Prentice-Hall, Inc.1 Chapter 8 The Home and Automobile Decision

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Chapter 8

The Home and Automobile Decision

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Smart Buying--Controlled Buying

Step 1: Do your homework.– Is the purchase a “need’ or “want”?– Consider alternative products and features.– Does the purchase fit your budget?

Step 2: Make your selection.– Comparison shop: price, product features, and

quality.– Be informed: check library and Web sources.

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Smart Buying (cont’d)

Step 3: Make your purchase.– Negotiate the price.– Evaluate financing alternatives.– Complete the purchase.

Step 4: Maintain your purchase.– Resolve complaints; keep good records.

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Transportation Needs

Step 1: Narrow your choices.Step 2: Pick your vehicle.Step 3: Make the purchase.

– Lease versus buy decisionStep 4: Maintain your purchase.Step 5: Consumer protection and your

vehicle.

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Step 1: Narrow Your Choices

Consider your lifestyle and needs versus wants

Look at the alternatives

Fit your car into your budget; calculate the payment.

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Step 2: Pick Your Vehicle Do your comparison shopping via the internet

or publications.– compare price– compare features– compare quality

Determine what is available in your price range.

Test-drive the exact vehicle you are considering.

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Step 3: Make the Purchase Take advantage of

sales, but negotiate the price– know the dealer’s 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 3: Make the Purchase (cont’d)

Evaluate financing alternatives– determine the length of financing– shop around to find the best interest rate– choose a financing period and rate to give you an

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 3: Lease Versus Buy

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 lease’s 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 doesn’t

depreciate too quickly.

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Calculating Your Monthly Lease Payment

Your lease payment depends on the following factors– agreed-upon price – up-front fees– down payment or trade allowance– residual value– rent or finance charge– length of the lease

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Step 4: Maintain Your Purchase

Read the owner’s manual and perform regular maintenance.

Don’t ignore warning signals.

Choose a good garage; check training and experience.

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Step 5: Consumer Protection and Your Car

Know and use your warrantyUse 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

Step 1: Do your shopping homeworkStep 2: Make your selectionStep 3: Make your purchaseStep 4: Postpurchase activities

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Comparing Options for Housing

Houses – typically single-family, free-standing dwellings

Cooperatives – multi-unit dwellings Condominiums – multi-unit dwellings Planned unit developments (PUDs) –

planned development with common land Apartments and other housing – multi-unit

dwellings

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Houses

Advantages– more space – greater privacy– builds equity

Disadvantages– maintenance time

and costs– repair costs– resale hassles

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Cooperatives

Corporate-owned dwellings in which the residents, as shareholders, own stock representative of the value of their unit. Monthly homeowner’s fee.

Advantages– low maintenance– more amenities– higher security

Disadvantages– lower capital

appreciation– difficult to sell– less privacy– harder to finance

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Condominiums Residents have

sole ownership of the living space but joint ownership of the land and common areas. Monthly maintenance fee.

Advantages– low maintenance– more amenities– higher security

Disadvantages– lower capital

appreciation– difficult to sell– less privacy

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Planned Unit Developments (PUDs)

Own home and land it sits on as well as shared ownership of the development.

Monthly homeowner’s fee for maintenance and common expenses. Popular on West Coast.

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Apartments and Other Housing

Advantages– lower cost– ease of moving (no house to sell)– little upkeep

Disadvantages– limited remodeling ability– limited lifestyle choices (e.g., pet)– less privacy

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Housing Step 1: Do Your Housing 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 (cont’d)

Determine what’s 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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Comparing Needs Versus Wants for Housing

Decide on the fundamentals such as bathrooms, bedrooms, and closet space

Decide on property size Compare other considerations like school

systems, proximity to shopping centers, or safety

Consider the future -- such as additional family members

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Costs of Housing: What’s Involved in Ownership

One-time or initial costsRecurring costsMaintenance and operating costs

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One-Time or Initial Costs

Down paymentClosing or settlement costs

– Discount points – Loan origination fees– Loan application fee – Appraisal fee– Other fees and costs

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Recurring Cost:

Monthly mortgage payments(PITI)

Maintenance and operating expenses

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Monthly Mortgage Payments (PITI)

Principal -- what you borrowed Interest -- the cost of borrowingTaxes -- support of government Insurance -- protection of your dwelling and

contents

Note: T & I are held in an escrow account.

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Maintenance and Operating Costs

Repairs to the structure

Replacing an appliance

Landscaping

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Weighing the Alternatives of Renting Versus Buying

Personal and lifestyle considerations

Financial considerations– Appreciation with

time.– Tax considerations.

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Advantages of Renting

Mobility No downpayment 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 homeAllows for capital appreciationGreater personal freedomTax advantagesProtection from rising rent costsPotential source of cash with home

equity loan

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Determining What’s 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 What’s Affordable: Other Factors

Calculation of your mortgage limit– 28% rule– 36% rule– 80% rule

Prequalification, or knowing for sure what is affordable

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Determining What’s Affordable: Other Factors

Accumulation of a down payment– Down payment sources and “gift letters”– FHA, VA, and FmHA federally-backed

loans require a lower downpayment– Private mortgage insurance (PMI)– IRA loan of up to $10,000 for first-time

homebuyer

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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 rentingNegotiating a sales priceSigning the sales contractFinancing the purchase – the mortgage

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Guidelines for Renting

Determine what you can affordCompare the location with shopping,

employment, and schoolsUnderstand the leaseGet every detail in writingResearch the reliability of the landlordAcquire renter’s insurance

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Negotiating a Sales PriceAlways haggle on the actual purchase

price and counteroffers Include all contingenciesConsider closing costsOffer earnest moneyNote: You may never see the seller

because often the real estate agents carry the offers between parties

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Signing the Sales Contract Always have a fixed

price Do a title search Perform a pest or

other inspection Make the contract

contingent on receiving the proper financing

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Signing the Contract (cont’d)

Divide the utilities, insurance, taxes, and interest equitably with the seller

Stipulate the condition of the dwelling upon transfer

Include all other contingencies that may interfere with a satisfactory purchase

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Financing the PurchaseShop for the lowest interest rate.Determine where you want to finance.Determine the length of the mortgage.Choose the type of mortgage.Note: Make sure you understand every

aspect of the mortgage before you sign. This could be your largest purchase ever.

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Sources of Mortgages

Mortgage bankers Mortgage brokers

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Conventional Or Government-Backed?

ConventionalVeteran’s Administration (VA)

mortgagesFederal Housing Administration (FHA)

mortgages

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Government-Backed Mortgages

Advantages– Lower interest– Smaller down payment requirement– Less strict lending standards

Disadvantages– More paperwork to qualify– Higher closing costs– Maximum lending limits

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Types of Mortgages

Fixed-rate mortgage loans

Adjustable-rate mortgage (ARM) loans

Other mortgage loan options

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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 (cont’d)

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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ARM Innovations

ConvertibleReduction-optionTwo-stepPrice level adjusted

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Other Mortgage Loan Options

Balloon payment mortgageGraduated payment mortgageGrowing equity mortgageShared appreciation mortgage

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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 Decisions: Term 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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Mortgage Decisions: Term of the Loan

Two other considerations:

– Time value of money

– The effect of taxes

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Housing Step 4: Postpurchase Activities

Time and money for upkeep and maintenance.

Refinancing your mortgage– 2% rule– closing costs

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Summary

Smart buying– Step 1: Do your homework to narrow

your car choice.– Step 2: Make your selection.– Step 3: Make your purchase.– Step 4: Maintain your purchase– Step 5: Consider consumer protection and

your car.

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Summary (cont’d)

Choosing a vehicle– consider your needs versus your wants– look at the alternatives– fit your car into your budget– do your comparison shopping via the internet or

publications– determine what is available in your price range– test-drive the exact vehicle you are considering

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Summary (cont’d)

Deal negotiation– take advantage of sales, but always

negotiate the price– know the dealer’s cost of the vehicle– understand the various dealer markups– be aware of any rebate that may apply– evaluate financing alternatives

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Summary (cont’d)

Leasing alternatives– closed-end leases, or walk-away leases– open-end leases

Choosing a housing type– decide on the fundamentals such as bathrooms,

bedrooms, and closet space– decide on property size– compare other considerations like school

systems, or proximity to shopping centers

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Summary (cont’d)

Smart buying for housing– Housing Step 1: Homework– Housing Step 2: Selection– Housing Step 3: Making the purchase– Housing Step 4: Postpurchase activities

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Summary (cont’d)

Buying versus renting– personal and lifestyle considerations– financial considerations

Types of mortgages– fixed-rate mortgage loans– adjustable-rate mortgage (ARM) loans– other mortgage loan options

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Summary (cont’d)

Sources of mortgages– mortgage bankers– mortgage brokers– conventional mortgages – government-backed mortgages