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Prequalify for a Loan

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					                      5-1


     CHAPTER 5:

MAKING AUTOMOBILE &
 HOUSING DECISIONS
                                     5-2

    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.
                                        5-3

         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
                                      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.
                                          5-6

        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
                                           5-7

     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.
                                           5-8
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)
                             5-9

  Meeting Housing Needs
Single family home
  – Most popular type.
  – Offers more privacy
    and property control.
  – Cost has increased
    dramatically in recent
    years.
                                          5-10
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.
                                           5-11
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.
                                         5-12
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.
                                           5-13

          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.
                                     5-14

     How Much Housing
      Can You Afford?
Benefits of owning a home
  – Provides personal satisfaction
  – Offers tax shelter
  – Acts as inflation hedge
                                   5-15

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
                                 5-16

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!).
                                            5-18
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).
                                                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.
                                         5-20
3. The Mortgage Payment (PITI):

        Composed of 4 parts:
 P   — Principal   Go to lender to repay
                   mortgage
 I   — Interest
                   Collected by lender
 T   — Taxes
                   and held in escrow
 I   — Insurance   account
                                        5-21

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.
                                       5-22


               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?
                                      5-23


 Mortgage payment should not
  exceed:
         $4,500 x .25 = $1,125

 Total installment payments should
  not exceed:
         $4,500 x .33 = $1,485
                                          5-24
4. 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.
                                      5-25
5. Maintenance & Operating Expenses:
 May be greater for larger or older homes
  Consider upkeep expenses:
    – Painting
    – Repairs
    – Lawn maintenance
  Consider operating expenses:
    – Utilities
                                   5-26



Calculating the Mortgage Payment:
            Example:
 What will the monthly mortgage
    payments be (PI only) on a
 $100,000, 30-year, 7% mortgage?
                                              5-27


Use the financial calculator:
Set on 12 P/YR         Set on 1 P/YR
and END mode:          and END mode:

100000 +/-   PV        100000 +/-   PV
    7        I/YR       7/12        I/YR
  360        N           360        N
 PMT         $665.30    PMT         $665.30
                                                              5-28

          The Mortgage Payment
            — Mostly Interest
700
600
                                                    Monthly
500                                                 payment
400           INTEREST                              $665.30
              ($139,508 total)
300
200
                                 PRINCIPAL
100
                                  ($100,000)
  0
                                                    Years
      0   5        10      15    20    25      30

Note that most of the mortgage payment will go toward
interest until after year 20!
                                     5-29



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
                                         5-30

   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.
                                         5-31
 Prequalify and apply for a mortgage.
 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.
                                      5-32

 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.
                                         5-34
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
                                   5-35
Other Mortgage Payment Options
  –Graduated-payment mortgages
  –Growing-equity mortgages
  –Shared-appreciation mortgages
  –Biweekly mortgages
  –Buy-downs
                                          5-36
 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.
                                        5-37

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!
           5-38




THE END!

				
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