McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

CHAPTER PLAYLI ST SONG:

“L i v i ng i n the Pr omised Land” by Wi l l i e Ne l son

Auto and Home Loans

7-2

Learning Objectives

LO 7-1 Recognize how to get the best deal when purchasing a car, compare purchase vs. lease options, and gain an understanding of the loan approval process.

LO 7-2 Compare buying vs. renting a home and evaluate which stage in life is best to make this investment.

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Learning Objectives, ctd.

LO 7-3 Describe the steps involved in purchasing a home, including financing options, and discuss the mortgage refinancing decision.

LO 7-4 Explain how home equity loans are used and describe the precautions that need to be taken when using them.

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Auto and Home Purchases

One of your largest purchasesYou need to do your homework

Research comparable purchases for both home and auto

Research the reliability and repair cost for autos Research the builder’s reputation and construction

practices Ask yourself, Is it better to buy new, buy used, lease,

or rent?Find what you wantNegotiate the priceClose the deal

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Steps of the Auto Purchase

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Step 1. Analyze Needs vs. Wants

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Step 1: Analyzing Needs vs. Wants

In America, your image and personality are often tied to the car or truck you drive. Do you need 4-wheel drive or just “want” it? What does driving a Jeep communicate to others? What does driving a hybrid or all-electric vehicle say

about you?Review your valuesNeeds are different from wantsDetermine your driving habits and vehicle

needs

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Need vs. Want Questions

How much cargo do you carry?How far do you drive on a daily basis?Do you drive highway miles or in town?What type of driving experience do you want? Do you want the wind blowing through your hair

riding in a convertible or something that will keep you warm in the winter?

Are you looking for speed, acceleration, and handling, or fuel economy?

Do you prefer manual or automatic transmission?How important is a GPS and/or entertainment

system?Do you need two-wheel drive, all-wheel drive, or

four-wheel drive?

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Step 2: Determine What You Can Afford

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Step 2: Determining What You Can Afford

Keep total debt-to-income ratio at 36% or less

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Step 3: Do Your Homework

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Step 3: Do Your Homework

Research new and used vehicles - meet needs/wants

Most new cars depreciate 35% - 40% in the 1st 3 years

Used cars Have an independent mechanic inspect it Research online for dependability, repair rate,

reliability, and priceNew cars

Warranty – 36 months, 36,000 miles Lower interest rates Latest safety features

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Leases

Long-term rental agreement (2-3 years)Limit on miles drivenEarly termination fee

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Cost of Leasing vs. Buying: An Automobile Comparison

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Step 3: Do Your Homework

Determine a fair price Consumer Reports Kelley Blue Book National Auto Dealers Association

Reliability CarFax Consumer Reports Edmonds

Insurance cost

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Step 4: Comparison Shop

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Step 4: Comparison Shop

Test drive How does the vehicle handle? Check acceleration,

breaking, cornering, engine noise, power, and passing acceleration

Car dealerships vs. private sale Dealerships allow trade-ins, warranties, financing, and

repairs Private ownership offers no warranties and it is

“Buyer Beware”

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Step 5: Negotiate a Deal

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Step 5: Negotiate a Deal

Decide on the vehicle you wantKnow the price of similar vehicles that have sold

Dealer cost for new cars Average trade-in or average private sale price for used cars

Know how much you are willing to spend/can afford, including insurance

Check with other dealers or other private salesStay in controlDon’t fall “in love” with a vehicleSettle on a priceReopen the negotiation with a trade-in if you

have one

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Step 6: Shop for Financing

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Step 6: Shop for Financing

Banks and Credit Unions Talk to your banker to prequalify for a loan and know

the amount you can borrow and the rateDealer Financing

Dealer might offer special rates and terms Is zero percent a good deal?

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Step 6: Shop for Financing

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Step 7: Close the Deal

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Step 7: Close the Deal

Dealerships – Finance and Insurance (F&I) person Will try to sell you extended warranties, extra

insurance, rust proofing, fabric protection, and paint sealant

A way for the dealership to increase profits Plan purchase before you talk to the F&I person Don’t feel pressured to purchase any extras

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Step 8: After-Sale Activities

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Step 8: After the Sale

Perform a final inspection of the vehicle before you drive it off the lot Look for repairs that need to be made If repairs need to be made, get them in writing

Call your insurance agent to make sure you have coverage

If you purchase from an individual Transfer the title Buy new license plates

Enjoy your ride!

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Home Ownership

Is it better to rent or buy?Do you like to make home repairs and do

yardwork?How much should you have for a down

payment?Where do you want to live?How long do you want to live there?What is your dream home?

Home OwnershipRent vs. Buy

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Home OwnershipRent vs. Buy

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Home OwnershipRent vs. Buy

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Home OwnershipLife Stages

During college and out of college, most people rent

Early Family Life Stage Buy first home, a starter home Buy second home as family expands and income

increases Use equity from first home for down payment on

second homeLate Family or Empty Nest Life Stage

Purchase third home or dream home Might purchase vacation home

Retirement Life Stage Downsize to a smaller, more accessible home

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Buying a HomeSelection Criteria

Price No more than two times total gross annual household

incomeLocation, location, location

Shopping, public transportation, resale value, school district

Maintenance New home: more expensive, less maintenance Older home: less expensive, more maintenance

School Systems Reputation of the school will affect your home’s resale

value

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Buying a HomeSelection Criteria

Insurance Flood insurance Earthquake insurance

Property Taxes Based on the assessed value of your property Support local government services and schools

Homeowners Association Fees need to be calculated into your monthly budget

Resale Value

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Real Estate Brokers

Commission of 3%-7% paid by the sellerListing agent–the seller chooses to advertise

the houseMultiple listing service (MLS)–all other real

estate agents can see the listing of the houseWill have showing and open housesCan help you find a house and determine

your needs and wants

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Real Estate Purchase

Down Payment – 20% down

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Real Estate Purchase

Monthly Payment Monthly payment—No more than 28% of total monthly

household income Total monthly debt payments—No more than 36% of

total monthly household income

Mortgage Type Map

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Mortgage Type Map

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Properties of an Adjustable Rate Mortgage

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Closing Costs

The amount due when you close on you home These fees do not reduce the principal of your loan Loan application fee Loan origination fee Points Appraisal fee Home inspection Title Search

Good Faith Estimate Required by Real Estate Settlement Procedures Act

(RESPA) Provides a “good faith estimate of all your closing costs”

within 3 business days of submitting your application for the loan

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Closing Costs

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Refinancing Your Home

When interest rates drop, you might save money by refinancing your home at a lower rate

Determine your break-even point Calculate your closing costs Divide your closing costs by you monthly savings in a

reduced payment Provides a rough estimate of the number of months to

your break-even pointDetermining factor: How long will you live in

that house?

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Refinancing

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Home Equity Loans

Borrowing money against the equity of your home and using the home as collateral (second mortgage)

Equity = Value of your home – what you owe on your home

Types Home Equity Line of Credit (HELOC)

Similar to a secured credit card Fixed Rate/Fixed Term

Similar to an auto loan with a fixed maturity date and rate

Balloon Payment Fixed rate for a specific time, then the entire balance of

the loan is due

Advantages Disadvantages

Ability to access the equity of your home

Interest may be tax deductible

Possible lower interest rates

Risk losing home if you cannot make payments

Cost of origination Appraisal fee Title search

Second Mortgages

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Learn

LO 7-1 Recognize how to get the best deal when purchasing a car, compare purchase vs. lease options, and gain an understanding of the loan approval process.

LO 7-2 Compare buying vs. renting a home and evaluate which stage in life is best to make this investment.

LO 7-3 Describe the steps involved in purchasing a home, including the financing options, and discuss the mortgage refinancing decision.

LO 7-4 Explain how home equity loans are used and describe the precautions that need to be taken when using them.

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Plan & Act

Assess purchase vs. lease options for your next auto purchase (Worksheet 7.1).

If you own or lease a car, review your auto maintenance recommendations to confirm you are taking care of this asset.

Create an online log to maintain your auto maintenance records (Worksheet 7.2).

Comparison-shop for a home equity loan (Worksheet 7.3).

Decide whether your lifestyle today is better suited to renting or buying a home. Use the online calculator to help make this determination. (www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?_r=1#)

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Evaluate

Review your automotive needs and, if you need or want a new vehicle, start the research stage to find out what vehicle is best suited for you.

If buying a first home is in your future, start saving today for the down payment.

How do these auto and home decisions fit in with your overall goals?

Log on to your online GoalTracker to assess the impact these decisions have on your goals and timelines.

Track overall how you are doing on your short-, mid- and long-term goals.

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Continuing Case Scenario

What steps would you suggest that Leigh take in determining how much she can borrow?