MAKING AUTOMOBILE &
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
Maintain and repair after you buy.
Choosing a Car
Factors to Consider:
New or used?
Size, body style, and features
Reliability and warranties
What to do with present car
Mileage ratings and safety features
The Purchase Transaction
Discuss price first, not financing or
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.
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
Homeowners can possibly use an
equity line of credit to pay off auto
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
The Leasing Process
– When the lease is over, you ―walk
away‖ from the car.
– Most customers choose this type.
– 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.
Lease payment calculation based on:
1. Capitalized cost (price) of the car
2. Estimated residual value at end of
3. Money factor (financing rate) on
4. Term or length of lease (typically 2
to 5 years)
Meeting Housing Needs
Single family home
– Most popular type.
– Offers more privacy
and property control.
– Cost has increased
dramatically in recent
– Can be apartment, townhouse, or cluster
– Buyer receives title to an individual unit
and jointly owns common areas.
– Owner usually pays monthly
homeowner’s fee in addition to
– Generally costs less than single family
– 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.
– Those who do not have enough cash for
a down payment.
– Those who are unsettled in their job or
– Those who do not want responsibilities
of home ownership.
– Those who feel current conditions for
home ownership are unattractive.
The Rental Option
A rental contract protects both the lessor
(owner) and lessee (one who leases).
Understand your rights and responsibilities
– Monthly payment and due date
– Penalties for late payment
– Length of lease agreement
– Deposit requirement
– Renewal options, restrictions, etc.
How Much Housing
Can You Afford?
Benefits of owning a home
– Provides personal satisfaction
– Offers tax shelter
– Acts as inflation hedge
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
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
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
– Protects the lender from the buyer
defaulting on the loan (does not
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).
. . . 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.
3. The Mortgage Payment (PITI):
Composed of 4 parts:
P — Principal Go to lender to repay
I — Interest
Collected by lender
T — Taxes
and held in escrow
I — Insurance account
Lenders' guidelines determine your
maximum monthly mortgage payment.
Typical Affordability Ratios:
– Monthly mortgage payment less
than 25–30% of monthly gross
– Total of all monthly installment loan
payments less than 33–38% of
monthly gross income.
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?
Mortgage payment should not
$4,500 x .25 = $1,125
Total installment payments should
$4,500 x .33 = $1,485
4. Property Taxes & Insurance:
Typically, each month the lender collects
1/12 of yearly amount and places in
Lender then pays these expenses on
homeowner's behalf when they come
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. Maintenance & Operating Expenses:
May be greater for larger or older homes
Consider upkeep expenses:
– Lawn maintenance
Consider operating expenses:
Calculating the Mortgage Payment:
What will the monthly mortgage
payments be (PI only) on a
$100,000, 30-year, 7% mortgage?
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
The Mortgage Payment
— Mostly Interest
400 INTEREST $665.30
0 5 10 15 20 25 30
Note that most of the mortgage payment will go toward
interest until after year 20!
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
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
– Commissions range from 5-7% of
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.
Financing the Transaction
Shop various lenders for mortgage
– Commercial banks
– Savings & loans
– Credit unions
– Mortgage banks
Online mortgage resources
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
Adjustable Rate Mortgage (ARM)
Interest rate varies, causing monthly
payments (PI) to vary. May cause
Features of ARMs:
–Interest rate caps
Other Mortgage Payment Options
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
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!