Personal Finance- Chapter 5 (Exam 2)

Closing Costs (2% to 7% of Purchase Price)

*Loan application fee •Loan origination fee •Title search •Attorney's fees •Appraisal fees •Home inspection •Mortgage tax •Filing fees •Credit reports •Miscellaneous

Closing the Deal:

- After the mortgage loan is approved •Governed by the Real Estate Settlement Procedures Act (RESPA) Prohibits kickbacks Requires clear disclosure of closing costs

Making Automobile and Housing Decision

- Buying a car is often the first large expenditure many people make. - It is the largest purchase, next to purchasing a home, for most people. - Buying a car involves what is a large sum of money for most people. - Most people buy many cars over their lifetimes. (Personal experience - 15 new cars and 7 used cars) - For these reasons, an informed, systematic approach is valuable

Other Adjustable-Rate Mortgages (ARMs)

Convertible ARMs: allow conversion to a fixed-rate loan during a specified period, e.g., between month 12 and month 60• Two-Step ARMs: limited to two interest rates, lower rate during the first 5 to 7 years, a higher rate for the remaining term.

Is buying a car an investment?

In most cases, a car is an asset, but not an investment. In most cases, it is an expense.

Adjustable-Rate Mortgages (ARMs)

Interest rate is adjusted at intervals (1 or 2 times per year) based on a rate index Monthly payments are adjusted accordingly Rates and monthly payments are usually lower than fixed-rate mortgages initially Borrower assumes most or all of the risk Annual interest caps: e.g., 1% to 2%, Lifetime caps: e.g., 5% to 8% Annual payment caps: e.g., 5% maximum - When interest rates are high and you expect them to go down

The Down Payment

It is Equity Required down payment is determined by the Loan-to-Value Ratio(the maximum percentage of the home value the lender will finance) Sources such as The Federal National Mortgage Association (Fannie Mae) can assist people lacking sufficient funds for down payment Down payments of less than 20% usually result in the requirement for Private Mortgage Insurance (PMI) - average cost is $40 to $70 per month

People may rent due to

Lacking funds for a down payment to buy Being unsettled in job or family status Don't want cares of home ownership Investing savings for a larger down payment for a better home Housing market or interest rates are not optimal

Variables Affecting Monthly Lease Payment

Lease Term- Lease period as mentioned in the contract Money Factor- Financing rate on a lease Residual Value- Remaining value of a leased car at the end of the lease term. Capitalized Cost- Price of a car that is being leased (less any capital reduction payment)

Property taxes

May be "escrowed" in the mortgage payments Fund schools and local services

Single-family homes

Most popular - stand-along or townhouses sharing a common wall, offer privacy and property control

Planning Over a Lifetime Auto and Housing Decision:

Pre-Family Independence: 20s: Start saving for a down payment on a house Compare renting versus buying a house Familiarize yourself with the various types of mortgages •Family Formation / Career Development: 30-45: Compare current mortgage rates to assess the value of refinancing Budget to make additional mortgage payments Save for the replacement of your car

Planning Over a Lifetime Auto and Housing Decision:

Pre-Retirement: 45-65: Periodically re-evaluate benefit of refinancing your mortgage Budget to pay off your mortgage before retiring Consider if different types of cars have advantages •Retirement: 65 and beyond: Re-evaluate housing choice and consider downsizing Pay off mortgage (if you still have one) Consider if more than one car is needed in retirement

Rental units

Range from duplexes, fourplexes, and single-family homes to large, high-rise apartment complexes containing several hundred units.

Key steps in buying a new car

Research to determine the cars that meet your needs (and wants): Vehicle type; size, passenger and cargo capacity Pricing Reliability and repair problems Fuel economy Safety features and ratings Features / Options - e.g. leather, navigation, paint, etc. (many are bundled in "trim levels" or "options groups") "Build and price"

Key steps in buying a new car

Sources for research information: Car magazines/websites Consumer magazines/websites Kelly Blue Book website Edmunds website YouTube User forums Engine type?•Gas•Diesel•Hybrid•Electric

The 28 / 36 Rule

states that a household should spend a maximum of 28% of its gross monthly income on total housing expenses and no more than 36% on total debt service, including housing and other debt such as car loans.

Economic factors of renting or buying:

- Housing prices and mortgage rates Tax write-offs of buying - interest, property taxes, (imputed rent income) Expected increase or decrease in home values Number of years one expects to remain in the housing unit (rule of thumb - at least 3 years) In 2015, it was 23% cheaper to buy than to rent, on average, in the U.S

Mortgage Refinancing

- If interest rates drop, consider refinancing the mortgage•Refinance only after comparing and analyzing: The terms of the old and new mortgages The total costs (and saving

Mortgage payments

- Monthly payments paid against the loan Each payment consists of principle and interest The interest portion may exceed the principle portion for many years

The Real Estate Sales Contracts

- Names of buyers and sellers •Sufficient description of the property for positive identification •Specific price and other terms •Signatures •Protects buyers and sellers by reducing chance of misunderstanding or misrepresentation - Earnest money deposits (possibly forfeited) •Contingencies (e.g., obtaining a loan, property inspection) •Personal property •Closing cost

Benefits of Home Ownership

- Security and peace of mind - Tax Shelter -Inflation hedge

Benefits of Leasing a Car

-Allow you to drive a more expensive car for similar monthly payments as buying a less expensive car. •Conserves cash that could be used for a down payment to purchase a car. •You have the convenience of not dealing as often with significant auto repairs. •Self-employed people may be able to treat the lease payments as tax-deductible business expenses

Leasing a car

-Arrangement in which the lessee receives the use of an asset in exchange for monthly payments to the lessor •Usually for terms of 2 to 4 years •In effect, it is "renting" a car for an extended period •At the end of the lease, you have no equity in the car

Closing costs

-Expenses borrowers pay when a mortgage loan is closed and they receive title to the purchased property. E.g., title search and insurance, loan origination fees, lawyer fees, appraisal fees, et

Mortgage points

-Fees charged by lenders at the time they grant a mortgage loan 1 point equals 1% of the mortgage loan amount Points increase the effective interest rate of the mortgage

The Leasing Process

-Find the car that suits your needs and wants •Don't discuss financing or leasing until you have negotiated the final price •Check with at least one independent leasing firm to compare terms •Agreement should be specific on early termination fees and costs (including total loss and stolen cars)

drawbacks of leasing a car

-Leasing is complicated - diligence is required •Leasing is usually more costly than purchasing •Terminating a lease early can be difficult and costly •At the end of the lease - you have nothing

Homeowner's insurance

-May be "escrowed" in the mortgage payments Required by mortgage lenders

Used (Pre-Owned)

-More features for less money Less warranty coverage Condition needs careful inspection

Prequalifying and Applying for a Mortgage

-Prequalify before seriously shopping for a home You will know how large a mortgage you can obtain You can estimate required down payment and closing costs You can uncover any credit issues You increase your bargaining power with the seller

New

-Warranty Latest features / safety technology New-car smell

Fixed-Rate Mortgage

30-Year is most common 10-Year and 15-Year are becoming popular Making extra principle payments can shorten the term and lessen total interest paid - When you plan to be in the home at least 5 to 7 years and want certainty in monthly payments - When interest rates are low and you expect them to go up

Condominiums

Apartments, townhouses, or cluster housing - buyer receives title to the housing unit, and joint ownership of common areas; monthly homeowner's fee for maintenance of common areas

The Costs of Home Ownership (Adding up the cost)

The Down Payment •Closing Costs (2% to 7% of Purchase Price) •Mortgage Points •Monthly Mortgage Payments •Property Taxes (vary greatly, e.g., PA vs. NJ) •Homeowner's Insurance •Operating Costs (electricity, gas, water, etc.) •Maintenance (old vs. new, small vs. large)

Cooperative apartment (co-op)

•Apartment in a building •In which each tenant owns a share of the nonprofit corporation that owns the building

Two types of Car Leases

•Closed-End Lease - "walk-away" lease (most car leases are of this type) Fixed term Lessor responsible for residual value (except excess mileage and wear & tear) •Open-End Lease - "finance" lease Minimum term with month-to-month after that Lessee is responsible for variance between residual value and fair market value.

Sources of Mortgage Loan

•Commercial Banks •Savings and Loan Associations •Credit Unions •Mortgage Brokers •Mortgage Bankers (e.g., Quicken Loans) •Rates and terms information available on the Internet

Affordability

•Determine how much money you can afford Down payment Monthly loan payments (rule-of-thumb max is 20% of Gross Income, but less is better) •Insurance - varies for different vehicles• Operating costs - e.g. fuel, tires, maintenance, registration fees, depreciation, property tax in some states. •Don't forget the sales tax!

The Purchase Transaction

•Do not buy a car based on MONTHLY PAYMENTS •Buy a car based on the PRICE •Know your financial state before you shop for cars •The "sticker price" is the MSRP, but is not very meaningful •Get a quote - including ALL costs •Let the dealer know you will be seeking other quotes •Research to find the dealer's invoice cost of the vehicle - 3% to 4% over invoice for sticker prices under $20,000 and 6% to 7% over invoice for cars over $20,000 (caveats

Inspect the car

•Ease of entry •Trunk / cargo area capacity •Comfort / adjustability of seating •Gauges and controls •Test drive: - Acceleration and handling - Turning radius - HVAC - Noise, ride comfort

When Lease Ends

•Excess mileage or excess "wear & tear" may be charged to you •You may decide to purchase the car if the residual value is less than the fair market value •Terminating a lease early can be difficult and costly

Housing Prices and the Recent Financial Crisis

•From 2001 though 2006, home prices rose rapidly •The median price of houses increased from $141,00 to $230,400 - a 63.4% increase! •The median price dropped to $154,600 by 2012 - a 33% drop! •14% of American families had negative equity in their homes •Many foreclosures resulted •The financial crisis reduced the average family's net worth by 23%

Lease versus Purchase Analys

•Performed to compare the differences between the total costs When the lease ends, the lessee can: •Return the car •Purchase the car

After the purchase

•Preserve your asset's value by performing recommended maintenance •Change the oil, rotate the tires on schedule •Keep your vehicle clean - inside and outside •Keep detailed records of maintenance with receipts •Revisit insurance coverage periodically •Consider performing some maintenance yourself (e.g., engine/cabin filters, oil changes, spark plug changes, lights.

When is it time to buy a first home?

•Reliable income •Good credit history •Cash to make at least a 3% down payment and pay closing costs (Federal National Mortgage Association - Fannie Mae) •Desire to build equity •Ability to pay for maintenance •Adequate (6 months) emergency fund •Plans to stay in the home for at least 3 year

What type of housing meets your need?

•Write down your preferences in housing in priority of: Essential Desirable A "plus" •Benefits you in these ways: Eliminates unsuitable housing Helps you recognize where trade-offs may be made Helps you focus on needs you can and will pay for