:
Financial and lifestyle flexibility

Compare costs for each alternative


Buying advantages:
Longer stay and appreciation, itemized taxes,
forced savings
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Determining What You Can


Afford
What is the maximum amount that a bank
will lend me?
Financial history
Ability to pay
Appraised home value

Should I borrow up to this maximum?


How big a down payment can I afford?

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Financing the PurchaseThe


Mortgage
Sources of mortgages:
S&Ls and commercial banks
Credit unions and mutual savings banks
Mortgage bankersoriginate mortgage
loans, sell to banks, pension funds,
insurance companies and collect payments
Mortgage brokersmiddlemen comparison
shop for a fee to secure mortgage loans for
borrowers but do not originate the loans

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Conventional and GovernmentBacked Mortgages


Conventional loansfrom a bank or S&L
secured by the property
Government-backed loansloan from
traditional lender but insured by government
FHA and VA loans:
lower interest rate, smaller down payment, less
strict financial requirements
more paperwork, higher closing costs, limited
funding

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Fixed-Rate Mortgages
Monthly payment doesnt change regardless
of market interest rate changes.
Can lock in low rates for the life of the loan.
An assumable loan can be transferred to a
new buyer.
Prepayment privilege allows early cash
payments to be applied to principal.
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Adjustable-Rate Mortgages
(ARM)
Interest rate of ARM fluctuates with level of
current interest rates.
Initial rateteaser ratelow for only a
short time period then adjusted upward.
Interest rate indexrates on ARMs are tied
to an index not controlled by the lender,
such as 6- or 12-month U.S. Treasuries.

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Adjustable-Rate Mortgages
Marginthe amount over the index rate that
the ARM is set.
Adjustment intervalhow frequently the
rate can be reset.

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Adjustable-Rate Mortgages
Rate Caplimits how much the interest rate can
change
Payment Capsets dollar limit on how much the
monthly payment can increase during any
adjustment period.
If interest rates go up, the monthly payment may be
too small to cover the interest duenegative
amortization.
Unpaid interest is added to the unpaid loan balance,
increasing its size.
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Adjustable-Rate Mortgages
ARM Innovations:
Convertible ARMto fixed-rate loan
Reduction-option ARMone time
opportunity to adjust interest rate.
Two-step ARMcombined aspects of fixedrate and ARM.

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Adjustable-Rate Versus
Fixed-Rate Mortgages
ARMs:
low interest rate in early years.
can get larger loan because PITI is lower.
reset interest rates push ARM payments
upward
Fixed-rate mortgages:
In general, fixed-rate better than ARM.
Payments never change.
Allows for control and planning.
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Specialty Mortgage Loan Options


Balloon Payment Mortgage Loansmall
monthly payments for 5-7 years, then entire
loan due.
Graduated Payment Mortgagepayments
set in advance, rising for 5-10 years, then
level off.
Growing Equity Mortgagedesigned to let
homebuyer pay off mortgage early.
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Specialty Mortgage Loan Options


Shared Appreciation Mortgageborrower
receives below-market interest rate, lender
receives a portion of future appreciation.
Interest Only Mortgageinterest only
payment for initial set period, then pay both
interest and principal for remainder of loan.

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Specialty Mortgage Loan Options


Option Payment ARM Mortgagescan make
different types of mortgage payments each
month
Options include:
Amount less than interest due
Interest only
Payment amount of 150- or 30-year fixed-rate
loan

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Risks Associated with Specialty


Mortgages
Big jump in monthly payments if interest
rates rise
Read fine print
Know how much your monthly payment
could increase, when, and whether you could
afford them
Penalties
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Beware of Subprime Mortgages


and Predatory Lending
Subprime mortgagesmortgages taken out
by borrowers with low credit scores.
Predatory lenders take advantage of these
lenders.
Abusive loanshigh-cost loans with little
chance of paying off
Avoid predatory loans with knowledge.
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Mortgage Decisions:
Length or Term of the Loan
15- or 30-year maturity on mortgage?
Prepayment opportunities
Size of monthly payment
Interest rate

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Smart Buying in Action:


Housing
Coming up with the down payment
Save, gifts from family and friends
At least 5% of closing costs have to come from homebuyer
Gift letter

Private Mortgage Insurance


Allows you to borrow more than 80% of appraised home
value
Charges .3 to 1.5% of the loan amount

Prequalifyinghave maximum amount youll qualify


for confirmed by a lender
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Smart Buying in Action:


Housing
Step 3: Make Your Purchase
Comparison shop
Traditional real estate agent
Independent or exclusive buyer-broker
Get it inspected
Make an offer and haggle
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Smart Buying in Action:


Housing
Contract
Earnest money
Closing
Settlement or closing statement

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Smart Buying in Action:


Housing
Step 4: Maintain Your Purchase
Pay attention to refinancing options
Consider refinancing if rates fall 2 percent or
more
Incur closing costs again

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Summary
Separate needs from wants, compare products,
negotiate, maintain product, and resolve complaints.
Lease or buy a vehicle that fits both your personal
and financial needs.
Choose housing that meets your needs, preshop,
comparison shop home and financing, and maintain
if your purchase.
Get the most out of your mortgage.
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