Making Automobile and Housing Decisions - Personal Financial Planning - Lecture Slides, Slides of Finance

Download Making Automobile and Housing Decisions - Personal Financial Planning - Lecture Slides and more Slides Finance in PDF only on Docsity! Making Automobile and Housing Decisions Docsity.com Agenda • Review of learning goals • Key chapter terms and definitions • Buying an automobile • Leasing your car • Meeting housing needs • How much housing can you afford? • The home-buying process • Financing the home purchase • Summary • Internet links and on-line resources Agenda Docsity.com MAKING AUTOMOBILE DECISIONS Docsity.com Buying an Automobile • Usually the first, major financial decision of your life. – Transportation is often required for school and for work – It involves a large sum of money – Automobiles have high operating costs including: • Insurance • gasoline and oil • Maintenance and repairs – Automobiles have a relatively short life…so this process of researching, selecting, buying and maintaining an automobile is a frequently recurrent activity. LG 1 Docsity.com 10 Steps to Buying an Automobile 1. Analyze how much car you can afford 2. Choose the best way to pay for your new car – cash, financing or lease 3. Select the right car for you in terms of size, performance, safety and styling. Choose at least three “target cars” to consider buying. 4. Decide on a price based on dealer’s cost for the car and option, plus a markup for the dealer’s profit, minus rebates and incentives. 5. Test-drive the car at least once, on both local streets and highways. 6. Get a used car inspected by a qualified independent mechanic. 7. Decide whether to trade in your used car or sell it yourself. 8. Begin negotiations with three or more dealers as necessary. Hold firm on your target price before closing the deal. 9. Review and sign contracts with the dealer’s finance manager, avoiding pressure to buy unnecessary extras. 10. Consider alternate buying strategies such as Internet buying services, or faxing your offer to local dealerships for competitive bids. Buying a Car LG 1 Docsity.com Operating Costs Fixed Costs: – Insurance – License – Monthly payments Variable Costs: – Change based on amount of driving: • Fuel • Oil • Tires • Maintenance Depreciation: – The loss in value of the car that occurs over its period of ownership. Buying a Car LG 1 Docsity.com The Purchase Transaction • Comparison shop. • Discuss price first, not financing or trade-in. • Don’t pay the sticker price. • Find out the dealer’s cost. • Check for special buyer’s incentives. • Negotiate for the best deal. • Be able to walk away. Buying a Car LG 1 Docsity.com Closing the Deal • A legally binding offer must be made through a sales contract specifying: – Offering price – Other conditions of the offer including trade-in if applicable. • A sales contract contractually binds you, therefore, before signing, ensure that you can afford the car. – Affording a vehicle involves more than being able to find the cash for financing to make the purchase… Docsity.com The Leasing Process • Closed-end lease – When the lease is over, you “walk away” from the car. – Most customers choose this type. • Open-end lease – The car’s residual value is used to determine the payment. – If you return the car and it is worth less than estimated, you pay the difference. Leasing a Car LG 2 Docsity.com Lease Payment Calculation Based On 1. Capitalized cost (price) of the car 2. Estimated residual value at end of lease 3. Money factor (financing rate) on lease 4. Term or length of lease (typically 2 to 5 years) Leasing a Car LG 2 Docsity.com Auto Leasing Checklist Smart car buyers should insist on knowing the following eight figures before negotiating a lease: 1. The purchase price of the car and options 2. The capitalized cost (the value on which monthly payments are based) 3. The money factor (interest rate assumption) 4. The total interest paid 5. The total sales tax 6. The residual value for which the car can be purchased at the lease’s end 7. The depreciation (the capitalized cost minus the residual value) 8. The lease term LG 2 Docsity.com Meeting Housing Needs Buy or Rent? Docsity.com Housing Choices • Single-family homes • Condominiums • Cooperative housing • Rental units LG 3 Docsity.com Meeting Housing Needs The single family home – Most popular choice. – Offers more privacy and property control. – Costs have increased dramatically in recent years. Housing Decisions LG 3 Docsity.com Meeting Housing Needs Cooperative Apartment – Fees cover service, maintenance, taxes, and mortgage on entire building. – Usually costs less than renting similar apartment. • Tenants own shares of the corporation that owns the apartment building. • Tenants lease units from corporation. • Tenants are assessed fees based on amount of space they occupy. Housing Decisions LG 3 Docsity.com Meeting Housing Needs Rental Unit Appropriate for: – Those who do not have enough cash for a down payment. – Those who are unsettled in their job or family status. – Those who do not want responsibilities of home ownership. – Those who feel current conditions for home ownership are unattractive. Housing Decisions LG 3 Docsity.com The Rental Option • Contract specifies – Monthly payment and due date – Penalties for late payment – Length of lease agreement – Deposit requirement – Renewal options, restrictions, etc. A rental contract protects both the lessor (owner) and lessee (one who leases). Understand your rights and responsibilities BEFORE signing! Housing Decisions LG 3 Docsity.com The Costs of Home Ownership Down Payment The Down payment – Represents the buyer’s equity. – Must be paid at time of closing. – Anywhere from 5% to 20% of the purchase price of the house, depending on lender's Loan to Value Ratio = the maximum percentage of the value of a property that the lender is willing to loan. Housing Decisions LG 4 Docsity.com The Costs of Home Ownership Closing Costs The closing costs on a home mortgage loan can be substantial – as much as 5 – 7% of the price of the home. Item Loan application fee $200 Title insurance 250 Legal fees 1,200 Land transfer tax (1.0%) 1,500 Property survey 1,000 Appraisal fee 250 Home inspection 250 Interest adjustment 250 Prepaid property tax 400 Home insurance 600 Total closing costs $5,900 Mortgage loan insurance 2,250 Housing Decisions LG 4 Docsity.com The Costs of Home Ownership Mortgage payments Depend on: – The principal – The term – Rate of interest – Period of payment – Amortization period Housing Decisions LG 4 Docsity.com The Costs of Home Ownership Mortgage payments … Step 2: Find effective monthly rate %575.005750016. 1005750016.1 1071225.1 1071225.1071225.1 )1(071225.1 1)1(071225. 1)ratemonthly 1(071225. 083333.0 1212 1 12 12 12 == += += +== += −+= −+== m m m m m m r r r r r r EAR Housing Decisions LG 4 Docsity.com The Costs of Home Ownership Mortgage payments … Step 3: Find monthly payment 83.400,1$ )7727.142(000,200$ )(000,200$ 00575. )00575.1( 11 (000,200$ )(000,200$ 00575.,1225 300 %005750016.,1225 = = = − = = =×= =×= PMT PMT PVIFAPMT PMT PVIFAPMT rn rn Housing Decisions LG 4 Docsity.com The Costs of Home Ownership Mortgage payments … Do a loan amortization table Housing Decisions LG 4 LOAN AMORTIZATION SCHEDULE Original Amount of the Mortgage = 200,000 Quoted rate of interest = 7.00% Amortization period = 25 years Payments = monthly Payment Balance Interest Payment Principal Retired Ending Principal 1 200,000 1,160 1,408 248 199,752 2 199,752 1,158 1,408 250 199,502 3 199,502 1,157 1,408 251 199,250 4 199,250 1,156 1,408 253 198,997 5 198,997 1,154 1,408 254 198,743 6 198,743 1,153 1,408 256 198,487 7 198,487 1,151 1,408 257 198,230 8 198,230 1,150 1,408 259 197,971 9 197,971 1,148 1,408 260 197,711 10 197,711 1,147 1,408 262 197,449 11 197,449 1,145 1,408 263 197,186 12 197,186 1,144 1,408 265 196,921 Docsity.com Responsibilities of Mortgagor • To pay taxes on the land and buildings • to keep the property adequately insured • to maintain the premises in a good state of repair • to pay principal and accrued interest, either in full at the maturity date or in installments as agreed to by the parties. Docsity.com Responsibilities of Mortgagee • To leave the mortgagor in possession and not to interfere with his use and enjoyment of the mortgaged property as long as the mortgagor fulfils all of his covenants. • To carry out the necessary discharge of the mortgage upon repayment of the loan in full plus accrued interest. K. Hartviksen Docsity.com Mortgage Registration • Registration has particular significance in mortgage lending: – the mortgagee must be sure that the mortgagor holds clear title to the land before the mortgage is arranged. – The mortgagee must register the mortgage or risk the loss of the land as security or loss of seniority of claim to another secured creditor who registered a claim. – When the mortgage loan is repaid, the mortgagee must provide the mortgagor with a discharge certifying repayment of the loan. – To obtain clear title to the mortgaged property, the mortgagor must register the discharge in the land registry office. K. Hartviksen Docsity.com Types of Residential Mortgages • Two types: • conventional • high ratio • Lenders require applicants to meet three basic qualifications: • a down payment of at least 5% of the purchase price (up to 25% down payment is also common) • total monthly payments for principal, interest, taxes and heating cannot exceed 32% of the borrower’s gross monthly income. • Total debt service payments (first mortgage and all other loan payments) cannot exceed 42% of gross income. K. Hartviksen Docsity.com Conventional Mortgages • Maximum loan to value ratio of 75% based on the purchase price or appraised value. • Mortgage insurance is not required for conventional mortgages. K. Hartviksen Docsity.com High Ratio Mortgages • Apply to mortgage loan to value ratios greater than 75% • lender will require mortgage insurance to protect against payment default. • Mortgage insurance is generally provided by Canada Mortgage and Housing under the National Housing Act. – Applicants must meet CMCH debt service and loan to value criteria to qualify for NHA insurance. – Debt service ratios are the same as conventional mortgage loans. – Loan value ratios are generally 90% for loans up to $180,000 and 80% for any additional balance up to a prescribed maximum. K. Hartviksen Docsity.com Power of Sale • The right to exercise power of sale by which a mortgagee may cause the mortgaged property to be sold, follows a default by a mortgagor. • Notices of power of sale, warning the mortgagor that the property will be sold unless arrears are paid, are served on both the mortgagor and any junior mortgagees. • If the mortgagor fails to bring the mortgage into good standing, parties holding further liens on the property have the right to pay off the mortgage in full or take an assignment of the mortgage and then take action against the mortgagor themselves. Docsity.com Use of Power of Sale • Power of sale and foreclosure are the two final and most drastic measures a mortgagee undertakes to recover what is owed. • Power of Sale is the most rapid and inexpensive remedy. – Since mortgage lenders are not normally in the business of owning and operating real estate, a power of sale is normally the remedy used by mortgagees in a stable or rising real estate market. – The mortgagee’s principal and accrued interest can be recovered through a sale of the real estate asset. Docsity.com Mortgage Foreclosure • A writ is issued in the Provincial Supreme Court which will involve costly court appearances. • The mortgagor is entitled to file for a Notice Desiring an Opportunity to Redeem which grants the mortgagor a six-month period to redeem the mortgaged premises by bringing arrears up to date. • The mortgagee sues for both possession and payment. Usually 15 days after the writ has been served, the mortgagee obtains judgement for the full amount owed and for possession of the property. If, within the six month period, the mortgagor is able to redeem the mortgaged premises, the mortgagee is accountable for funds received pursuant to the money judgement and any net income resulting from possession. Upon redemption, the mortgagee must reconvey possession of the property to the mortgagor. • Failure to redeem results in a final order of foreclosure which transfers ownership to the mortgagee. Docsity.com Maintenance & Operating Expenses May be greater for larger or older homes • Consider upkeep expenses: – Painting – Repairs – Lawn maintenance • Consider operating expenses: – Utilities Housing Decisions LG 4 Docsity.com The Mortgage Payment — Mostly Interest 0 100 200 300 400 500 600 700 0 5 10 15 20 25 30 Years Note that most of the mortgage payment will go toward interest until after year 20! Monthly payment $665.30 INTEREST ($139,508 total) PRINCIPAL ($100,000) Housing Decisions LG 4 Docsity.com The Home Buying Process • Shop the market and decide whether to use an agent. – Most realtors belong to Multiple Listing Service (MLS) and have access to a large part of the market. – Agents typically are employed by seller and are paid only if they make a sale. – Commissions range from 5-7% of sales price. Housing Decisions LG 5 Docsity.com Interest rate varies, causing monthly payments (PI) to vary. May cause negative amortization! Features of ARMs: –Adjustment period –Index rate –Margin –Interest rate caps –Payment caps Adjustable Rate Mortgage (ARM) Financing the Home LG 6 Docsity.com – But you will probably have to pay closing costs on the new loan! Refinancing your Mortgage • Can reduce your monthly payment if new rate is lower; • Can reduce the total borrowing costs in financing the home; Financing the Home LG 6 Docsity.com Reverse Mortgages Docsity.com What is a Reverse Mortgage? • You continue to own your own home • The loan is generally 10-40% of the homes value • Issuers will not offer large mortgages or favourable terms untill the retiree is much older due to risk that the mortgage value will be greater than house value • Two types – Term or straight – Reverse annuity mortgage (RAM) Docsity.com Conventional vs Reverse Mortgage • Conventional – regular payments over time – growing equity – falling debt – at end of loan borrower owes nothing • Reverse – no regular payments over time – growing debt – falling equity – at the end of loan borrower owes a substantial amount Docsity.com Who Qualifies • Must be 62 years or older • Must own your home with name on title • Must be the principal residence • No minimum income level • Medical conditions have no effect on eligibility Docsity.com A Simplified Example • Original home value……. $200000 Does not include closing costs, • Monthly Loan Advance……$1000 fees, or home selling costs • Monthly Interest Rate……0.5% • Appreciation Rate……. 4% per year A B C D (D-C) End of Year Principle Interest @ .5% Loan BalanceHome Value Home Equity 1 $12,000.00 $397.00 $12,397.00 $208,000.00 $195,603.00 2 $24,000.00 $1,559.00 $25,559.00 $216,320.00 $190,761.00 3 $36,000.00 $3,532.00 $39,532.00 $224,972.80 $185,440.80 4 $48,000.00 $6,368.00 $54,368.00 $233,971.71 $179,603.71 5 $60,000.00 $10,118.00 $70,118.00 $243,330.58 $173,212.58 6 $72,000.00 $14,840.00 $86,840.00 $253,063.80 $166,223.80 7 $84,000.00 $20,594.00 $104,594.00 $263,186.36 $158,592.36 8 $96,000.00 $27,442.00 $123,442.00 $273,713.81 $150,271.81 9 $108,000.00 $35,453.00 $143,453.00 $284,662.36 $141,209.36 10 $120,000.00 $44,698.00 $164,698.00 $296,048.86 $131,350.86 Docsity.com Things to Consider • Amount could become due earlier if you do not carry out responsibilities of property taxes, insurance and repairs • You will never be asked to move or sell to repay • You may repay in full at anytime (36 month rule) • Tax-Free money • Can help reduce income tax (RRSP contributions: top-ups) • It can take as little as 30 days • If the value of the home does not increase substantially then a large amount of its value at selling time will be absorbed by the interest Docsity.com Where to apply • Through most of the national chartered banks in Canada • Credit unions • Mortgage brokers • Investment and financial planning firms • CHIP (Canadian Home Income Plan Corp.) Docsity.com Summary • What it is • Who qualifies • Uses of the money • Repayment • An Example • Things to consider • Where to apply • Costs Docsity.com In summary you have learned how to … • Implement a plan to research and select a new or used automobile. • Decide whether to buy or lease a car. • Identify housing alternatives, assess the rental option, and perform a rent-or-buy analysis. • Evaluate the benefits and costs of home ownership and estimate how much you can afford for a home. • Describe the home-buying process. • Choose mortgage financing that meets your needs. Summary Docsity.com Internet Links and On-Line Resources • 10 steps to buying a car • General Motors Online • Canoe Money Car Loan Rates • AutoTrader online • Insurance Bureau of Canada on auto insurance • Black book price for cars according to Canadian Driver • Leasing versus buying for the same car • Housing prices in Canada – Canadian Real Estate Association • Mortgage Qualifier calculator at Dinkytown Web • Canada Mortgage and Housing Corporation (CMHC) guide to buying, renting and financing. • What renovations will add the greatest value to your home – Reader’s Digest • Multiple Listing Service • 10 things not to do before closing – realestate.com • Mortgage loan insurance from Genworth Financial Canada (formerly GE Mortgage Insurance Canada) Web Links Docsity.com Key Chapter Terms • Depreciation • Sales contract • Lease • Closed-end lease • Open-end lease • Residual value • Capitalized cost • Purchase option • Condominium • Cooperative Apartment • Rental contract • Down payment • Loan-to-value ratio • Mortgage loan insurance • Closing costs • Gross debt service ratio • Total debt service ratio • Property taxes • Multiple Listing Service • Prequalification • Offer to purchase • Agreement of purchase and sale • Good faith deposit • Contingency clause • Title check • Mortgage loan • Mortgage broker • Fixed-rate mortgage • Variable-rate mortgage • Interest-rate cap • Convertible mortgage • Conventional mortgage Terms Docsity.com Definitions 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. Terms Docsity.com Definitions 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 the seller, the contract legally binds them to its terms. Terms Docsity.com Definitions Open-end 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. Terms Docsity.com Definitions Residual Value • The remaining value of a leased car at the end of the lease term. Terms Docsity.com Definitions Capitalized Cost • The price of a car that is being leased. Terms Docsity.com Definitions Cooperative Apartment (co-op) – An apartment in a building in which each tenant owns a share of the corporation that owns the building. Terms Docsity.com Definitions 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 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. Terms Docsity.com Definitions 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. Terms Docsity.com Definitions Closing costs – All expenses that borrowers ordinarily pay at the time a mortgage loan is closed and title to the purchased property is conveyed to them. Terms Docsity.com Definitions Gross debt service (GDS) ratio – The ratio of the borrower’s monthly housing costs (mortgage payments, heating costs, and taxes) to their monthly gross income. Terms Docsity.com Definitions Total debt service (TDS) ratio – The ratio of the borrower’s total debt service costs (housing costs plus other debt service) to their monthly gross income. Terms Docsity.com