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Chapter 8 – Homes and Cars

• Theme: get most for money with well thought-out spending decisions– Do homework – separate wants and needs– Make selection – compare alternatives, quality,

features and price tradeoffs• Base on choice within budget

• Maintain purchase – see complaints section

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Vehicles

Narrow choices – needs, wants, affordability

Selection – test drive, compare operating cost

Invoice price isn't whole story; rebates? 0%?

Financing – find lowest cost sourceNegotiate price first, financing is separate

Dealer may offer low rate; compare with rebate

Credit union – probably the best source

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Car Financing

• Loans and leases

• Sources: credit unions, bank, car finance companies

• Loan/Rebate tradeoff– One or the other– Is the rebate worth more than the interest

savings?

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Car Leases

• Leasing – lessor owns and rents to you

• Pricing = vehicle + interest - residual value +/- other

• Closed-end (walkaway) – lessor has risk on residual

• Open-end – if market value less than estimated, you pay difference

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Auto Loan Discrimination

• How financing system works– Dealer sends credit info to finance company.– Loan approved at minimum rate say 8%– Dealer may add up to 3%– Finance company buys loan at 8%, dealer

keeps 3%

• Allegations: markup varies by ethnicity even with comparable credit records

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Other Dirty Tricks

• www.autodealerscam.org

• Looks at unfair tactics used by dealers to manipulate customers

• Lists and explains 13 watchouts and other advice

• Other sites provide tips to buyers

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Car Summary

• Purchase and financing are separate issues.

• Choose what’s affordable– New cars – know dealer’s costs and rebates

• Typical margin – about 6%

• Use Consumer Reports and online dealers

– Trade-ins – get history and have inspected

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Housing

• Probably your largest investment and largest monthly outlay– On average, 26% of after-tax income

• Balance needs, wants and affordability– Price/quality tradeoffs

– Decide where/how to finance

– Post purchase costs – maintenance, taxes, insurance

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Ownership Costs

• One-time – down payment, points, closing costs– Mortgage – amount not covered by equity– Lenders like large equity – 20% down

• Recurring – mortgage, taxes, insurance

• Maintenance – varies by age of house

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Closing or Settlement Costs

• Associated with ownership transfer – 5 to 7%

• Purpose is for lender to recoup costs and increase return

• Text lists about 11 general types

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Points

• One-time, nonrefundable interest charge at closing to increase lender’s return– 1 point = 1% of mortgage; $3,000 on

$300,000– Lowers nominal rate, not APR– 6.62% + 0 6.50 + 1 point

• Analyze tradeoff – how long to recover the points through the lower rate?

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Rent versus Buy

• Rent = flexibility; Buy = financial benefits, personal freedom (and some headaches)

• Buying complexities: increasing equity from loan repayment and inflation plus tax savings– Offsets: maintenance and selling costs

• Ownership: not desirable if stay less than three years but tax benefits if itemize

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Renting versus Buying

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Affordability Questions

• Down payment – what can you afford?

• Maximum amount you can borrow

• Are you comfortable with payments?

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Credit Factors

• Financial history – income, job stability, assets and credit rating

• Monthly payment of Principal, Interest, Taxes and Insurance called PITI

• PITI < 28% of gross income

• PITI + other debt < 36% of gross income

• Appraised value > 80% of mortgage

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Reducing the Down Payment

• Government backed mortgage – 5 to 10% down

• Private mortgage insurance (PMI) - 0.3 to 2.0% of loan amount

• IRA – first time buyers may withdraw without penalty

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Real Estate Agents

• Wealth of information

• Possible conflicts – who do they represent?– Probably themselves (get commission quickly)

• Consider:– Experience, honesty, knowledge of mortgage

market, familiarity with your area, diplomacy, understanding your views

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Making the Purchase

• Listed at asking price– Is it negotiable? Risk of being outbid?

• Contract: price, method of payment, closing date, free and clear title, pro-rations

• Contingencies hurt; prequals help buyer• Escrow agent – exchanges funds and

provides flow-of-funds statement

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Mortgages

• Sources: S&L's, banks, credit unions– Mortgage bankers and brokers

• Conventional loans – from traditional sources with standard ratios– Subprime loans

• Government backed – FHA, VA, others– Advantage: rates, down payments, standards– Disadvantage: paperwork, default insurance

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Fixed Rate Mortgages

• Monthly payment doesn't change regardless of interest rate changes

– 10 to 30 years

– May be assumable

– Prepayment – penalty or no penalty?

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Median Home Prices

Metro area (000) 3 yr change

R-side- San Bernd $227 64.5%

Los Angeles 362 64.3

San Diego 429 60.0

Orange County 499 58.0

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Adjustable Rates (ARM's)

• Rates fluctuate with current rates– Borrower benefits if rates fall; hurt if rise

• Teasers – low initial rate

• Index – rate mortgage's rate tied to– Index plus margin = ARM's rate– Adjustment interval– Rate and payment caps

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Innovations

• ARM's – usually lower than fixed– Lender can re-price if rates rise– May qualify for larger loan if payment

lowered

• ARM's may be convertible to fixed rate• Term – 10, 15, 20 or 30 year payoffs

– Pros: lower rate and good if rates drop– Cons: bad if rates rise

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Home Equity Loans

• Home equity loan – amortizing loan secured by second mortgage

• Home equity line – revolving loan (repaid, reborrowed, repaid like credit card)- also secured

• Advantages: lower rate than credit card; interest may be tax deductible