Bennie Waller wallerbd@longwood.edu - PowerPoint Presentation

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Bennie Waller

wallerbd@longwood.edu

434-395-2046

Longwood University

201 High Street

Farmville, VA 23901Slide2
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Make good buying decisions.

Choose a vehicle that suits your needs and budget.

Choose housing that meets your

needs

Decide whether to rent or buy housing.

Calculate the costs of buying a home.

Get the most out of your mortgageSlide4

Big ticket purchases should be researched and must provide the utility while fitting in your lifestyle as well as your budget

A house is the single largest investment

Automobiles are also a significant cost.

Both homes and autos will typically be financed.

As you enter into “big ticket” purchases be sure to differentiate wants from needs as they must fit lifestyle and wallet

Take your time, do research to determine what will work best for your situationSlide5
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Differentiate Want from Need

You may need transportation, but exactly what do you need in a vehicle?

Do you have kids (or plan to have kids), dogs?

Do you drive extensively (work, visits, vacations)

Do your homework

.

How much can you afford?

How much down payment?

How much monthly payments?

Comparison shop – price and attributes

Operating and insurance costsSlide7

Make Your Purchase

Get a fair price.

Know dealer costs or invoice costs

Dealer holdback – 2-3% manufacturer rebate

Get quotes and negotiate

Financing Alternatives

:

Cheapest—cash

Investigate all financing options before buying.

Keep financing out of the negotiations.

The shorter the term, the higher the monthly payments.Slide8

Leasing

: ideal for financially stable, want new car every few years, drive less than 15,000 miles annually, good credit, no down payment

Closed-end or walk-away lease

Purchase option

Open-end

leaseSlide9

Maintain your purchase

Keep vehicle in best running condition.

Don’t ignore signs of trouble.

Your first line of protection is the warranty.

Know your rights under the

Lemon lawsSlide10
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Given your needs should you still have choices to make

Vehicles are NOT cheap. What transaction works best for you?

New – more expensive, warranty, sometimes promotional interest rates

Lease – low payments, no equity

Used – less expensive, higher interest rates, little or no warranties

Will you need to take out a loan or will you use savings?Slide13

P

V = 9,861.30

F

V = 0

N = 3 x 12 =36

I = 6/12=.50

PMT = 300

Let’s start by assuming that you can comfortably afford $300/month. Given this amount, what are your best options?Slide14

PMT

= 509.09

PV = -23000

F

V = 0

N = 4x12=48

I = 3/12 = .25

Alternatively, assume that you can obtain a $23,000, 4 year loan from an auto company running a promotion at 3% for customers with excellent credit. What would your monthly payment?

Monthly Payment = 509.09

Total Payments = $24,436.30

Interest Payments = 1,436.30Slide15

Before making your purchase;

Maintenance costs – more for used cars

O

perating costs -

I

nsurance - much higher for a sports car

Warranties

Rebates and interest rate promotions

Test drive the car

Reconsider extended warranties and other add-ons

Sources for information include

Nada.com

Kbb.com

Consumerreports.orgSlide16

If buying a used car

Always have car inspected by a mechanic.

Know the Lemon laws

Ask lot’s of questions

Has the car been wrecked?

Does it have water damage?

Warranties?

Negotiate!!

Be willing to walk away.

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Cash

Financing – Check with banks, credit unions and dealerships

Know your credit score and shop for the best terms

Lease – good option for those that

Want a new vehicle every few years

Drive less than 15,000 miles

Take good care of car

Little or no down payment

Lease options

Negotiate car value

Negotiate fees and ratesSlide18

Lease options

Closed-end or walk-away at end of term

Purchase option

Open-end – at lease expiration, current market value is compared to the stated residual value in lease contract.

You are responsible for the difference if the market value is less than the residual value.

Buy or lease comparison

Compare the costs of each alternative over period of lease. For example, a two year lease would be compared with cost of buying for two years. Programs are readily available on the web.Slide19

Housing is expensive

Many equate home ownership with financial success and stability

Home ownership is the single largest investment and can be as much as 25% of after-tax income.Slide20

A House:

Most potential for capital appreciation.

Cooperatives and Condominiums:

Homeowner’s fee

Planned unit developments

Apartments and other rental housingSlide21

Differentiate Wants from Need

What is important in a house?

Location

Schools

Conveniences

Affordability

Know (at least generally) what you want before starting

Do research

School districts, communities

How much can you afford?Slide22

If purchasing a home, you are likely to incur significant

one-time

costs such as

Down payment

Loan points

Credit/origination fees

Application fee

Appraisal, title, attorney, home inspection fee

Title search and insurance costs

Recurring costs

PITI

Maintenance

RepairsSlide23

The Down Payment, Points, and Closing Costs on the Purchase of a $150,000 House, Borrowing $120,000, with 20% Down at a Rate of 6% with 2 PointsSlide24
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Decision based on

Lifestyle

Career

Financial stability

Advantages to renting

Flexibility to relocate relatively easy

No unexpected housing expenditures (broken AC)

Advantages to owning

Stable payments over time

Tax advantages

More freedom in personalizing property

Capital appreciationSlide26
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Know

your credit and shop for the best rates

Get prequalified – it may give you an advantage when negotiating prices.

Get referrals for brokers or real estate agents

Ask lots of questions

Be careful of dual agency relationships with brokers

Get property inspected by licensed home inspector. Use the report to negotiate property price.

Earnest money - sends signal of seriousness

Get your own closing attorney to represent your interestsSlide29

What is the maximum amount the bank will lend me?

Financial history

Ability to pay

Appraised home

value

Calculating your mortgage limit

Should I borrow up to this maximum?

How big a down payment can I afford?

Ratios that you should be familiar

Maximum PITI 28% of gross income

Maximum debt including PITI 36% of gross income

20% down payment

80% Loan to Value (LTV)Slide30

Comparison shop

Traditional real estate agent

Independent or exclusive buyer-broker

Get it inspected

Make an offer and haggle

Contract

Earnest money

Closing

Settlement or closing statementSlide31

Maximum loan amount

6% FRM with

monthly amortization, 30 years

28% ratio

36% ratio

36,000

Annual Income

36,000

Annual Income

3,000

Monthly Income

3,000

Monthly Income

840

PITI (28%)

1,080

PITI and other debts (36%)

100

Monthly taxes

250

Monthly car payment

100

Monthly insurance

100

Monthly credit card payment

640

Income

for PI

100

Monthly student loan payment

630

Income for

PITI

100

Monthly taxes

100

Monthly insurance

430

Gross income for PI

$106,746.63

Maximum amount of loan

$71,720.39

Maximum amount of loanSlide32

Maximum

home value

Based on 80% LTV

mortgage lending guidelines

28% ratio

36% ratio

$106,746.63

$71,720.39

80% LTV

$133,433.29

$89,650.49

20% PMT

$26,686.66

$17,930.10

With 20% you will have to pay private mortgage insurance Slide33

Factors to consider

Interest rate

Size of monthly payment

Term of mortgage

Loan Amount

100,000

100,000

Interest

6.00%

6.00%

Years

30

15

Monthly Payments

599.55

843.86

Total Payments

215,838.19

303,788.46

Interest

115,838.19

203,788.46Slide34
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30 year FRM at 6% Slide38

Mortgage terms will be influenced by a

number of factors,

such as interest

rates, financial discipline,

other financial

goals

, time

value of money, and taxes.

30-year

mortgage

typically has lower rate and provides tax benefits for longer period of time.

Interest rates should

not be the only deciding factor when considering mortgage term.Slide39
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As with all consumer loans, there are a multitude of sources.

Banks, S&Ls, credit unions, mortgage companies, mortgage brokers.

Government-backed loans are available (VA loans)

As with any loan, know your ability

Pull your credit and shop around.

Ask many questions about rates, points, termsSlide41

Fixed rate mortgage (FRM)

Monthly payment does not change over term of loan

Generally higher rate relative to ARM

Allows for more stability in financial planning

Adjustable rate mortgages (ARM)

Interest rate tied to some benchmark and will fluctuate

Initial “teaser” rate may be unreasonably low and then adjusted upward.

ARM margin – the amount over the index rate that the ARM rate will be set (prime+5%)

ARM interval (how often is rate adjusted)

ARM caps – limit on amount rate can increase during any given periodSlide42

Balloon – payment typically amortized over a long period of time but with lump sum payment required at some point.

Graduated payment – initial lower payments but increase over time before leveling level off

Growing equity – designed to allow mortgage to be paid off early.

Bridge (construction) loans - Slide43

Subprime mortgages—mortgages taken out by borrowers with low credit scores.

Predatory lenders take advantage of these lenders.

Abusive loans—high-cost loans with little chance of paying off

Avoid predatory loans with knowledge.Slide44
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Refinancing is when you pay off an existing mortgage with a new mortgage (can be with same institution).

A rule of thumb as to whether refinancing is financially prudent is whether interest

rates

are at

least two percentage points lower than the existing

mortgage?

Also you should plan on being in the property at least two years in order to be able to recoup the costs required for refinancing.

Be careful not to squander the equity in your home.Slide46

A short sale

is when the selling price will not cover the outstanding mortgage on the property.

A seller attempting a short sell will need approval from the financial institution holding the existing mortgage.

Short

sales are used when real estate values have fallen

and

the

bank deems it beneficial to accept the short sell rather than

foreclose on the property owner.

The seller may still be responsible for the difference between the selling price and mortgage balance.Slide47

Before signing a lease or rental agreement, be sure to

:

Make sure you can afford the rent (a lease is a contract)

Understand

the

terms of the lease

and all

restrictions. Get everything in writing.

Make a list and take video/pictures of any items that are of concern. Provide a copy to landlord and get signature.

Purchase

renter’s insurance for personal property and liability protection.Slide48

Keep a record of all communications

First contact the individual/firm from whom you purchased the asset.

Next, contact the company. Larger

companies have a department for such issues.

If by phone, don’t be emotional. State the facts calmly. Don’t make threats.

If in writing, send either an email or registered letter to ensure you have a record.

File a complaint with regulating authorities or organizations such as the BBB.

LawsuitSlide49