PFIN 4

Making Automobile and Housing Decisions

5

Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

GITMAN/ JOEHNK/ BILLINGSLEY

2Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

1 Design a plan to research and select a new or used automobile

2 Decide whether to buy or lease a car

3 Identify housing alternatives, assess the rental option, and perform a rent-or-buy analysis

4 Evaluate the benefits and costs or homeownership and estimate how much you can afford to pay for a home

5 Describe the home-buying process

6 Choose mortgage financing that meets your needs

LEARNING OUTCOMES

PFIN4 | CH5

Guidelines for Purchasing Decisions

3Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

• Research purchase thoroughly considering the market and the personal needs

• Base the selection on the needs• Negotiate the best price and arrange

financing on favorable terms• Understand all the terms of the sale before

signing the contract• Maintain the purchase and make

necessary changes promptly

PFIN4 | CH5

Factors That Affect Affordability

4Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

• Amount of down payment• Size of the monthly loan payment• Operating costs• Type of vehicle

• Gas, diesel, or hybrid• New or used• Size, body style, and features

• Other considerations• Trading in/selling, fuel economy, safety

measuresPFIN4 | CH5

Purchase Transactions

5Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

• Negotiating price• Sticker price - Manufacturer’s suggested retail

price• Key to negotiating a good price is knowing the

dealer’s cost for the car• Closing the deal

• Sales contract: Agreement to purchase an automobile that states the offering price and all conditions of offer• When signed by the buyer and seller, the

contract legally binds them to its terms

PFIN4 | CH5

Lease

6Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

• Arrangement in which the lessee receives the use of an asset in exchange for monthly payment• Closed-end lease• Open-end lease

PFIN4 | CH5

Variables Affecting Monthly Lease Payment

7Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH5

Lease versus Purchase Analysis

8Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

• Performed to compare the differences between the total costs

• When the lease ends, the lessee can:• Return the car• Purchase the car

PFIN4 | CH5

Housing Prices and the Recent Financial Crisis

9Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

• Analyze the history of housing prices• Foreclosures: Lenders attempt to recover

loan balances from borrowers who have quit making payments by forcing the sale of the home pledged as collateral

PFIN4 | CH5

Types of Housing Units

10Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH5

Types of Housing Units

11Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH5

Benefits of Owning a Home

12Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH5

Types of Costs to be Considered

13Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

• Down payment: Portion of the full purchase price provided by the purchaser when a house or other major asset is purchased• Loan-to-value ratio: Maximum percentage of

the value of a property that the lender is willing to loan

• Private mortgage insurance (PMI): Policy that protects the mortgage lender from loss in the event the borrower defaults on the loan

PFIN4 | CH5

Types of Costs to be Considered

14Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

• Mortgage points: Fees charged by lenders at the time they grant a mortgage loan

• Closing costs: Expenses that borrowers pay when a mortgage loan is closed and they receive title to the purchased property

• Mortgage payments

PFIN4 | CH5

Types of Costs to be Considered

15Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

• Property taxes: Levied by local governments on the assessed value of real estate for the purpose of:• Funding schools• Law enforcement• Local services

• Homeowner’s insurance• Required by mortgage lenders and covers the

replacement value of a home and its contents• Maintenance and operating expenses

PFIN4 | CH5

Home Buying Process

16Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH5

Home Buying Process

17Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH5

Sources of Mortgage Loans

18Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

• Mortgage loans• Secured by the property

• Mortgage bankers• Firm that solicits borrowers, originates

primarily government-insured and government-guaranteed loans, and places them with mortgage lenders

• Mortgage brokers• Firm that solicits borrowers, originates

conventional loans, and places them with mortgage lenders

PFIN4 | CH5

Types of Mortgage Loans

19Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH5

Features of ARM

20Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

• Adjustment period• Period of time between rate or payment

changes• Index rate

• Baseline index rate that captures interest rate movements

• Margin• Percentage points a lender adds to the index

rate to determine the rate of interest

PFIN4 | CH5

Features of ARM

21Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

• Interest rate cap• Limit on the amount that the interest rate can

increase each adjustment period and over the life of the loan

• Payment cap• Limit on the monthly payment increase that

may result from a rate adjustment

PFIN4 | CH5

ARM

22Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

• Negative amortization• Principal balance on a mortgage loan

increases because the monthly loan payment is lower than the amount of monthly interest being charged

• Convertible ARM• Allows borrowers to convert from an

adjustable-rate to a fixed-rate loan• Two-step ARM

• Have two interest rates - one for the first 5 to 7 years of the loan, and another for the remaining term of the loan

PFIN4 | CH5

Mortgage Payments Options

23Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH5

Mortgage Payments Options

24Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH5

Conventional, Insured, and Guaranteed Loans

25Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH5

Refinancing Mortgage

26Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

• If the interest rates drop, consider refinancing the mortgage• Should be refinanced after comparing and

analyzing the terms of old and new mortgages

PFIN4 | CH5

27Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

• Depreciation • Anchoring• Sales contract• Lease• Closed-end lease• Open-end (or finance)

lease• Residual value• Capitalized cost• Money factor• Purchase option

KEY TERMS

• Foreclosures• condominium (condo)• Cooperative

apartment (co-op)• Rent ratio• Down payment• Loan-to-value ratio• Private mortgage

insurance (PMI)• Mortgage points• Closing costs

PFIN4 | CH5

28Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

• Homeowner’s insurance

• Real estate short sale• Multiple Listing

Service• Prequalification• Earnest money

deposit• Contingency clause• Real Estate

Settlement Procedures Act

• Mortgage loan

KEY TERMS

• Mortgage banker• Mortgage broker• Fixed-rate mortgage• Adjustable-rate

mortgage• Adjustment period• Index rate• Margin• Interest rate cap• Payment cap• Negative amortization

PFIN4 | CH5

29Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

SUMMARY

• Guidelines for purchase decisions• Research the purchase• Select the best item based on the needs• Buy the item after negotiating• Maintain the purchase and make necessary

repairs

• Leasing is an arrangement in which the lessee receives the use of an asset in exchange for making monthly lease payments over a specified period

PFIN4 | CH5

30Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

SUMMARY

• Bubble in real estate prices encouraged increase in construction and extraction of a lot of home equity through home equity loans and refinancing

• Home buying process• Shop the market• Use an agent• Apply for a mortgage• Enter into a sales contract • Close the deal

PFIN4 | CH5