7-1: Buying a Home

Costs of Financing a home: Purchase price = tag price Downpayment = a percentage of

the purchase price; between 0% and 30%

Interest = cost of borrowing money Closing costs = fees and expenses

paid by the buyer to complete purchase

FINANCING: After the downpayment is paid,

the balance is paid by taking a mortgage loan from a bank or other lender.

Principal = Purchase price – downpayment

(amount borrowed) Interest is charged and is part of

monthly payments.

CLOSING COSTS:

Include: legal fees, title insurance, loan origination fees, appraisal and inspection fees, land surveys, and taxes

1% to 4% of purchase price

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MORTGAGE =part of principal+interest1) Fixed Rate Mortgage: equal

monthly payments. (use sample Amortization table on page 256)

ex. Find monthly payment on:a. $40,000 mortgage taken for 30

years at 9%$321.85

b. $75,000 loan for 25 yrs @7%: $530.08

c. $65,000 loan at 9% for 30 yrs: $523.01

ex

The Smiths are buying a house for $425,000. They are making a downpayment of 20%. The closing costs will be 3.5% of the purchase price.

1. How much is their downpayment?

2. How much are closing costs?

3. How much cash do they need to complete the sale?

4. How much are they borrowing?

DISCUSSION:

What are the benefits of buying a home?

What factors need to be considered in making the decision to buy a home?

How much interest do the homeowners end up paying?

7.1 Day 22) Variable or Adjustable Rate Mortgage: • the interest rate is not guaranteed• Usually rate is lower than Fixed R.M.• However, lender can increase or decrease

rate at specified intervals3) Graduated Payment Mortgage (GPM):• Starts with low payments that rise gradually4) Balloon payment mortgage: • Entire payment for first few years goes to

interest only; the last years pay off the principal.

REFINANCING A MORTGAGE

Why refinance? Interest rates go down!!!Refinance = take out a NEW

mortgage to pay off an OLD one.

Pay closing costs again, and sometimes prepayment penalty

Ex. The Rowes had a fixed rate mortgage at 16.25%. The monthly payment on the old mortgage was $845.86. They got a new mortgage at 13% and their new monthly payment is $585.79. To get the new mortgage, they had to pay closing costs of $935. They also had to pay a prepayment penalty of $500.

a. How much did they save in the first year?

b. How much did they save the second year?

7-2: The Cost of Owning a Home

What are the ongoing expenses??? Property taxes

Repairs Maintenance Insurance Mortgage

interest

CONS (of owning a home) Depreciation=loss in value caused

by aging and use.Ex. Lisa’s home cost her $70,000. She

estimates that depreciation reduces the value of the home by 3% each year. Find the depreciation for 1 year.

$70,000 x 0.03 = $2,100 Loss of income on money

invested=money you would have otherwise earned interest on!!!

PROS (of owning a home) Tax deduction = a “break” on

income tax Equity=the difference between what

is owed and the value of the house. RENT OR OWN???Advantages of renting: no big

downpayment, no maintenance costsDisadvantages: no income tax benefits,

no equity earned

7.3 Depreciating a Motor Vehicle

DISCUSSION:

What do you think has more value: a 3-year-old car with 18,000 miles ORa 1-year-old car of the same make and model with 34,000 miles?

Depreciation= loss of value The difference between a car’s

original cost and its resale or trade-in value.

Resale value= market value Find in Kelley Blue Book

Trade-in value = amount you get for your old car when you trade it in for a new car.

Ex. Alfonzo buys a car for $16,500 and 4 years later trades it in for $7,500. Find the total depreciation.

$16,500 – 7,500 = $9,000

Finding Average Annual DepreciationEx. A car that cost $14,800 has an estimated trade-in value of $5,900 at the end of 4 years. Find the average annual depreciation.

($14,800 – 5,900) = $8,900$8,900 ÷ 4 = $2,225

Finding Rate of Depreciation

Rate of Depreciation = (straight-line method)

Average annual depreciationOriginal cost

ex. Original cost = $14,500. At the end of 4 years, the resale value of a car is $5,600. Find rate of depreciation.

($14,500 – 5,600) ÷ 4 = $2,225 ~ average annual depreciation

$2,225 ÷ $14,500 = 0.153 or 15%

7-4 Cost of Operating a Motor Vehicle

Operating costs = sum of all the annual expenses: Insurance Gas, Oil, Inspection fees, tires,

repairs License Garage rent, parking fees Toll, taxes General upkeep Depreciation Loss of interest on investment

Kay paid $14,200 for her car. Her annual payments for insurance, gas, oil, and other repairs total $1,900. The car depreciates 18% a year. Kay could have earned $568 interest on her investment in the car. What was her total annual cost of operating the car?

$1,9000.18 x $14,200 + 2,556

568 $5,024

Leasing a Motor Vehicle Leasing = renting a car for a

fixed amount of time Leases usually run for 24, 36, or

48 months The number of miles a car or

truck can be driven is LIMITED. There is a fee for excess mileage.