Chapter 5 Making Automobile and Housing Decisions How Will This Affect Me? A home is typically the largest single investment you’ll ever make, and a car is usually the second largest. The decisions to buy and finance these assets are important, personal, and complicated. This chapter presents frameworks for deciding when to buy a first home, how to finance a home, and when to rent rather than to purchase a home. It also discusses the best way to go about buying a new or a used car and how to decide between leasing and purchasing a car. Given the large costs of such assets, the frameworks provided in this chapter can significantly improve your short- and long-term financial well-being. This chapter along with Part 5 on Investment Planning will be of the most interest to the students. Getting their attention should be easy and you want to build on their primary interests: Should I lease or purchase a car Should I rent or purchase a home Given these are the major interests of students and in fact are the major topics in the chapter, I suggest that you build on them and use a case for each. The critical thinking case 5.1 uses worksheet 5.1 to examines the lease v purchase of a car. The critical thinking case 5.3 uses worksheet 5.2 to examine the question whether to rent or purchase a home [a condo in this case]. In addition, financial planning exercises 2 and 3 examine these same questions. I suggest you discuss in class the critical thinking questions and assign as homework problems 2 and 3. Learning Goals LG1 Design a plan to research and select a new or used automobile. A useful exercise is to go to Carmax or other site and compare the cost of owning a car where: Car 1 is purchased new and sold at the end of four years versus Car 2 is purchased as a two-year old used car and sold two years later Of course, car 2 requires more buying and selling with the sale price not certain. But the result will be interesting. Researching a car by reading Consumer Reports gives an independent look at cars. All the manufacturers have website that gives information about their cars. Generally, for information about prices, you will need to go to site like CARMAX or to a dealer and talk. You need to research first then select the car you want. These steps need to occur before and separate from the purchase activity. LG2 Decide whether to buy or lease a car. About 30 percent of registered cars are leased. Exhibit 5.1 gives steps to follow in buying a car and Exhibit 5.2 give guidance in selecting the best car for the buyer. The Worksheet 5.1 gives a format for comparing the lease v purchase decision. In addition, several web sites give information about the decision. The Consumers Report site is: https://www.consumerreports.org/buying-a-car/leasing-vs-buying-a-new-car/ [accessed September 5, 2018] As noted above, this decision is very relevant to students and generally of great interest. It deserves some class time—at least about half of one class. After discussion, work through the critical thinking problem 5.1 to give an example of the decision. As noted above, homework problem 2 uses Worksheet 5.1. LG3 Identify housing alternatives, assess the rental option, and perform a rent-or-buy analysis. The Worksheet 5.2 gives a format for making this decision. It is an important decision. I knew a couple of school teachers in Milwaukee that never purchased a home. They rented their entire life—they did not want the maintenance issues and wanted to invest in the stock market. For them it was the right decision. For younger people, the decision may turn on the length of time they plan to be in one place. Over three years, the appreciation in value will normally [2008-2009 were not normal years] cover the cost of selling a home, so if you plan to stay in one place more than three years, purchase is frequently the better. Note Exhibit 5.3. If you Google “rent buy house calculator” you will see a variety of calculators to analysis the rent v buy decisions. I doubt they are any better than the one in the book, but they are there. I suggest you spend half a class discussing this decision, and then work through criterial thinking problem 5.3 to give an example of the decision. As noted above, homework problem 3 uses Worksheet 5.2. LG4 Evaluate the benefits and costs of homeownership and estimate how much you can afford to pay for a home. Worksheet 5.3 examines how much you can afford and is used in Financial Planning Exercise 4. Discussing this problem will cover the topic. LG5 Describe the home-buying process. Exhibit 5.7 discusses strategies to improve the home-buying process. The chapter covers this process and gives the terminology needed to understand the process. Small class time is all that is required. LG6 Choose mortgage financing that meets your needs. The Test Yourself Questions 5-20, 5-21, and 5-22 below cover the options to consider. The Financial Planning Exercise 7 gives some examples of comparing mortgage types and payments. Depending upon the prior knowledge of your students on using financial calculators or present value tables, the coverage in the textbook may be sufficient. Thus, little time will be required. If prior knowledge is less, this material may prove difficult and will require additional class time. It is important that the students understand how to compute mortgage payments and various mortgage terms. If your students are Excel users, the PMT function works well and is straight forward. Financial Facts or Fantasies? These may be used as “teasers” to get the students on the right page with you. Also, they may be used as quizzes after you covered the material or as “pre-test questions” to get their attention. For most people, an automobile will be their second largest purchase. Fact: A car ranks second only to housing with respect to the amount of money spent. The most popular form of single-family housing is the condominium. Fantasy: The most popular form of single-family housing is the single-family home – a detached residence that sits on its own legally defined lot. Condos, in contrast, are built typically in large, multi-unit developments on grounds that are common to all residents. The closing costs on a home are rather insignificant and seldom amount to more than a few hundred dollars. Fantasy: Closing costs – most of which must be paid by the buyer – on home purchases can amount to several thousand dollars and often total an amount equal to 50 percent or more of the down payment. The amount of money you earn has a lot to do with the amount of money you can borrow. Fact: Your monthly income is a key determinate of how large a mortgage loan you can afford. Also important are your credit record and the level of your total monthly installment loan payment. Mortgage insurance guarantees the lender that the loan will be paid off in the event of the borrower’s death. Fantasy: Mortgage insurance protects the lender from loss in the event the borrower defaults on the loan. In an adjustable-rate mortgage, payment will change periodically, along with prevailing interest rates. Fact: In this popular form of home mortgage loan, the term of the loan is fixed (usually at 15 or 30 years), but the rate of interest, and therefore the size of the monthly mortgage payment, is adjusted up and down in line with movements in interest rates. Financial Facts or Fantasies? These may be used as a quiz or as a pre-test to get the students interested. 1. True False For most people, an automobile will be their second largest purchase. 2. True False The most popular form of single-family housing is the condominium. 3. True False The closing costs on a home are rather insignificant and seldom amount to more than a few hundred dollars. 4. True False . The amount of money you earn has a lot to do with the amount of money you can borrow. 5. True False In an adjustable-rate mortgage, payment will change periodically, along with prevailing interest rates. 6. True False Mortgage insurance guarantees the lender that the loan will be paid off in the event of the borrower’s death. Answers: 1. True 2. False 3. False 4. True 5. True 6. False YOU CAN DO IT NOW The “You Can Do It Now” cases may be assigned to the students as short cases or problems. They will help make the topic more real or relevant to the students. In most cases, it will only take about ten minutes to do, that is, until the student starts looking around at the web site. But they will learn by doing so. What’s Your Car Worth? If you have a car, it’s good to know what it is worth from time-to-time. That way you’ll have a better sense of your net worth and you’ll know how much your car is depreciating over time. Just go to the Kelley Blue book site at http://www.kbb.com" www.kbb.com and go the “Price New/Used Cars” – you can do it now. YOU CAN DO IT NOW Rent vs. Buy a Home? Thinking about buying a home rather than continuing to rent? Or would you just like to know the relative attractiveness of renting vs. buying a home? You can use the “Rent vs. Buy Calculator” available at http://www.trulia.com/rent_vs_buy/ to evaluate this for your area of the country. It’s easy and informative – you can do it now. YOU CAN DO IT NOW Current Mortgage Rates If you’re considering buying a home, you need to know current mortgage rates to determine prospective monthly payments and what price you can pay for the home. Up-to-date market rates for different maturities of fixed and adjustable rate mortgages are available at http://www.bankrate.com. And you can also obtain refinancing rates there when you already have a mortgage and are considering refinancing it. It’s so accessible – you can do it now. Financial Impact of Personal Choices Read and think about the choices being made. Do you agree or not? Ask the students to discuss the choices being made. Clara Wants to Buy a House but Doesn’t Want a Roommate Now Clara Foster has saved $10,000 toward a $20,000 down payment on buying a home. She puts aside $300 a month in her house fund and is currently renting a one-bedroom apartment on her own for $1,300 a month. If she rented a two-bedroom apartment with a roommate, she could reduce her rent to $900 a month. While having a roommate is not Clara’s favorite solution, she’d be able to build up her down payment for buying a house a lot faster if she were able to save an extra $400 a month. If Clara stays on her own and her finances remain the same, it will take her about 2 ¾ years to put aside the needed additional $10,000. In contrast, if she set aside the rent saved by getting a roommate, she would have the needed $10,000 in about only 14 months. Doing without a roommate at this stage in Clara 's life is costly. Additional comments: The case demonstrates the kind of tradeoffs that are necessary to maintain and achieve a financial plan. There are others issues that could be raised. For example, how would Clara feel if she did not get along with the roommate? Or if she does get along well, how will she feel moving out on the roommate when she has her down payment saved? Personal choices almost always have a financial impact. How’s Your Local Housing Market? What’s the best source of information about available housing in your community? The answer is a well-informed professional real estate agent whose business is helping buyers find and negotiate the purchase of the most suitable property at the best price. However, there’s another readily available source of information: the local newspaper. Almost anything you want to know about the local housing scene can be found in the real estate section of the paper. For this project, you’ll gather information concerning your local housing market. Review recent issues of your local newspaper and describe the market for both purchased homes and rental units. Look for useful information such as location, size of property, price or rent, lease requirements, and so forth. You should observe that the housing market is very fragmented, which makes good purchase and rent decisions more difficult. See if you can answer questions such as: What is the average size of a house or apartment in your community? What is the typical sales price or monthly rent per square foot? Is the purchase market competitive? How about the rental market? How great a difference exists in prices and rents between the most and least desirable areas of the community? Also check online for other sources of information, such as the county tax office, and try to find out how much property taxes and homeowner’s insurance premiums average in your area. From your study of the local market, summarize its conditions and be prepared to participate in a class discussion of the local housing market. Teaching suggestions: Perhaps you could help the student by identifying neighborhoods or areas of the city based upon your knowledge of the locality. In addition, most large real estate agency have web pages that allows searches by type and size of housing, price of housing, and location. This will make a good team project; it will take some time depending upon how adept the student is with computers and web pages, and the resources available in the school’s or community’s library. One last resource is the census bureau data that may be accessed via www.census.gov. Financial Planning Exercises 1. Planning a new car purchase: Anna Davis has just graduated from college and needs to buy a car to commute to work. She estimates that she can afford to pay about $450 per month for a loan or lease and has about $2,000 in savings to use for a down payment. Develop a plan to guide her through her first car-buying experience, including researching car type, deciding whether to buy a new or used car, negotiating the price and terms, and financing the transaction. Exhibit 5.1 lists the steps in buying a new car. Research which car best meets your needs and determine how much you can afford to spend on it. Choose the best way to pay for your new car—cash, financing, or lease. Ask your insurance agent for annual premium quotes for insuring various cars, as auto insurance is another significant expense of owning a car. Assuming a three-year loan at 5% with a $450 per month payment plus $2,000, Janet can purchase a $17,000 car. [PV(.05/12,3*12,450) + 2,000 = $17,000] With a 1%, six-year loan, she can purchase a $33,000 car. PV(.01/12,6*12,450) + 2,000 = 33,000 rounded down to nearest thousand. Check Web sites like Edmunds.com and TV and newspapers for incentives and rebates on the car you would like to buy. This could include a cash rebate or low-cost financing. Decide on a price based on the dealer’s cost for the car and options, plus a markup for the dealer’s profit, minus rebates and incentives. Find the exact car for you in terms of size, performance, safety, and styling. Choose at least three “target cars” to consider buying. Get online quotes from multiple car dealers. Test-drive the car—and the car salesperson. Test-drive the car at least once, both on local streets and on highways. Determine if the car salesperson is someone you want to do business with. Is he or she relaxed, open, and responsive to your questions? If you are trading in your old car, you are not likely to get as high a price as if you sell it yourself. Look up your car’s trade-in-value at Edmunds.com or kkb.com. Get bids from several dealers. Check carmax.com. Negotiate the lowest price on your new car by getting bids from at least three dealers. Hold firm on your target price before closing the deal. Close the deal after looking not just at the cost of the car but also the related expenses. Consider the sales tax and various fees. Get the salesperson to fax you a worksheet and invoice before you go to the dealership. Review and sign the paperwork. If you have a worksheet for the deal, the contract should match it. Make sure the numbers match and there are no additional charges or fees. Inspect the car for scratches and dents. If anything is missing—like floor mats, for example—ask for a “Due Bill” that states it in writing. 2. Lease vs purchase car decision: Use Worksheet 5.1. Ben Halls is trying to decide whether to lease or purchase a new car costing $18,000. If he leases, he’ll have to pay a $600 security deposit and monthly payments of $450 over the 36-month term of the closed-end lease. Ben could earn 1% on the amount of any down payment or security deposit. On the other hand, if he buys the car then he’ll have to make a $2,400 down payment and will finance the balance with a 36-month loan with a 4% interest rate; he’ll also have to pay a 6 percent sales tax ($1,080) on the purchase price, and he expects the car to have a residual value of $6,500 at the end of 3 years. Ben can earn 4 percent interest on his savings. Use the automobile lease versus purchase analysis form in Worksheet 5.1 to find the total cost of both the lease and the purchase and then recommend the best strategy for Ben. From Worksheet 5.1 below, better alternative is to purchase the car. The total cost of leasing is $16,218 and of purchasing, $13,632.67. If purchase, buyer bears the burden of repairs that may or may not be covered by warranties. The major advantage of purchasing is you own the car at the end of the loan. At the end of the lease, you do not have a car. However, if you lease a new car every three years, you get to drive a new car every three years. If you purchase, you may have the same car for a long period. [My Pilot is 15 years old.] 3. Rent versus buy home. Use Worksheet 5.2. Emma Sanchez is currently renting an apartment for $725 per month and paying $275 annually for renter’s insurance. She just found a small townhouse she can buy for $185,000. She has enough cash for a $10,000 down payment and $4,000 in closing costs. Her bank is offering 30-year mortgages at 5 percent per year. Emma estimates the following costs as a percentage of the home’s price: property taxes, 2.5 percent; homeowner’s insurance, 0.5 percent; and maintenance, 0.7 percent. She is in the 22 percent tax bracket and does not plan to itemize deductions on her taxes. Emma estimates that the value of the home will appreciate 2 percent per year. Using Worksheet 5.2, calculate the cost of each alternative and recommend the least costly option—rent or buy—for Emma. Note since Emma will not itemize, there are no tax advantages to mortgage interest or property taxes. Given the increase in the standard deduction enacted by the 2017 tax act, 90% of taxpayers are expected to elect the standard deduction and not itemize deductions. The total of down payment and closing costs is $14,000. If this amount is put into a bank saving account, it will earn about 1% before taxes. The solution below assumes opportunity cost of 1% before tax or .78% after tax [1% * (1-.22)]. If the $14,000 could earn 4% before tax [3.1% after-tax], there would be an additional cost of purchasing of $327.60 [$436.80 – 109.20] The expected rate of appreciation is an important advantage to purchasing. The solution assumes a rate of 2% for estimated appreciation of $3,700 per year. If the actual rate is 3%, there is another $1,850 of advantage to purchasing. If the value of the home decreases in value, things change. There is no consideration for the psychic income of the location of the house or the quality of the house v that of the rented property. That income is specific to the person and will vary between people. Historically, Americans have preferred to own their own home. But, . . . Looking only at Worksheet 5.2, better to rent, cost of renting $8,975 compared to cost of buying of $12,004.20 yields an advantage to renting of $3,029.20. If Emma could itemize deductions, the tax impact of itemizing would reduce the cost of buying by [(.22 * 4,625) + (,22 * (11,276.25 – 2,523.25))] = $2,943.16. With the tax shelter of property taxes and mortgage interest, the cost of buying becomes [$12,004.20 – 2,943.16] = $9,061.04. In this case, the advantage to renting is only $86.04 [9,061.04 – 8,975.00]. Certainly, the psychic income of owning your home will make buying the preferred choice. 4. Maximum affordable mortgage payment. Using the maximum ratios for a conventional mortgage, how big a monthly payment could the Ross family afford if their gross (before-tax) monthly income amounted to $3,500? Would it make any difference if they were already making monthly installment loan payments totaling $750 on two car loans? The range for mortgage payments over income is from 25 to 30 percent. The range for the total of all installment payments is 33 to 38 percent. So, if the Taylor family income is $3,500 per month: Maximum monthly mortgage payment they could afford: $1,050 ($3,500 x .30). Maximum total monthly installment loan payments: $1,330 ($3,500 x .38). If they are already paying $750 monthly on installment loans, the maximum mortgage payment they could make would be $580 ($1,330 – $750). 5. Changes in mortgage principal and interest over time. Explain how the composition of the principal and interest components of a fixed-rate mortgage change over the life of the mortgage. What are the implications of this change? Exhibit 5.5 graphs the relationship between principal and interest payments over the life of a mortgage. Over time, the portion of the payment that is principal increases and the portion that is interest decreases. From the graph, it is the 16th year before the payment of principal is greater than the payment of interest. 6. Calculating required down payment on home purchase. How much would you have to put down on a house with an appraised value of $105,000 and the lender required an 80 percent loan-to-value ratio? A loan to value ratio of 80 percent indicates the maximum amount that a lender will loan on a property. The “value” refers to the appraised value, thus, with a ratio of 80 percent, the lender will loan $84,000 [80% * $105,000]. Thus, the down payment required is the purchase price less the loan or $16,000 [$100,000 - $84,000]. In addition, closing costs of about half of the down payment or $8,000 would have to be paid. So, a total of $24,000 would have to be available to purchase the property.
7. Calculating monthly mortgage payments. Find the monthly mortgage payments on the following mortgage loans using either your calculator or the table in Exhibit 5.6: 8. Estimating closing costs on home purchase. How much might a home buyer expect to pay in closing costs on a $220,000 house with a 10 percent down payment? How much would the home buyer have to pay at the time of closing, taking into account closing costs, down payment, and a loan fee of 3 points? Closing costs are about 50% of the down payment. For a $220,000 purchase price, with a 10% down payment, the closing costs will be about $11,000 [10% * $220,000] * 50%. 3 points will require an additional $5,940 (3% * [90% * $220,000]) which is included as part of the closing costs. Thus, the amount due at closing would be about $39,000 which is the down payment of $22,000 plus estimated closing costs of $11,000 plus points of $5,940 rounded to $6,000. 9. Using a real estate broker. Describe the ways in which a real estate broker represents buyers versus sellers. What’s a typical real estate commission? The primary responsibility of the real estate broker is to sell the property. Most agents realize that to sell the property they must find the property that the buyer wants. The agent has valuable information about the location of the property and community. The agent will also have information about the various financial institutions that may provide financing. While the agent will describe the best points about the property, the buyer is the one who will select which property to purchase. The agent will listen to the needs of the buyer and try to match property they have listed or that is available through a multiple listing service with those needs. A typical real estate commission is 5 or 6%. Lower value property may have a higher commission and high value property may have a lower commission. If you are selling several properties, an agent may negotiate a fixed price for selling the properties. 10. Adding to monthly mortgage payments. What are the pros and cons of adding $100 a month to your fixed-rate mortgage payment? Pros: The higher your extra payment, the sooner you pay off your mortgage. This would provide extra future flexibility to meet needs like funding a child’s college education or retirement. Extra payments can also dramatically reduce the total interest paid on a mortgage. Cons: You will have less short-term flexibility because the extra payments obviously absorb resources. And the lower amount of interest will reduce the tax shelter benefit associated with the mortgage. The extra principal payment will not reduce your monthly payment. 11. Refinancing a mortgage. Use Worksheet 5.4. Daisy Tran purchased a condominium ten years ago for $300,000, paying $1,439 per month on her $240,000, 6 percent, 30-year mortgage. The current loan balance is $200,857. Recently, Daisy has been considering refinancing her condo. She expects to remain in the condo for at least four more years and has found a lender that will make a 4 percent, 20-year, $200,857 loan, requiring monthly payments of $1,217. Although there is no prepayment penalty on her current mortgage, Daisy will have to pay $1,500 in closing costs on the new mortgage. She is in the 22 percent tax bracket. Based on this information, use the mortgage refinancing analysis form in Worksheet 5.4 to determine whether Daisy should refinance her mortgage under the specified terms. From the worksheet below, it will take 8.7 months to breakeven on the refinancing. Since she plans to stay in the home for another 4 years, it will be to her advantage to refinance the mortgage Test Yourself – Legacy questions for your use 5-1 Briefly discuss how each of these purchase considerations would affect your choice of a car: a. Affordability This is your first step. You’ll need to calculate two numbers unless you can pay cash for the entire cost of the car. • Amount of down payment: This money will come from savings, so be sure not to deplete your emergency fund. • Size of the monthly loan payment you can afford: Analyze your available resources—after considering your other expenses, including housing—and then your transportation requirements. Don’t forget to include insurance. Your monthly car payment should be no more than 20 percent of your monthly net income. b. Operating costs The out-of-pocket cost of operating an automobile includes not only car payments but also insurance, license, fuel, oil, tires, and other operating and maintenance outlays. Also, consider how quickly the car will decline in value or depreciate. While, this is not an out-of-pocket or cash cost, it will impact the future value of the car. c. Gas, diesel, hybrid, or electric? Each of these options will impact the annual operating costs and the initial purchase cost. If you want to go “green” regardless of the cost, you may select a hybrid [gas and electric] or an electric car. With gas prices around $3 per gallon, the miles per gallon of gas number is important. Each option has advantages and disadvantages. Diesel can pollute more and may produce more noise. Hybrid will cost more initially and may have higher repair prices. Electric may have some performance [acceleration or power to climb hills] issues and access to charging stations especially in rural areas. d. New, used, or “nearly new”? Exhibit 5.2 list steps to consider in finding the care for you. You may be able to afford a “luxury” car by buying a used car. The cost may be about 25% less by buying a used car than a new car. If you plan to drive a car 150,000 miles, buying a car with 30,000 miles may not be a problem. Leased car are a good source; however, dealers are pricing these cars higher than they did five year ago and may not be the best source. e. Size, body style, and features Your personal choices and family status will control these features. The options that add to the cost of a new car, will have little impact on the price of a used car. While most people need a car for transportation and therefore the style may not matter, some need a car that will enhance their status either for business or personal purposes. f. Reliability and warranty protection Assess the reliability of a car by talking with friends who own similar cars and reading objective assessments published by consumer magazines and buying guides such as Consumer Reports. Study the warranty offered by new car manufacturers, comparing those for cars that interest you. 5-2 Describe the purchase transaction process, including shopping, negotiating price, and closing the deal on a car. Shopping is all about finding the best car for you. Exhibit 5.2 lists some steps to take. The key is to compare cars and dealers. In addition to assessing reliability, talking with friends who own similar cars and reading objective assessments published by consumer magazines and buying guides such as Consumer Reports gives you great information that helps you hone in on the car for you. Negotiating price can always be done. Before making an offer, prepare a worksheet with the cost versus the list price for the exact car you want. The more information you have, the better you will be at negotiating price. You need to avoid anchoring [allowing the initial price to dominate assessment of value] and you need to be ready to walk away. There is always another car or dealer that is available to you. Closing the deal involves executing a sales contract. Whether you’re buying a new or used car, to make a legally binding offer, you must sign a sales contract that specifies the offering price and all the conditions of your offer. At this point the dealer will offer a variety of add-ons that will increase the price. Again knowing that this will happen and being prepared will help you stick to the purchase of the car and not the other services. 5-3 What are the advantages and disadvantages of leasing a car? Leasing is another way to pay for a car. You need to first look at the cost of leasing versus buying. Note the Financial Road sign in the chapter, “When Does it make Sense to Lease a Car?” The reasons are mostly not financial. If you plan to keep the car for 150,000 miles, buying will be better for you. Worksheet 5.1 gives a form for comparing the lease versus buy option. 5-4 Given your personal financial circumstances, if you were buying a car today, would you probably pay cash, lease, or finance it, and why? Which factors are most important to you in making this decision? The factors referred to in 5-3 answer will apply here. Most students are concerned with down payments and getting more car than they can afford. Thus, leasing will look good. 5-5 In addition to single-family homes, what other forms of housing are available in the United States? Briefly describe each of them. Single-family homes: They can be stand-alone homes on their own legally defined lots or row houses or townhouses that share a common wall. As a rule, single-family homes offer buyers privacy, prestige, pride of ownership, and maximum property control. Condominiums: The term condominium, or condo, describes a form of ownership rather than a type of building. Condominiums can be apartments, townhouses, or cluster housing. The condominium buyer receives title to an individual residential unit and joint ownership of common areas and facilities such as lobbies, swimming pools, lakes, and tennis courts. Cooperative apartments: In a cooperative apartment, or co-op, building, each tenant owns a share of the nonprofit corporation that owns the building. Residents lease their units from the corporation and pay a monthly assessment in proportion to ownership shares, based on the space they occupy. Rental units: Some individuals and families choose to rent or lease their place of residence rather than own it. They may be just starting out and have limited funds for housing, or they may be uncertain where they want to live. Perhaps they like the short-term commitment and limited maintenance responsibilities. 5-6 What type of housing would you choose for yourself now, and why? Why might you choose to rent instead of buy? Worksheet 5.2 gives a format for analyzing the rent versus buy cost comparison. A major factor in the decision is the availability of funds for down payment and the time you expect to stay in the unit. Rule of thumb is if you will be in the unit for less than three years, rent. More than three years, buy. 5-7 Why is it important to have a written lease? What should a rental contract include? Oral agreements may be binding as to the additional services that are offered by the lessor. However, the written lease agreement will govern the use of the real estate. Most leases are written to protect the lessor, but there will be some provisions that gives the lessee rights. It is important to read the agreement even though it has a lot of legalize that is boring to read. You need to understand what you sign. 5-8 Briefly describe the various benefits of owning a home. Which one is most important to you? Which is least important? Major benefits of owning versus renting are: Tax shelter, that is, property taxes and mortgage interest are deductible for federal and state income tax, thus, these costs of ownership will reduce or “shelter” taxes on other income such as your salary. However, with the 2017 tax act, the increase in the standard deduction has reduce the available of the tax savings. For many, rent and invest may be the better decisions. Costs of renting do not provide tax benefits. Inflation hedge, in general value of real estate increases over time. The major cost of ownership, mortgage interest, does not increase over time. Thus, the cost of ownership as a percent of the value of the house decreases over time. Within a certain time period, say a five year period, housing value may in fact decrease, but over longer period of time, the value will increase. 5-9 What does the loan-to-value ratio on a home represent? Is the down payment on a home related to its loan-to-value ratio? Explain. The loan-to-value ratio specifies the maximum percentage of the value of a property that the lender is willing to loan. For example, if the loan-to-value ratio is 80 percent, the buyer will have to come up with a down payment equal to the remaining 20 percent. 5-10 What are mortgage points? How much would a home buyer have to pay if the lender wanted to charge 2.5 points on a $250,000 mortgage? When would this amount have to be paid? What effect do points have on the mortgage’s rate of interest? Mortgage points are fees charged by lenders at the time that they grant a mortgage loan. In appearance, points are like interest in that they are a charge for borrowing money. In fact for federal tax purposes, points are deductible as interest. 2.5 points on a $250,000 required the borrower to pay $6,250 up front as part of closing costs on the mortgage. The amount would be paid at the time of the closing. Paying points will reduce the interest rate on the loan and thereby the annual cost of the loan. Some refer to points as “buying down the interest rate”. 5-11 What are closing costs, and what items do they include? Who pays these costs, and when? Closing costs are all other expenses besides the down payment that borrowers ordinarily pay at the time a mortgage loan is closed and title to the purchased property is conveyed to them. The buyer typically pays the majority of the closing costs, although the seller may, by custom or contract, pay some of the costs. Closing costs are made up of such items as: (1) loan application fees, (2) loan origination fees, (3) points (if any), (4) title search and insurance, (5) attorneys' fees, (6) appraisal fees, and (7) other miscellaneous fees for things like mortgage taxes, filing fees, inspections, credit reports, and so on. Closing costs, including points, can total an amount equal to 50% or more of the down payment. When the down payment is only 10%, closing costs can run as high as 70% or more of the down payment. Exhibit 5.4 gives an example of closing costs. 5-12 What are the most common guidelines used to determine the monthly mortgage payment one can afford? The most common guidelines used to determine the amount of monthly mortgage payments one can afford are the affordability ratios that stipulate: Monthly mortgage payments should not exceed 25 to 30% of the borrower's monthly gross (before tax) income; and The borrower's total monthly installment loan payments (mortgage and other consumer loan payments) should not exceed 33 to 38% of monthly gross income. 5-13 Why is it advisable for the prospective home buyer to investigate property taxes? Because they’re local taxes levied to fund schools, law enforcement, and other local services, the level of property taxes differs from one community to another. In addition, within a given community, individual property taxes will vary according to the assessed value of the real estate—the larger and/or more expensive the home, the higher the property taxes, and vice versa. As a rule, annual property taxes vary from less than 0.5 percent to more than 2 percent of a home’s approximate market value. Thus, the property taxes on a $100,000 home could vary from about $500 to more than $2,000 a year, depending on location and geographic area. 5-14 Describe some of the steps home buyers can take to improve the home-buying process and increase their overall satisfaction with their purchases. Gather all the information available about the location of the home. The standing joke: What are the three most important factors in buying a home? Answer, location, location, and location. The more you know about the area, the more you will be satisfied with your decision. You must begin your home search project by figuring out what you require for your particular lifestyle needs—in terms of living space, style, and other special features. 5-15 What role does a real estate agent play in the purchase of a house? What is the benefit of the MLS? How is the real estate agent compensated, and by whom? Most home buyers rely on real estate agents because they’re professionals who are in daily contact with the housing market. Once you describe your needs to an agent, he or she can begin to search for appropriate properties. Your agent will also help you negotiate with the seller, obtain satisfactory financing, and, although not empowered to give explicit legal advice, prepare the real estate sales contract. Most real estate firms belong to a local Multiple Listing Service (MLS), a comprehensive listing, updated daily, of properties for sale in a given community or metropolitan area. Buyers should remember that agents typically are employed by sellers. Unless you’ve agreed to pay a fee to a sales agent to act as a buyer’s agent, a realtor’s primary responsibility, by law, is to sell listed properties at the highest possible prices. Agents are paid only if they make a sale, so some might pressure you to “sign now or miss the chance of a lifetime.” 5-16 Describe a real estate short sales transaction. What are the potential benefits and costs from the perspective of the homeowner? A real estate short sale is the sale of property in which the proceeds are less than the balance owed on a loan secured by the property sold. This procedure is an effort by mortgage lenders to come to terms with homeowners who are about to default or are defaulting on their mortgage loans. Although it certainly can reduce a lender’s losses, it can also be beneficial for the homeowner. A real estate short sale will avoid having a foreclosure appear on the homeowner’s credit history. Short sales should also help homeowners manage the costs that got them into trouble in the first place. Finally, a short sale is usually faster and cheaper for the homeowner than a foreclosure. Most short sales fully satisfy the debt owed, but this is not always the case, so homeowners should confirm this in the settlement. 5-17 Why should you investigate mortgage loans and prequalify for a mortgage early in the home-buying process? Prequalification can work to your advantage in several ways. You’ll know ahead of time the specific mortgage amount that you qualify for—subject, of course, to changes in rates and terms—and can focus your search on homes within an affordable price range. Prequalification also provides estimates of the required down payment and closing costs for different types of mortgages. It identifies in advance any problems, such as credit report errors, that might arise from your application and allows you time to correct them. Finally, prequalification enhances your bargaining power with the seller of a house you want by letting her or him know that the deal won’t fall through because you can’t afford the property or obtain suitable financing. And since you will have already gone through the mortgage application process, the time required to close the sale should be relatively short. 5-18 What information is normally included in a real estate sales contract? What is an earnest money deposit? What is a contingency clause? State laws generally specify that, to be enforceable in court, real estate buy–sell agreements must be in writing and contain certain information, including: (1) the names of buyers and sellers, (2) a description of the property sufficient for positive identification, (3) specific price and other terms, and (4) usually the signatures of the buyers and sellers. An earnest money deposit is the money that you pledge to show good faith when you make an offer. If, after signing a sales contract, you withdraw from the transaction without a valid reason, you might have to forfeit this deposit. A valid reason for withdrawal would be stated in the contract as a contingency clause. With a contingency clause, you can condition your agreement to buy on such factors as the availability of financing, a satisfactory termite inspection or other physical inspection of the property, or the advice of a lawyer or real estate expert. 5-19 Describe the steps involved in closing the purchase of a home. An overview of these closing requirements may be found on HUD’s Web site (go to the “Homes” section of http://www.hud.gov). Exhibit 5.7 provides some tips to help you sail smoothly through the home-buying process in general and the closing process in particular. Specific steps include the title check [normally performed by a title insurance company] and preparation of the closing statement. 5-20 Describe the various sources of mortgage loans. What role might a mortgage broker play in obtaining mortgage financing? The major sources of home mortgages today are commercial banks, thrift institutions, and mortgage bankers or brokers; also, some credit unions make mortgage loans available to their members. Most mortgage brokers also have ongoing relationships with different lenders, thereby increasing your chances of finding a loan even if you don’t qualify at a commercial bank or thrift institution. 5-21 Briefly describe the two basic types of mortgage loans. Which has the lowest initial rate of interest? What is negative amortization, and which type of mortgage can experience it? Discuss the advantages and disadvantages of each mortgage type. The fixed-rate mortgage still accounts for a large portion of all home mortgages. Both the rate of interest and the monthly mortgage payment are fixed over the full term of the loan. The payments are fixed and there is no uncertainty with the loan. The adjustable-rate mortgage (ARM) provides that the rate of interest, and therefore the size of the monthly payment, is adjusted based on market interest rate movements. Typically the ARM will have lower rated than the fixed-rate mortgage, at least initially. The rates will change as the general interest rates vary at each adjustment date, generally every five years. Some ARMs are subject to negative amortization— an increase in the principal balance resulting from monthly loan payments that are lower than the amount of monthly interest being charged. In other words, you could end up with a larger mortgage balance on the next anniversary of your loan than on the previous one. 5-22 Differentiate among conventional, insured, and guaranteed mortgage loans. A conventional mortgage is a mortgage offered by a lender who assumes all the risk of loss. To protect themselves, lenders usually require a down payment of at least 20 percent of the value of the mortgaged property. To promote homeownership, the federal government, through the Federal Housing Administration (FHA), offers lenders mortgage insurance on loans with a high loan-to-value ratio. These loans usually feature low down payments, below-market interest rates, few if any points, and relaxed income or debt-ratio qualifications. Guaranteed loans are similar to insured loans, but better—if you qualify. VA loan guarantees are provided 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. Critical Thinking Problems 5.1 The Newtons New Car Decision: Lease versus Purchase Farrah and Same Newton, a dual-income couple in their late 20s, want to replace their seven-year-old car, which has 90,000 miles on it and needs some expensive repairs. After reviewing their budget, the Newtons conclude that they can afford auto payments of not more than $350 per month and a down payment of $2,000. They enthusiastically decide to visit a local dealer after reading its newspaper ad offering a closed-end lease on a new car for a monthly payment of $245. After visiting with the dealer, test-driving the car, and discussing the lease terms with the salesperson, they remain excited about leasing the car but decide to wait until the following day to finalize the deal. Later that day, the Newtons begin to question their approach to the new car acquisition process and decide to reevaluate their decision carefully. Critical Thinking Questions 1. What are some basic purchasing guidelines that the Newtons should consider when choosing which new car to buy or lease? How can they find the information they need? Exhibit 5.1 lists key steps in buying a new car whether you purchase or lease the car. There are many web pages that give information about various cars that you can reach via the internet. Your research needs to extend beyond the newspaper ads. Edmunds.com is a good place to look for the needed information. 2. How would you advise the Newtons to research the lease-versus-purchase decision before visiting the dealer? What are the advantages and disadvantages of each alternative? Until you understand how leasing works and compare lease terms with bank financing, you won’t know if leasing is the right choice for you. Thus, you need to understand the leasing process before you get to the dealer and learn the specific terms of the lease. The most important question to ask yourself is why you need a new car every few years. Leasing may make sense if: • You value purchasing flexibility. A lease allows you to put off the purchasing decision while using the car. It’s like having a test drive that lasts several years instead of a few minutes. • You value the convenience of not having to deal with significant auto repairs. • You’re self-employed and can write off your leasing payment as a business expense. • You want to drive a luxury car for less, but you don’t want to put up that much money. If you like to drive a car until the wheels fall off, you do not want a lease. If you decide to purchase, it will be to your advantage to start a new car fund and contribute the same amount of monthly payment even after you have paid the loan off. Then when you need a new car, you will have the funds necessary to purchase the car. 3. Assume that the Newtons can get the following terms on a lease or a bank loan for the car, which they could buy for $17,000. This amount includes tax, title, and license fees. • Lease: 48 months, $245 monthly payment, 1 month’s payment required as a security deposit, $350 end-of-lease charges; a residual value of $6,775 is the purchase option price at the end of the lease. • Loan: $2,000 down payment, $15,000, 48-month loan at 5 percent interest requiring a monthly payment of $345.44; assume that the car’s value at the end of 48 months will be the same as the residual value and that sales tax is 6 percent. The Newtons can currently earn interest of 3 percent annually on their savings. They expect to drive about the same number of miles per year as they do now. a. Use the format given in Worksheet 5.1 to determine which deal is best for the Newtons. b. What other costs and terms of the lease option might affect their decision? c. Based on the available information, should the Newtons lease or purchase the car? Why? The worksheet is below. Based on the worksheet, there is an advantage to leasing of $927. Thus, if you have faith in all of the estimates in the worksheet, leasing is the way to go. You may be able to earn more on your down payment than you estimate; if so, another reason to lease. The value at the end of three years may be different than you have estimated. If the actual value is more, a reason to purchase. If the value is less, another advantage to leasing. The rate on the note is 5%. Many dealers have loans for 1% with terms up to 6 years. Change the terms of the loan will impact the cost of purchasing. You will never be completely accurate in your estimates. You do your best and then consider your estimates to be 100% correct and make your decision. Per the analysis below, you should lease the car. 5.2 Evaluating a Mortgage Loan for the Gerrards Ben and Marie Gerrard, both in their mid-20s, have been married for four years and have two preschool-age children. Ben has an accounting degree and is employed as a cost accountant at an annual salary of $62,000. They’re now renting a duplex but wish to buy a home in the suburbs of their rapidly developing city. They’ve decided they can afford a $215,000 house and hope to find one with the features they desire in a good neighborhood. The insurance costs on such a home are expected to be $800 per year, taxes are expected to be $2,500 per year, and annual utility bills are estimated at $1,440—an increase of $500 over those they pay in the duplex. The Gerrards are considering financing their home with a fixed-rate, 30-year, 6 percent mortgage. The lender charges 2 points on mortgages with 20 percent down and 3 points if less than 20 percent is put down (the commercial bank that the Gerrards will deal with requires a minimum of 10 percent down). Other closing costs are estimated at 5 percent of the home’s purchase price. Because of their excellent credit record, the bank will probably be willing to let the Gerrards’ monthly mortgage payments (principal and interest portions) equal as much as 28 percent of their monthly gross income. Since getting married, the Gerrards have been saving for the purchase of a home and now have $44,000 in their savings account. Critical Thinking Questions 1. How much would the Gerrards have to put down if the lender required a minimum 20 percent down payment? Could they afford it? With a 20% down payment, the Gerand’s need 20% * $215,000 or $43,000 just for the down payment. Closing costs are estimated at $10,750, giving a total of $53,750 needed at closing without points. Their total saving account is $44,000. No they cannot afford 20% down. 2. Given that the Gerrards want to put only $25,000 down, how much would their closing costs be? With $25,000 down, the principal on the loan will be $190,000. Closing costs are estimated at 5% of purchase price or $10,750 without considering points. With less than 20% down, the lender requires 3 points or 3% * $190,000 = $5,700. Total closing costs are estimated to be $16,450. Considering only principal and interest, how much would their monthly mortgage payments be? Loan of $190,000, 30-year, 6% will require a payment of $1,139.15 [=pmt(.06/12,30*12,190,000) using Excel or with Exhibit 5.6 Would they qualify for a loan using a 28 percent affordability ratio? 28% of their income is [.28 * 62,000 = $17,360 per year or $1,447 per month. So Yes. 3. Using a $25,000 down payment on a $215,000 home, what would the Gerrards’ loan-to-value ratio be? Calculate the monthly mortgage payments on a PITI basis. Loan-to-value ratio would be 190,000/215,000 or 88.4%. As a rule, lenders prefer no more than 80%. The payment on a PITI basis includes principal, interest, property taxes and insurance. 4. What recommendations would you make to the Gerrards? Explain. They can afford to purchase the home with their current income level. The down payment, closing costs, and points will take most of their savings, so they will need to budget continued saving in order to rebuild their emergency fund. 5.3 Julie’s Rent-or-Buy Decision Julie Brown is a single woman in her late 20s. She is renting an apartment in the fashionable part of town for $1,200 a month. After much thought, she’s seriously considering buying a condominium for $175,000. She intends to put 20 percent down and expects that closing costs will amount to another $5,000; a commercial bank has agreed to lend her money at the fixed rate of 6 percent on a 15-year mortgage. Julie would have to pay an annual condominium owner’s insurance premium of $600 and property taxes of $1,200 a year (she’s now paying renter’s insurance of $550 per year). In addition, she estimates that annual maintenance expenses will be about 0.5 percent of the price of the condo (which includes a $30 monthly fee to the property owners’ association). Julie’s income puts her in the 25 percent tax bracket (she itemizes her deductions on her tax returns), and she earns an after-tax rate of return on her investments of around 4 percent. Critical Thinking Questions 1. Given the information provided, use Worksheet 5.2 to evaluate and compare Julie’s alternatives of remaining in the apartment or purchasing the condo. From the worksheet below, there is an advantage to purchasing of over $8.000. Assuming that the location and quality of the condo space is equal to the rental space, Julie should purchase the condo. In the analysis, there is no consideration of the appreciation in the value of the condo. With appreciation, there is even a greater advantage to purchasing the condo. Note, the worksheet has the impact of taxes included, albeit with a old tax rate. For taxpayer who itemize deductions the worksheet is useful. 2. Working with a friend who is a realtor, Julie has learned that condos like the one that she’s thinking of buying are appreciating in value at the rate of 3.5 percent a year and are expected to continue doing so. Would such information affect the rent-or-buy decision made in Question 1? Explain. Adding the appreciation will make the purchase alternative even more favorable. 3. Discuss any other factors that should be considered when making a rent-or-buy decision. Location is important and must be considered. For example, the rental unit may be on a public transportation route that makes it convenient to get to work and other places. If the purchase unit is not near public transportation, there may be additional transportation costs to consider. Also the case is mute about how long she plans to remain in this location. If she plans to move to a different city within three years, renting will probably be the better alternative. She has the cost of selling the condo to consider. If she will stay in the location for three years, the appreciation will cover the cost of selling at a future date. 4. Which alternative would you recommend for Julie in light of your analysis? I suggest she purchase the condo. Terms Found in the Chapter
adjustable-rate mortgage (ARM) A mortgage on which the rate of interest, and therefore the size of the monthly payment, is adjusted based on market interest rate movements.
adjustment period On an adjustable-rate mortgage, the period of time between rate or payment changes.
anchoring A behavioral bias in which an individual tends to allow an initial estimate (of value or price) to dominate one’s subsequent assessment (of value or price) regardless of new information to the contrary.
balloon-payment mortgage A mortgage with a single large principal payment due at a specified future date
biweekly mortgage A loan on which payments equal to half the regular monthly payment 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, often only for a short period.
capitalized cost The price of a car that is being leased.
closed-end lease The most popular form of automobile lease; often called a walk-away lease, because at the end of its term, the lessee simply turns in the car (assuming the preset mileage limit has not been exceeded and the car hasn’t been abused).
closing costs All expenses (including mortgage points) that borrowers ordinarily pay when a mortgage loan is closed and they receive title to the purchased property.
condominium (condo) A form of direct ownership of an individual unit in a multiunit project in which lobbies, swimming pools, and other common areas and facilities are jointly owned by all property owners in the project.
contingency clause A clause in a real estate sales contract that makes the agreement conditional on such factors as the availability of financing, property inspections, or obtaining expert advice.
conventional mortgage A mortgage offered by a lender who assumes all the risk of loss; typically requires a down payment of at least 20 percent of the value of the mortgaged property.
convertible ARM An adjustable-rate mortgage loan that allows borrowers to convert from an adjustable-rate to a fixed rate loan, usually at any time between the 13th and the 60th month.
cooperative apartment (co-op) An apartment in a building in which each tenant owns a share of the nonprofit corporation that owns the building.
depreciation The loss in the value of an asset, such as an automobile, that occurs over its period of ownership; calculated as the difference between the price initially paid and the subsequent sale price.
down payment A portion of the full purchase price provided by the purchaser when a house or other major asset is purchased; often called equity.
earnest money deposit Money pledged by a buyer to show good faith when making an offer to buy a home.
FHA mortgage insurance A program under which the Federal Housing Administration (FHA) offers lenders mortgage insurance on loans having a high loan-to-value ratio; its intent is to encourage loans to home buyers who have very little money available for a down payment and closing costs.
fixed-rate mortgage The traditional type of mortgage, in which both the rate of interest and the monthly mortgage payment are fixed over the full term of the loan.
foreclosure The process whereby lenders attempt to recover loan balances from borrowers who have quit making payments by forcing the sale of the home pledged as collateral. A borrower typically cannot make scheduled mortgage payments and the lender repossesses the property in an effort to recover the loan balance owed.
graduated-payment mortgage A mortgage that starts with unusually low payments that rise over several 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 more quickly.
homeowner’s insurance Insurance that is required by mortgage lenders and covers the replacement value of a home and its contents.
interest-only mortgage . A mortgage that requires the borrower to pay only interest; typically used to finance the purchase of more expensive properties
index rate On an adjustable-rate mortgage, the baseline index rate that captures interest rate movements.
interest rate cap On an adjustable-rate mortgage, the limit on the amount that the interest rate can increase each adjustment period and over the life of the loan.
lease An arrangement in which the lessee receives the use of a car (or other asset) in exchange for making monthly lease payments over a specified period.
loan-to-value ratio The maximum percentage of the value of a property that the lender is willing to loan.
margin On an adjustable-rate mortgage, the percentage points a lender adds to the index rate to determine the rate of interest.
money factor The financing rate on a lease; similar to the interest rate on a loan.
mortgage banker A firm that solicits borrowers, originates primarily government-insured and government- guaranteed loans, and places them with mortgage lenders; often uses its own money to initially fund mortgages that it later resells.
mortgage broker A firm that solicits borrowers, originates primarily conventional loans, and places them with mortgage lenders; the broker merely takes loan applications and then finds lenders willing to grant the mortgage loans under the desired terms.
mortgage loan A loan secured by the property: If the borrower defaults, the lender has the legal right to liquidate the property to recover the funds it is owed.
mortgage points Fees (one point equals 1 percent of the amount borrowed) charged by lenders at the time they grant a mortgage loan; they are related to the lender’s supply of loanable funds and the demand for mortgages.
Multiple Listing Service (MLS) A comprehensive listing, updated daily, of properties for sale in a given community or metropolitan area; includes a brief description of each property with a photo and its asking price but can be accessed only by realtors who work for an MLS member.
negative amortization When the principal balance on a mortgage loan increases because the monthly loan payment is lower than the amount of monthly interest being charged; some ARMs are subject to this undesirable condition.
open-end (finance) lease An automobile lease under which the estimated residual value of the car is used to determine lease payments; if the car is actually worth less than this value at the end of the lease, the lessee must pay the difference.
payment cap On an adjustable-rate mortgage, the limit on the monthly payment increase that may result from a rate adjustment.
PITI Acronym that refers to a mortgage payment including stipulated portions of principal, interest, property taxes, and homeowner’s insurance.
prequalification The process of arranging with a mortgage lender, in advance of buying a home, to obtain the amount of mortgage financing the lender deems affordable to the home buyer.
private mortgage insurance (PMI) An insurance policy that protects the mortgage lender from loss in the event the borrower defaults on the loan; typically required by lenders when the down payment is less than 20 percent.
property taxes Taxes levied by local governments on the assessed value of real estate for the purpose of funding schools, law enforcement, and other local services.
purchase option A price specified in a lease at which the lessee can buy the car at the end of the lease term.
Real Estate Settlement Procedures Act (RESPA) A federal law requiring mortgage lenders to give potential borrowers a government publication describing the closing process and providing clear, advance disclosure of all closing costs to home buyers.
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.
rent ratio The ratio of the average house price to the average annual rent, which provides insight into the relative attractiveness of buying a house versus renting in a given area of potential interest.
rental contract (lease agreement) A legal instrument that protects both the lessor and the lessee from an adverse action by the other party; it specifies the amount of the monthly payment, the payment due date, penalties for late payment, the length of the lease agreement, deposit requirements, fair wear and tear, definitions and provisions, the distribution of expenses, renewal options and early termination penalties, and any restrictions on children, pets, subleasing or using the facilities.
residual value The remaining value of a leased car at the end of the lease term.
sales contract An agreement to purchase an automobile that states the offering price and all conditions of the offer; when signed by the buyer and seller, the contract legally binds them to its terms.
shared-appreciation mortgage A loan that allows a lender or other party to share in the appreciated value when the home is sold.
title check The research of legal documents and courthouse records to verify that the seller conveying title actually has the legal interest he or she claims and that the title is free of all liens and encumbrances.
two-step ARM . An adjustable-rate mortgage with just two interest rates: one for the first five to seven years of the loan, and a higher one for the remaining term of the loan
VA loan guarantee A 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.
Chapter 5 Making Automobile and Housing Decisions Learning Goals How Will This Affect Me? I. Buying an Automobile Choosing a Car Affordability Operating Costs Gas, Diesel, or Hybrid? New, Used, or "Nearly New"? Size, Body Style, and Features II. The Purchase Transaction A. Negotiating Price B. Closing the Deal III. Leasing Your Car The Leasing Process Lease versus Purchase Analysis When the Lease Ends IV. Meeting Housing Needs: Buy or Rent? A. Housing Prices and the Financial Crisis 2008-2009 B. What Type of Housing Meets Your Needs? C. Analyzing the Rent-or-Buy Decision V. How Much Housing Can You Afford? Benefits of Owning a Home The Cost of Homeownership C. The Down Payment D. Points and Closing Costs E. Mortgage Payments F. Affordability Ratios G. Property Taxes and Insurance H. Maintenance and Operating Expenses I. Performing a Home Affordability Analysis VI. The Home-Buying Process A. Shop the Market First B. Real Estate Short Sales C. Using an Agent D. Prequalifying and Applying for a Mortgage E. The Real Estate Sales Contract F. Closing the Deal VI. Financing the Transaction Sources of Mortgage Loans Types of Mortgage Loans Fixed-Rate Mortgages Adjustable-Rate Mortgages (ARMs) a. Features of ARMs b. Beware of Negative Amortization E. Fixed Rate or Adjustable Rate? F. Other Mortgage Payment Options G. Conventional, Insured, and Guaranteed Loans H. Refinancing Your Mortgage Planning over a Lifetime Financial Impact of Personal Choices Financial Planning Exercises Solution Manual for Personal Finance Michael Joehnk , Randall Billingsley , Lawrence Gitman 9780357033609
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