pfp test 2
operating costs
Depend on how much you use the car Include: fuel and maintenance
Consider ownership when you have:
Down payment saved (≥ 20% ideal) Location/employment stability (5 to 7 years) Adequate resources to sustain homeownership Most young people (90%) are renters Average age of first-time home buyer is 31 80% of people 55-64 are homeowners
How to Acquire an Automobile
Either purchase the automobile (OWNER) Pay cash - full equity Finance - partial equity (until loan paid off) OR lease the automobile Make lease payments (lease company owns the car) Leasing is a form of financing (pay for depreciation) You pay for the portion you use - no equity OR rent the automobile Car rental company owns the vehicle You rent it (no upkeep, limited choice, no financing)
FICO
Fair Isaac Corporation, not free, s the only seller of actual FICO scores used by most lenders to make credit decisions
disadvantages of renting
↓ aesthetic flexibility No equity
Credit score
A numerical evaluation of your credit based on specific criteria determined by the credit scoring company
Mortgage - Points
A point (interest point) is a fee equal to 1% of the total loan amount, payable at closing (usually 0-3 point range) 1 point = 1 % of loan amount (not purchase price) A loan origination fee that represents a premium paid to obtain a lower mortgage rate Example: House price = $185,000, LTV=80%, 3.85% interest with 2 points. How much do you pay in points? 2 points = 2% of loan amount Loan = 80% of house price = 185,000*0.8 = $148,000 Amount paid for points = 148,000*2% = $2,960
Credit Score - The Amounts you Owe = 30%
Amount owed on all accounts. Amount owed on different types of accounts. Whether you have a balance on certain types of accounts. Number of accounts where you carry a balance. How much of the total credit line is being used on credit cards and other revolving credit accounts. How much is still owed on installment loan accounts, compared with the original loan amounts. Credit utilization: the amount you owe compared to how much credit you have available. You can control how much you use and lenders determine how much credit they are willing to provide. FICO's research shows that people using a high percentage of their available credit limits, compared to people using a lower level of credit, are more likely to have trouble making some payments now or in the near future.
Choosing a Credit Card
Annual Percentage Rate (APR) Cost of credit, higher APR, higher cost Grace Period Time between date of purchase and date interest starts being charged on purchase (15-45 days). Annual Fees Look for no fee card, typically $15-$55/yr. Transaction Fees/Other Charges Cash advance, past due PMT, over limit, flat fee Customer service (24-hr toll free) Other benefits - insurance, discounts, rebates, protection
What are you going to live in?
Apartment, townhome, house, mobile home...
advantages of owning
Appreciation & Taxes* (Own > Rent) Equity (financial benefit) Psychic benefits
Lost Credit Cards
Call the 3 national credit reporting organizations and the Social Security Administration to place a fraud alert on your name and social security number: Equifax: 800-525-6285 Experian: 888-397-3742 Trans Union: 800-680-7289 SSA (fraud line): 800-269-0271
What to do if your Credit Cards are Lost or Stolen?
Call your credit card company immediately Copy all your cards, front and back, and keep the 800 numbers handy to report loss or theft Put this information in a safe place in case of theft File a police report immediately in the jurisdiction of the loss This shows the credit card company that you are diligent and trying to find it
What is a "FICO" Credit Score?
Credit scoring method developed by Fair Isaac Corporation (FICO) Opened to the public in March 2001 Ranges from 300 to 850 Score that is generally used by the banking industry Used in credit approval and other areas as well, i.e. insurance, leasing, employment... Check myfico.com to see how credit scores can affect your mortgage payments
Where are you going to live?
Depends on your preferences and life situation: job, family, etc.
Buying an Automobile
Differentiate wants from needs Do your homework Research purchase thoroughly, considering the market and your needs Make your purchase Select the item most suitable. Negotiate the best price. Arrange favorable financing. Understand terms of sale before you buy. Maintain your purchase
Vehicle Choices - Purchasing Transaction
Discuss price first, not financing or trade-in. ESPECIALLY avoid discussing the payment you can afford! Payment is easy to manipulate, and hides the true cost of the car! Take your financial calculator and make sure the salesperson sees it! Shows that you are savvy and won't be fooled! Don't pay the sticker price. Do some digging: Find out the dealer's cost! Negotiate for the best deal. <$20K - 3-4% over dealer's cost >$20K - 6-7% Use the INTERNET! Be able to walk away. DON'T SIGN ANYTHING!!
Credit Cards - Know the Trouble Signs
Do you only make the minimum payment each month? YESNO Have you reached your credit limit on any of your cards? YESNO Do you wait for your monthly bill to determine how much you have charged? YESNO Do you get cash advances because you do not have enough in your checking account? YESNO Have you been turned down for credit or had a card cancelled? YESNO Are you unaware of the interest costs associated with carrying your credit card balance?
Three Major National Credit Reporting Bureaus
Equifax Credit Information Services www.equifax.com Experian www.experian.com Trans Union www.transunion.com
carrying costs
Exist regardless of whether you drive it or not Include: car payment, insurance, depreciation losses
Mortgage - Closing Costs
Expenses paid by borrower at the time of purchase and may include: Loan fees: application and origination (points) Title search and insurance Other Fees: Attorney, survey, appraisal, recording/filing, notary, inspections (termite, radon, etc.), credit reports. Typically range from 2-10% of mortgage loan amount. Also applies when refinancing mortgage loans
Choosing an Automobile
Factors to Consider: Affordability Amount of Down Payment? How much Loan can you afford? How credit worthy are you? What to do with present car? Trade in? Sell on your own? Donate
Credit Calculation - The Credit Calculation Process (works for ALL credit type calculations!)
Find loan amount (PV) Loan amount = Sales Price - Down Payment Find PMT & N Calculate Total Paid Total Paid = PMT * N Finance Charge (interest cost) = Total Paid - Loan Amount Calculate Total Cost = Finance Charge + Sales Price = Total Paid + Down Payment
Types of Mortgages
Fixed-Rate or Conventional Mortgage: Fixed rate, term and payment for mortgage (PI). TI can (and most likely will) change! Typically offered over 15 or 30 years Adjustable-Rate Mortgage or ARM: Rate can fluctuate over loan term Risk of interest rate change assumed by borrower (not lender), typically 1-3 pp lower than conventional mortgage If you don't have payment flexibility DON'T get this kind of mortgage. PMT caps sometimes offered - BE WARY! This can lead to negative amortization (PMT < interest due, principal bal. ↑)
Mortgage - Affordability Ratios used by Lenders
Front-End Ratio: PITI = 28% of monthly gross income. Back-End Ratio: ALL monthly debt (PITI plus car and other loans) = 36% of monthly gross income. The lower PITI of the two used by the lender. Example: Gross monthly income = $6000, car payment=$500, student loans=$200. What is the maximum PITI payment? Limited by back-end ratio, is the maximum PITI $1,460 is the maximum PITI
What makes you an attractive borrower?
Good credit score Stable employment Stable residence Good collateral Collateral: an asset that the lender may take as compensation if the borrower fails to meet their obligation. Car for an auto loan, house for a mortgage, etc. Annual income Current level of outstanding debt
good and bad things about credit cards
Good for.... Convenient method of payment Establishing and building credit history Improving credit score* Not so good for.... Temptation...Research shows that a consumer's "willingness to pay" increases up to 100 percent when using a credit card rather than pay with cash. The average credit card purchase costs 112 percent the cash price Can get into a lot of trouble, if not used appropriately!
Credit Cards - Protect Against Fraud
Handle your account information with care Save your credit card receipts. Compare them to your recent account activity. Destroy old statements and receipts. Use caution when giving out your credit card number. Be aware of where your cards are at all times. If card is stolen, by law your liability is protected $50 max on credit cards Some companies have zero liability protection $50-$500 on debit cards (within 2 days/60 days)
Credit Score - Length of Credit History = 15%
How long your credit accounts have been established. Your FICO® Score considers the: age of your oldest account, age of your newest account and average age of all your accounts. How long it has been since you used certain accounts. Generally, a longer credit history = a better FICO® Score
Credit Score - New Credit = 10%
How many new accounts you have. How long it has been since you opened a new account. How many recent requests for credit you have made, as indicated by inquiries to the credit reporting agencies. Length of time since credit report inquiries were made by lenders. Whether you have a good recent credit history, following past payment problems. FICO's research shows that opening several credit accounts in a short period of time represents greater risk - especially for people who do not have a long credit history. FICO® Scores do not penalize you for "rate shopping" when seeking a mortgage, auto loan or student loan. To enable you to shop for the best rate, the FICO® Score ignores inquiries for similar financing types made in the 30 days prior to scoring. That means all inquiries made during your shopping period are counted as one inquiry when determining your score.
Information on your Credit Report
Identifying Info (name, SSN, age, addresses) Trade Lines (credit accounts) Type of account (bank card, auto loan, mortgage, etc.) Credit limit and/or loan amount Current balance and payment history Credit Inquiries (voluntary & involuntary) Public Record and Collection Items State and county court record information (bankruptcies, foreclosures, suits, wage attachments, liens, judgments) Overdue debt from collection agencies
credit score
Information collected by credit bureaus from subscribers, creditors, public court records, and the consumer
Why is Credit Scoring important?
Information collected by credit bureaus from subscribers, creditors, public court records, and the consumer Can affect your ability to get a job It also may reduce the cost of your insurance products which are based on your credit score It may help you get the best deal on many types of loans: home, car, and consumer loans The higher your credit score, the lower your interest cost
Borrowing: Credit Cards - Types of Consumer Credit
Installment Credit (closed-end) Repay principal (amount owed) plus interest through equal monthly payments Non-installment Credit Single payment loans Open-ended credit (revolving credit) E.g., credit cards, home equity line of credit Service credit E.g., utilities, dentists, physicians, etc. Any service provider that does not require full payment in advance.
downsides to credit cards
It is too easy to spend money You don't think of how much you are spending It is easy to lose track of what you spend It requires discipline to track charges Interest costs are very high How is interest on credit cards calculated? You are obligating future income Debt limits future flexibility
Mortgage - Down Payment (DP)
Lenders (banks or mortgage brokers) generally require 80% Loan to Value (LTV) Ratio (=20% DP) LTV = loan amount/purchase price of home (i.e., the % of your house that you OWE) DP < 20% private mortgage insurance (PMI) required - this is to protect the lender ONLY! can range from .25 to 2.0% of loan value If you get PMI, make sure you keep track and ask for it to be removed when you have an LTV of 80%!
Sam is ready to purchase a house that costs $150,000. He wants the minimum LTV to avoid PMI. He qualifies for a 30-year fixed-rate loan at 4.5%. Loan amount Minimum loan to value to avoid PMI insurance is 80% of the sale price(Down payment = 20%*150,000 = $30,000)
Loan amount = 150,000 - 30,000 = $120,000 PMT=? (N=360, I/Y=4.5/12, PV=120,000, FV=0) CPT PMT=$608.02 Total finance charge = amount of loan payments - loan amount = PMT*N-PV = 608.02*360-120,000 = $218,888.05 - 120,000 = $98,888.05
Suppose you have negotiated the price of a new Toyota Tacoma to $21,471 with a down payment of $8000. APR is 4.9% for a 5-year loan term. What is the finance charge on this loan? What is the total cost of this car?
Loan amount = 21,471-8000 = $13,471 PMT=? (N=60, I/Y=4.9/12, PV=13,471, FV=0) CPT PMT=$253.60 Total finance charge = Total Paid- Loan Amount = PMT*N-PV = 253.60*60-13,471 = $1,744.86 Total Cost of Car = Finance Charge + Sales Price = $23,215.86
Tax advantages of Homeownership:
Mortgage interest and property taxes are deductible No taxes on capital gains on primary residence* Tax credits for energy-efficient home improvements
Vehicle Choices - Be able to walk away!
NO CAR is truly unique Manufacturer builds millions of copies of each car! If the dealer gives you a hard time.... Go next door to their competitor! No sale is truly unique If you miss this sale, the dealer down the street will have a similar one next week! Above all, don't let yourself feel pressured, confused, nervous, or overwhelmed. If you do, WALK AWAY immediately and try again another day at another dealer
Credit Reporting Agencies, Your Rights With the Credit Bureau
Nearly 80% of reports contain incorrect or old information, so: Be proactive: you can initiate change Review your report and report inaccuracies for investigation IMPORTANT TO HAVE AN ACCURATE CREDIT REPORT The law entitles you to get a FREE copy of one credit report each year from each of the three CRAs (at www.annualcreditreport.com)
Choosing an Automobile
New / Used / Certified ? Advantages/Disadvantages? Where to shop? How to shop? Online? In person? Franchise dealerships Superstores Independent used car lots Private individuals
Get 3 free Credit Reports each year
Once for each credit bureau Go to www.annualcreditreport.com Choose your state and credit reporting company Fill out the form Answer the questions View and print the credit report
Suppose Jon has $2000 debt on his credit card (20% APR), with a required minimum payment of $35. Jon pays the minimum (assume no additional charges), how long does it take Jon to pay off his debt?
PV = $2,000 I/Y = 20%/12 PMT = $35 FV = 0 N = ? CPT N = 184.1894 How many years? 184.1894/12 = 15.3491 How much interest?
How much interest does Jon save paying off his debt charges if he increases his payment to $50 payment each month?
PV = 2000, I/Y = 20/12, PMT = $35+15=50 (enter as neg.), FV = 0 N = ? CPT N=66.46 (66.46/12=5.54 years) How much interest saved? Total amount paid = PMT * N = 50*66.46=3,323 Total principal (amount borrowed) = PV = 2000 Total finance charge = total amount paid - principal Total finance charge = 3,323 - 2000 = $1,323 Total saved interest = 4,446 - 1,323 = $3,123
Suppose Jon has $2000 debt on his credit card (20% APR), with a required minimum payment of $35. Jon pays the minimum (assume no additional charges), how long does it take Jon to pay off his debt?
PV = 2000, I/Y = 20/12, PMT = -$35, FV = 0, N = 184.1894 How much interest? Total amount paid = PMT * N = 35*184.1894=6446.63 Total principal (amount borrowed) = PV = 2000 Total finance charge = total amount paid - principal Total finance charge = 8 (round to 2 decimals) INCORRECTAnswer = $4446.63
How much time does Jon save paying off his debt charges if he increases his payment to $50 payment each month?
PV = 2000, I/Y = 20/12, PMT = -$50, FV = 0 N = ? CPT N=66.46 (66.46/12=5.54 years) How much time is saved? (round to 2 decimals) Time in months = 1 INCORRECT184.19-66.46 = 117.73 months or 9.81 years!
advantages of renting
Payment (Rent < Own) No Down payment ↑ mobility ↓ responsibility
Factors That Determine Your Credit Score
Payment history Amounts owed Length of credit history New credit Types of Credit used
Credit Score - Payment History = 35%
Payment information on many types of accounts: Credit cards - such as Visa, MasterCard, American Express and Discover. Retail accounts - credit from stores where you do business, such as department store credit cards. Installment loans - loans where you make regular payment amounts, such as car loans and mortgage loans. Finance company accounts. Public record and collection items - reports of events such as bankruptcies, foreclosures, suits, wage attachments, liens and judgments. Details on late or missed payments ("delinquencies") and public record and collection items. The number of accounts that show no late payments.
Credit bureaus or CRAs
Private organizations which maintain credit information on individuals which it allows subscribers to access for a fee
What a FICO score does NOT include:
Race, color, religion, national origin, sex and marital status. Prohibited by law (Consumer Credit Protection Act) Age. (Other types of scores may consider your age) Employment info (Salary, occupation, title, tenure, etc.) Lenders may, however, consider this information. Residence (where you live). Interest rates on a particular credit card or other account. Any items reported as child/family support obligations. Certain types of inquiries (requests for your credit report or score). any inquiries you initiate or from employers or insurance companies, or any inquiries lenders make without your knowledge are NOT counted. Checking your own credit report and score is not considered in scoring models such as the FICO® Score. Any information not found in your credit report. Any information that is not proven to be predictive of future credit performance.
What are Secured Credit Cards?
Similar to regular credit cards except that these cards are tied to a checking or savings account (for collateral). When this money is gone, the card is worthless until additional funds are deposited These cards are convenient, especially to build credit as credit scoring agencies cannot tell the difference between a secured and unsecured card
Are you going to RENT or OWN?
Single family dwelling - detached, most popular choice, offers more variety/privacy/property control Condominium - legal title to specific unit, joint ownership of common areas, HOA fees additional, generally lower cost
morgage payment
T and I are collected by lender and held in escrow (optional, but sometimes worth it)
FACT act
The Fair and Accurate CreditTransactions (FACT) Act was signed in 2003, with many of its provisions becoming active in 2004 and 2005. It provides: Greater Protection Against Identity Theft New Standards for Information Sharing and Credit Reporting
Steps to Becoming a Homeowner
What can you afford? Assess your credit situation (credit report/credit score) Estimate monthly housing costs Prequalify for a mortgage Search for a home Make a list of needs and wants Real estate agent (paid by seller, ~6%), MLS, zillow.com Make an offer/counteroffer Negotiate and sign purchase agreement (earnest money) Purchase the home Secure financing and home insurance Home inspection Closing and Possession
Credit Score - Types of Credit in Use = 10%
What kinds of credit accounts you have. Do you have experience with both revolving (credit cards and lines) and installment (fixed loan amount and payment) accounts, or has your credit experience been limited to only one type? How many accounts you have of each type. Your FICO® Score considers your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. It is not necessary to have one of each, and it is not a good idea to open a credit account you don't intend to use.
Estimating Your Credit Score
Whatsmyscore.org calculator FICO score estimator CalcXML estimator Credit.com calculator
Renting Basics
Your responsibilities: Read your lease carefully (it's a legal contract) Terms including: rent (amount, due date, penalties), length of lease agreement, damage/security deposit, subleasing, renewal options, restrictions, etc. Renter's insurance Your rights: Harassment, habitability, nonperformance of landlord Need help? Legal questions? - Student Legal Service (SUB-307) Financial questions? - Red to Black (SUB-201)
how is credit score calculated
all calculated using models developed by the Fair Isaac Corporation. FICO and VantageScore 3.0 both begin with the information on your credit report and use this information to calculate a score that can run from 300 all the way to 850.
Mortgage - Your Monthly Payment
morgage payment goes directly to the lender, P and I
disadvantages of owning
↑ responsibility & time Down payment, closing & borrowing costs ↓ mobility