Begin Chapter 7

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Auto and Home Loans
CHAPTER PLAYLIST SONG:
“Living in the Promised Land” by
Willie Nelson
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
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.
7-2
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.
7-3
Auto and Home Purchases
 One of your largest purchases
 You 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 want
 Negotiate the price
 Close the deal
7-4
Steps of the Auto Purchase
7-5
Step 1. Analyze Needs vs. Wants
7-6
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 values
 Needs are different from wants
 Determine your driving habits and vehicle needs
7-7
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 fourwheel drive?
7-8
Step 2: Determine What You Can Afford
7-9
Step 2: Determining What You Can Afford
 Keep total debt-to-income ratio at 36% or less
7-10
Step 3: Do Your Homework
7-11
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
price
 New cars
 Warranty – 36 months, 36,000 miles
 Lower interest rates
 Latest safety features
7-12
7-13
Leases
 Long-term rental agreement (2-3 years)
 Limit on miles driven
 Early termination fee
7-14
7-15
Cost of Leasing vs. Buying: An Automobile Comparison
7-16
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
7-17
Step 4: Comparison Shop
7-18
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”
7-19
Step 5: Negotiate a Deal
7-20
Step 5: Negotiate a Deal
 Decide on the vehicle you want
 Know 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 sales
Stay in control
Don’t fall “in love” with a vehicle
Settle on a price
Reopen the negotiation with a trade-in if you have one
7-21
Step 6: Shop for Financing
7-22
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 rate
 Dealer Financing
 Dealer might offer special rates and terms
 Is zero percent a good deal?
7-23
Step 6: Shop for Financing
7-24
Step 7: Close the Deal
7-25
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
7-26
Step 8: After-Sale Activities
7-27
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!
7-28
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?
7-29
Home Ownership
Rent vs. Buy
7-30
Home Ownership
Rent vs. Buy
7-31
Home Ownership
Rent vs. Buy
7-32
Home Ownership
Life 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 home
 Late 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
7-33
Buying a Home
Selection Criteria
 Price
 No more than two times total gross annual household income
 Location, 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
7-34
Buying a Home
Selection 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
7-35
Real Estate Brokers
 Commission of 3%-7% paid by the seller
 Listing agent–the seller chooses to advertise the
house
 Multiple listing service (MLS)–all other real estate
agents can see the listing of the house
 Will have showing and open houses
 Can help you find a house and determine your needs
and wants
7-36
Real Estate Purchase
 Down Payment –
20% down
7-37
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
7-38
Mortgage Type Map
7-39
Mortgage Type Map
7-40
Properties of an Adjustable Rate Mortgage
7-41
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

7-42
Closing Costs
7-43
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 point
 Determining factor: How long will you live in that
house?
7-44
Refinancing
7-45
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)


Fixed Rate/Fixed Term


Similar to a secured credit card
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
7-46
Second Mortgages
Advantages
Disadvantages
 Ability to access the
 Risk losing home if you
equity of your home
 Interest may be tax
deductible
 Possible lower interest
rates
cannot make payments
 Cost of origination


Appraisal fee
Title search
7-47
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.
7-48
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#)
7-49
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.
7-50
Continuing Case Scenario
What steps would you suggest that Leigh take
in determining how much she can borrow?
7-51
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