applying the planning process Chapter 8 Automobile and Housing Decisions Where Does This Fit in Your Comprehensive Financial Plan Protection Plan for death and incapacity Chapters 16 17 Reasons to Buy a Car No alternative means of transportation Car purchase is part of your financial plan Current vehicle does not meet your needs More drivers in the family Build wealth Save and invest to meet short term and long term goals Chapters 11 15 Secure basic needs Liquidity consumer purchases and credit decisions insurance employee benefits Chapters 5 10 Establish a firm foundation Evaluate your finances acquire tools and skills set goals develop a budget Chapters 1 4 Prioritize your objectives Price Sticker invoice ask Equipment and characteristics Make and model standard equipment options age mileage fuel efficiency New versus used Safety and Reliability National Highway Traffic Safety Association Warranties Repair history What is a warranty Warranty a promise Express warranty in writing Full warranty Seller will fix all problems Limited warranty Seller will fix certain problems Implied warranty assumed by the law Merchantability Purchased goods are assumed to be fit for the purpose they are intended for If sold as is there is no implied warranty of merchantability 1 Lease Terminology Leasing versus Buying Decision should be based on sound financial analysis not on which choice gives you the lower payment If you buy the car you own it and it will have value after the term of the loan is up If you lease the car you are only paying for the temporary use of the vehicle like renting versus buying What happens if car depreciates more than expected Assuming that the reduction was not due to your mistreatment of the car Closed end lease you can walk away if you are within the mileage Also may be penalty for early cancellation Open end lease you will have to pay more at the end if the depreciation was greater than expected How much can you afford to spend on housing Use your budget and consider tax effects Mortgage interest is tax deductible Property taxes are tax deductible Don t forget to include additional costs for utilities maintenance and repairs Gross capitalized cost Price you negotiate for the car Capitalized cost reduction Down payment or net from trade in Residual value Expected value of the car at the end of the lease Rent charge Finance charge Acquisition fee Fee from dealer credit report paperwork processing Excess wear and mileage limits Miles you can drive year without incurring penalties 10 to 30 cents per mile at the end of the lease Purchase Option Price to purchase the vehicle at the end of the lease term Acquisition fee Fee from dealer credit report paperwork processing Excess wear and mileage limits Miles you can drive year without incurring penalties 10 to 30 cents per mile at the end of the lease Purchase Option Price to purchase the vehicle at the end of the lease term Steps to Buying a Home Determine how much you can afford Calculate maximum mortgage and closing costs you can afford Calculate maximum house price Investigate and evaluate mortgage choices Choose an agent to work with Choose a neighborhood and house Negotiate terms effectively Total monthly housing costs Often abbreviated PITI for Principal and interest PI Property taxes T Homeowner s insurance I Plus repairs and maintenance Plus marginal increase in utilities 2 Real Estate Brokers Professionals who help to connect qualified buyers with sellers of real estate What is the cost Usually 6 to 7 of the sales price Paid by seller 10 for vacant land Broker s Legal Role Brokers are agents for the principal who hires them the Seller Must act in the best interest of the principal Duties include confidentiality loyalty full disclosure accounting and due diligence Studies show that more than half of buyers believe the broker works for them Qualifying for a Mortgage 5 Cs of Credit Revisited Credit score FICO score provided by credit reporting agencies must be at least 600 better terms for better scores Debt service ratio PITI monthly gross income 33 Value added by real estate agents Experience Negotiation Understanding of complex transactions Information about properties local area and financing Conflicts of Interest Objectives of the broker s Sell the house with the least effort and get paid Objectives of the seller Sell the house quickly at highest possible price Objectives of the buyer Buy the right house at the lowest possible price Qualifying for a Mortgage Lenders evaluate the property based on Appraisal Quality of the property and the market Environmental issues Payment ratio Credit payments monthly gross income 38 Loan value ratio Typically 75 to 90 3 Types of Mortgages Fixed rate conventional mortgage Fixed rate 15 30 years level payments Adjustable rate mortgage ARM Fixed term fluctuating payments caps on annual increase and life of loan teaser rates Balloon mortgage Graduated payment mortgage Wraparound mortgage Reverse annuity mortgage Construction Financing Short term loans for the period of construction Usually a floating rate prime 2 to 5 paid interest only monthly Developer receives money in draws after completing certain steps in the construction process Lenders often require that the permanent financing be committed in advance Subsequent Mortgages The primary lender has the first lien on your property in the event of nonpayment Junior liens could include Second mortgage or home equity loan Mechanics lien Tax lien The Mortgage Market Primary market origination of the mortgages between borrower and lender Secondary market original lender sells the loan to another financial intermediary Packaged with similar loans Securities backed by the mortgages are issued and sold in the market Main players FannieMae and Ginnie Mae FHA and VA loans FreddieMac conventional Deciding whether to pay points Lenders commonly will reduce the rate you pay in return for you paying points up front One point 1 of the mortgage For a 100 000 loan 1 point 1 000 Suppose lender offers 5 with no points or 5 with 1 point Closing Costs Mortgage related costs Application fee usually paid in advance Credit report fee usually paid in advance Mortgage points one point 1 of mortgage Mortgage insurance premium if your loan to value ration is 80 pay Loan origination fee for processing mortgage Attorney fee for bank documents First mortgage payment interest to end of month 4 More Closing Costs Escrows Two to three months property tax and