Chapter 5

Making Automobile and Housing Decisions

LEARNING OUTCOMES

 Design a plan to research and select a new or used automobile

 2 Decide whether to buy or lease a car  3 Identify housing alternatives, assess the rental

option, and perform a rent-or-buy analysis  4 Evaluate the benefits and costs or homeownership

and estimate how much you can afford to pay for a home

 5 Describe the home-buying process  6 Choose mortgage financing that meets your needs

Guidelines for Purchasing Decisions

3

• Research purchase thoroughly considering the market and the personal needs

• Base the selection on the needs • Negotiate the best price and

arrange financing on favorable terms

• Understand all the terms of the sale before signing the contract

• Maintain the purchase and make necessary changes promptly

Factors that Affect Affordability

4

• Amount of down payment • Size of the monthly loan payment • Operating costs • Type of vehicle

• Gas, diesel, or hybrid • New or used • Size, body style, and features

• Other considerations • Trading in/selling, fuel economy,

safety measures

Purchase Transactions

5

• Negotiating price • Sticker price – Manufacturer’s

suggested retail price • Key to negotiating a good price is

knowing the dealer’s cost for the car • Closing the deal

• Sales contract: Agreement to purchase an automobile that states the offering price and all conditions of offer • When signed by the buyer and seller,

the contract legally binds them to its terms

Lease

6

• Arrangement in which the lessee receives the use of an asset in exchange for monthly payment • Closed-end lease • Open-end lease

Variables Affecting Monthly Lease Payment

7

Lease versus Purchase Analysis

8

• Performed to compare the differences between the total costs

• When the lease ends, the lessee can: • Return the car • Purchase the car

Housing Prices and the Recent Financial Crisis

9

• Analyze the history of housing prices

• Foreclosures: Lenders attempt to recover loan balances from borrowers who have quit making payments by forcing the sale of the home pledged as collateral

Types of Housing Units

10

Benefits of Owning a Home

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Types of Costs to be Considered

12

• Down payment: Portion of the full purchase price provided by the purchaser when a house or other major asset is purchased • Loan-to-value ratio: Maximum

percentage of the value of a property that the lender is willing to loan

• Private mortgage insurance (PMI): Policy that protects the mortgage lender from loss in the event the borrower defaults on the loan

Types of Costs to be Considered

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• Mortgage points: Fees charged by lenders at the time they grant a mortgage loan

• Closing costs: Expenses that borrowers pay when a mortgage loan is closed and they receive title to the purchased property

• Mortgage payments

PFIN6 | CH5

Types of Costs to be Considered

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• Property taxes: Levied by local governments on the assessed value of real estate for the purpose of: • Funding schools • Law enforcement • Local services

• Homeowner’s insurance • Required by mortgage lenders and covers the

replacement value of a home and its contents • Maintenance and operating expenses

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Home Buying Process

15

Home Buying Process

16

Sources of Mortgage Loans

17

• Mortgage loans • Secured by the property

• Mortgage bankers • Firm that solicits borrowers,

originates primarily government- insured and government-guaranteed loans, and places them with mortgage lenders

• Mortgage brokers • Firm that solicits borrowers,

originates conventional loans, and places them with mortgage lenders

Types of Mortgage Loans

18

Features of ARM

19

• Adjustment period • Period of time between rate or

payment changes • Index rate

• Baseline index rate that captures interest rate movements

• Margin • Percentage points a lender adds to

the index rate to determine the rate of interest

Features of ARM

20

• Interest rate cap • Limit on the amount that the interest

rate can increase each adjustment period and over the life of the loan

• Payment cap • Limit on the monthly payment

increase that may result from a rate adjustment

ARM

21

• Negative amortization • Principal balance on a mortgage loan

increases because the monthly loan payment is lower than the amount of monthly interest being charged

• Convertible ARM • Allows borrowers to convert from an

adjustable-rate to a fixed-rate loan • Two-step ARM

• Have two interest rates – one for the first 5 to 7 years of the loan, and another for the remaining term of the loan

Mortgage Payments Options

22

Mortgage Payments Options

23

Conventional, Insured, and Guaranteed Loans

24

Refinancing Mortgage

25

• If the interest rates drop, consider refinancing the mortgage • Should be refinanced after

comparing and analyzing the terms of old and new mortgages

SUMMARY

• Guidelines for purchase decisions • Research the purchase • Select the best item based on the

needs • Buy the item after negotiating • Maintain the purchase and make

necessary repairs • Leasing is an arrangement in

which the lessee receives the use of an asset in exchange for making monthly lease payments over a specified period

SUMMARY

 Bubble in real estate prices encouraged increase in construction and extraction of a lot of home equity through home equity loans and refinancing

 Home buying process  Shop the market  Use an agent  Apply for a mortgage  Enter into a sales contract  Close the deal

MG 105 Personal Financial Management Week 5

Making Automobile & Housing Decisions: Overview and Weekly Checklist

Overview

Welcome to Week 5: This week we will cover 5 as we explore the process of buying an automobile and a home.

After reading Chapter 5 and completing assignments, the student should be able to:

 Implement a plan to research and select a new or used automobile  Decide whether to buy or lease a car  Identify housing alternatives, assess the rental option, and perform a rent-or-buy analysis  Evaluate the benefits and costs of homeownership and estimate how much you can afford

for a home  Describe the home-buying process  Choose mortgage financing that meets your needs  This chapter discusses many important issues regarding automobile and housing decisions.

Week 5 Checklist

 Read Chapter 5 in your textbook  Watch Videos  Read the Lecture Notes  Participate on Wk5_ Discussion by Thursday- 11:59 PM  Complete Wk5_iGrad course by Sunday-5PM  Complete Wk5_Chapter _5 Quiz by Sunday – 5 PM