Download Lease

GITMAN/ JOEHNK/ BILLINGSLEY
PFIN
4
5
Making
Automobile
and Housing
Decisions
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.
LEARNING OUTCOMES
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
2
Guidelines for Purchasing Decisions
• 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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
3
Factors That Affect Affordability
•
•
•
•
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
measures
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
4
Purchase Transactions
• 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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
5
Lease
• Arrangement in which the lessee receives
the use of an asset in exchange for monthly
payment
• Closed-end lease
• Open-end lease
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
6
Variables Affecting Monthly Lease Payment
Capitalized cost
• Price of a car that is being leased
Residual value
• Remaining value of a leased car at the end of the lease term
Money factor
• Financing rate on a lease
Lease term
• Lease period as mentioned in the contract
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
7
Lease versus Purchase Analysis
• Performed to compare the differences
between the total costs
• When the lease ends, the lessee can:
• Return the car
• Purchase the car
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
8
Housing Prices and the Recent Financial
Crisis
• 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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
9
Types of Housing Units
Capitalized cost
• Price of a car that is being leased
Residual value
• Remaining value of a leased car at the end of the lease term
Money factor
• Financing rate on a lease
Lease term
• Lease period as mentioned in the contract
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
10
Types of Housing Units
Cooperative apartment (co-op)
• Apartment in a building
in which each tenant owns a share of the nonprofit
corporation that owns the building
Rental units
• Range from duplexes, fourplexes, and single-family homes
to large, high-rise apartment complexes containing
several hundred units
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
11
Benefits of Owning a Home
Security and
peace of mind
Tax shelter
Inflation hedge
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
12
Types of Costs to be Considered
• 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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
13
Types of Costs to be Considered
• 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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
14
Types of Costs to be Considered
• 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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
15
Home Buying Process
Real estate short sale
• Sale of real estate property in which the
proceeds are less than the balance owed on a
loan secured by the property sold
Multiple Listing Service (MLS)
• Comprehensive listing of properties for sale in
a given community or metropolitan area
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
16
Home Buying Process
Contingency clause
• Makes the agreement conditional on factors such as the
availability of financing, property inspections, or obtaining
expert advice
Real Estate Settlement Procedures Act (RESPA)
• Requires lenders to give potential borrowers a government
publication describing the closing process
• Requires lenders to provide clear, advance disclosure of all
closing costs to home buyers
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
17
Sources of Mortgage Loans
• Mortgage loans
• Secured by the property
• Mortgage bankers
• Firm that solicits borrowers, originates primarily
government-insured and governmentguaranteed loans, and places them with
mortgage lenders
• Mortgage brokers
• Firm that solicits borrowers, originates
conventional loans, and places them with
mortgage lenders
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
18
Types of Mortgage Loans
Fixed-rate mortgage
• Rate of interest and the monthly mortgage
payment are fixed over the full term of the loan
Adjustable-rate mortgage (ARM)
• Rate of interest is adjusted based on market
interest rate movements
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
19
Features of ARM
• 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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
20
Features of ARM
• 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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
21
ARM
• 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 adjustablerate 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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
22
Mortgage Payments Options
Interest-only mortgage
• Requires the borrower to pay only interest
Graduated-payment mortgage
• Starts with unusually low payments that rise over years to a fixed
payment
Growing-equity mortgage
• Fixed-rate mortgage with payments that increase over a specific period
• Extra funds are applied to the principal so that the loan is paid off
quickly
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
23
Mortgage Payments Options
Biweekly mortgage
• Payments equal to half the regular monthly
payment that are made every two weeks
Buydown
• Financing made available by a builder or seller to a
potential new-home buyer at well below market
interest rates
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
24
Conventional, Insured, and Guaranteed Loans
Conventional mortgage
• Offered by a lender who assumes all the risk of loss
Federal Housing Administration (FHA) mortgage insurance
• Offers lenders mortgage insurance on loans having a high loan-to-value ratio
• Intent is to encourage loans to home buyers who have very little money
available for a down payment and closing costs
VA loan guarantee
• Offered by the U.S. Veterans Administration to lenders who make qualified
mortgage loans to eligible veterans of the U.S. Armed Forces and their
unmarried surviving spouses
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
25
Refinancing Mortgage
• If the interest rates drop, consider
refinancing the mortgage
• Should be refinanced after comparing and
analyzing the terms of old and new mortgages
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
26
KEY TERMS
•
•
•
•
•
•
•
•
•
•
Depreciation
Anchoring
Sales contract
Lease
Closed-end lease
Open-end (or finance)
lease
Residual value
Capitalized cost
Money factor
Purchase option
• Foreclosures
• condominium (condo)
• Cooperative apartment
(co-op)
• Rent ratio
• Down payment
• Loan-to-value ratio
• Private mortgage
insurance (PMI)
• Mortgage points
• Closing costs
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
27
KEY TERMS
• Homeowner’s
insurance
• Real estate short sale
• Multiple Listing Service
• Prequalification
• Earnest money deposit
• Contingency clause
• Real Estate Settlement
Procedures Act
• Mortgage loan
•
•
•
•
•
•
•
•
•
•
Mortgage banker
Mortgage broker
Fixed-rate mortgage
Adjustable-rate
mortgage
Adjustment period
Index rate
Margin
Interest rate cap
Payment cap
Negative amortization
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
28
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
29
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
30