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Prentice-Hall, Inc. 1
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.
Prentice-Hall, Inc. 56
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
Prentice-Hall, Inc. 58
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