The Home and Automobile Decision

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Chapter 8

• The Home and Automobile Decision

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Transportation Needs

• Step 1 Narrowing your choice
• Step 2 Picking your vehicle
• Step 3 Making the purchase
• Step 4 The lease-versus-buy decision
• Step 5 Maintaining your purchase
• Step 6 Consumer protection and your car

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Step 1Narrowing Your Choice

• Lifestyle
• Needs versus wants
• Alternatives
• Fit your car into your budget

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Step 2Picking Your Vehicle

• Comparison shop via the internet or
  publications
  
• Compare price
• Compare features
• Compare quality
• What is available in your price range?
• Test-drive the exact vehicle you are considering

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Step 3Making the Purchase

• Negotiate the price
• Know the dealers cost of the vehicle and any
  holdback
  
• Understand the various dealer markups
• Be aware of any rebate(s) that may apply

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Step 3Making the Purchase (contd)

• Evaluate financing alternatives
• Length of financing
• Find the best interest rate
• Affordable monthly payment
• Consider a lease
• Negotiate a fair vehicle value and a low rent or
  finance charge
  
• Choose a vehicle with slow depreciation

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Step 4 The Lease-Versus-Buy Decision

• Closed-end leases, or walk-away leases
• Normally offer a purchase option
• Require the dealer to be responsible for resale
• Account for about 80 of all leases
• Open-end leases
• Compare the market value to the leases residual
  value of the vehicle
  
• Are to be avoided because you pay the difference

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When is Leasing a Good Option?

• If you are financially stable
• If you drive less than 15,000 miles annually
• If you take good care of your vehicles
• If you use your vehicles for business travel
• If you do not modify your vehicles
• If the vehicle you are considering doesnt
  depreciate too quickly

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Step 5Maintaining Your Purchase

• Read the owners manual and perform regular
  maintenance
  
• Dont ignore warning signals
• Choose a good garage check training and
  experience

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Step 6 Consumer Protection and Your Car

• Know and use your warranty.
• Use the lemon laws, if necessary, to get a
  refund
  
• Made 4 attempts to fix the problem
• Car out of service at least 30 days during the 12
  months after purchase or the first 12,000 miles

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Addressing Your Housing Needs

• Housing Step 1 Homework
• Housing Step 2 Selection
• Housing Step 3 Making the purchase
• Housing Step 4 Postpurchase activities

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Housing Step 1 Homework

• Compare your needs versus wants for housing
• Compare your options for housing and the costs of
  each
  
• Weigh your alternatives of renting versus buying

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Housing Step 1 Homework (contd)

• Determine whats most affordable
• Lending standards
• Your financial history
• Your ability to pay
• The appraised value of the home
• Maximum mortgage
• The down payment
• Prequalifying

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Costs of Housing One-Time or Initial Costs

• Down payment
• Closing or settlement costs
• Discount points
• Loan origination fees
• Loan application fee
• Appraisal fee
• Other fees and costs

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Costs of Housing Monthly Mortgage Payments (PITI)

• Principal what you borrowed
• Interest the cost of borrowing
• Taxes support of government
• Insurance protection of your dwelling and
  contents
  

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Costs of Housing Maintenance and Operating Costs

• Repairs to the structure
• Replacing an appliance
• Landscaping

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Advantages of Renting

• Mobility
• No down payment
• Can be less expensive
• Protection from declining housing values
• More extensive amenities
• No home repair or maintenance
• No groundskeeping responsibilities
• No property taxes

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Advantages of Buying

• Build equity in your home
• Allows for capital appreciation
• Greater personal freedom
• Tax advantages
• Protection from rising rent costs
• Potential source of cash with home equity loan

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Determining Whats Affordable Lending Standards

• 1. Financial history
• Income stability
• Credit history
• 2. Ability to pay
• Housing cost ratio at a maximum of 28 of gross
  income
  
• Housing and other long-term debt ratio at a
  maximum of 36 of gross income
  
• 3. Appraised home value

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Determining Whats Affordable Other Factors

• Calculation of your mortgage limit
• 28 rule (front-end ratio)
• 36 rule (back-end ratio)
• 80 rule (home-equity rule)
• Prequalification, or knowing for sure what is
  affordable

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Housing Step 2 Selection

• The search process
• Use a traditional real estate agent
• Use an independent or exclusive buyer-broker
• Use the Internet to learn about buying a home
• The inspection process
• Structural
• Mechanical

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Housing Step 3 Making the Purchase

• Guidelines for renting
• Negotiating a sales price
• Signing the sales contract
• Financing the purchase the mortgage

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Guidelines for Renting

• Determine what you can afford
• Compare the location with shopping, employment,
  and schools
  
• Understand the lease
• Get every detail in writing
• Research the reliability of the landlord
• Acquire renters insurance

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Negotiating a Sales Price

• Always haggle on the actual purchase price and
  counteroffers
  
• Include all contingencies
• Consider closing costs
• Offer earnest money

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Financing the Purchase

• Shop for the lowest interest rate
• Determine where you want to finance
• Determine the length of the mortgage
• Choose the type of mortgage

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Fixed-Rate Mortgage Loans

• Assumable loans allow for transfer of the
  mortgage with the home
  
• Prepayment privilege allows the payee to
  increase the monthly payment without a fee

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Adjustable-Rate Mortgage (ARM) Loans

• Initial rate the first rate on the mortgage,
  usually short-term
  
• Interest rate index determines annual rate
  adjustment
  
• Margin the difference between the index rate
  and the quoted rate
  
• Adjustment interval the length of time between
  adjustments

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Adjustable-Rate Mortgage (ARM) Loans (contd)

• Rate cap the maximum rate increase allowed
  either per year or over the life of the loan
  
• Payment cap the maximum allowable payment
  amount normally not a desired feature due to the
  risk of negative amortization

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Adjustable-Rate Versus Fixed-Rate Mortgages

• Fixed-rate issues to consider
• Fixed payments
• Lower interest rate risk
• No risk of negative amortization
• Adjustable-rate issues to consider
• Lower initial interest rate
• May qualify for a larger loan due to lower
  monthly payments
  
• With rising rates, rising payments

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Mortgage DecisionsTerm of the Loan

• 15-year advantages
• Less total interest paid
• Faster equity accumulation and payoff
• Lower interest rate
• 30-year advantages
• Lower monthly payments increase affordability and
  financial flexibility
  
• Higher time value of money
• Greater tax advantages due to interest payment
  deductions

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Housing Step 4Postpurchase Activities

• Time and money for upkeep and maintenance
• Refinancing your mortgage
• 2 rule
• Closing costs