Personal Finance Bennie Waller wallerbdlongwood edu 434 395

Personal Finance Bennie Waller wallerbd@longwood. edu 434 -395 -2046 Longwood University 201 High Street Farmville, VA 23901 Bennie D Waller, Longwood University

Big Ticket Purchases Autos and Homes Bennie D Waller, Longwood University

Big Ticket Purchases Ø Make good buying decisions. Ø Choose a vehicle that suits your needs and budget. Ø Choose housing that meets your needs Ø Decide whether to rent or buy housing. Ø Calculate the costs of buying a home. Ø Get the most out of your mortgage Bennie D Waller, Longwood University

Big Ticket Purchases Big ticket purchases should be researched and must provide the utility while fitting in your lifestyle as well as your budget Ø A house is the single largest investment Ø Automobiles are also a significant cost. Ø Both homes and autos will typically be financed. Ø As you enter into “big ticket” purchases be sure to differentiate wants from needs as they must fit lifestyle and wallet Ø Take your time, do research to determine what will work best for your situation Bennie D Waller, Longwood University

Before you buy Bennie D Waller, Longwood University

Transportation needs Ø Differentiate Want from Need Ø You may need transportation, but exactly what do you need in a vehicle? Ø Do you have kids (or plan to have kids), dogs? Ø Do you drive extensively (work, visits, vacations) Ø Do your homework. Ø How much can you afford? Ø How much down payment? Ø How much monthly payments? Ø Comparison shop – price and attributes Ø Operating and insurance costs Bennie D Waller, Longwood University

Transportation needs Ø Make Your Purchase Ø Get a fair price. Ø Know dealer costs or invoice costs Ø Dealer holdback – 2 -3% manufacturer rebate Ø Get quotes and negotiate Ø Financing Alternatives: Ø Cheapest—cash Ø Investigate all financing options before buying. Ø Keep financing out of the negotiations. Ø The shorter the term, the higher the monthly payments. Bennie D Waller, Longwood University

Transportation needs Ø 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 lease Bennie D Waller, Longwood University

Transportation needs Ø 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 laws Bennie D Waller, Longwood University

Transportation needs Bennie D Waller, Longwood University

Lease versus Purchase Decision Bennie D Waller, Longwood University

What can you afford? Ø Given your needs should you still have choices to make Ø Vehicles are NOT cheap. What transaction works best for you? Ø New – more expensive, warranty, sometimes promotional interest rates Ø Lease – low payments, no equity Ø Used – less expensive, higher interest rates, little or no warranties Ø Will you need to take out a loan or will you use savings? Bennie D Waller, Longwood University

How much can you afford? Let’s start by assuming that you can comfortably afford $300/month. Given this amount, what are your best options? PV = 9, 861. 30 FV = 0 N = 3 x 12 =36 I = 6/12=. 50 PMT = 300 Bennie D Waller, Longwood University

How much can you afford? 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? PMT= 509. 09 PV = -23000 FV = 0 N = 4 x 12=48 I = 3/12 =. 25 Monthly Payment = 509. 09 Total Payments = $24, 436. 30 Interest Payments = 1, 436. 30 Bennie D Waller, Longwood University

Other factors to consider Before making your purchase; Ø Maintenance costs – more for used cars Ø Operating costs Ø Insurance - much higher for a sports car Ø Warranties Ø Rebates and interest rate promotions Ø Test drive the car Ø Reconsider extended warranties and other add-ons Ø Sources for information include Ø Nada. com Ø Kbb. com Ø Consumerreports. org Bennie D Waller, Longwood University

Used car tips Ø Ø If buying a used car Always have car inspected by a mechanic. Know the Lemon laws Ask lot’s of questions Ø Has the car been wrecked? Ø Does it have water damage? Ø Warranties? Ø Negotiate!! Ø Be willing to walk away. Bennie D Waller, Longwood University

Financing alternatives Ø Cash Ø Financing – Check with banks, credit unions and dealerships Ø Know your credit score and shop for the best terms Ø Lease – good option for those that Ø Want a new vehicle every few years Ø Drive less than 15, 000 miles Ø Take good care of car Ø Little or no down payment Ø Lease options Ø Negotiate car value Ø Negotiate fees and rates Bennie D Waller, Longwood University

Financing alternatives Ø Lease options Ø Closed-end or walk-away at end of term Ø Purchase option Ø Open-end – at lease expiration, current market value is compared to the stated residual value in lease contract. Ø You are responsible for the difference if the market value is less than the residual value. Ø Buy or lease comparison Ø 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. Bennie D Waller, Longwood University

Housing options ØHousing is expensive ØMany equate home ownership with financial success and stability ØHome ownership is the single largest investment and can be as much as 25% of after-tax income. Bennie D Waller, Longwood University

Housing Options Ø A House: ØMost potential for capital appreciation. Ø Cooperatives and Condominiums: ØHomeowner’s fee ØPlanned unit developments Ø Apartments and other rental housing Bennie D Waller, Longwood University

Housing Ø Differentiate Wants from Need Ø What is important in a house? Ø Location Ø Schools Ø Conveniences Ø Affordability Ø Know (at least generally) what you want before starting Ø Do research Ø School districts, communities Ø How much can you afford? Bennie D Waller, Longwood University

Housing costs Ø If purchasing a home, you are likely to incur significant onetime costs such as ØDown payment Ø Loan points Ø Credit/origination fees Ø Application fee Ø Appraisal, title, attorney, home inspection fee Ø Title search and insurance costs Ø Recurring costs Ø PITI Ø Maintenance Ø Repairs Bennie D Waller, Longwood University

Housing costs 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 Points Bennie D Waller, Longwood University

Monthly Mortgage Payments Required to Repay a $10, 000 Loan with Different Interest Rates and Different Maturities Bennie D Waller, Longwood University

Rent versus Buy Ø Decision based on Ø Lifestyle Ø Career Ø Financial stability Ø Advantages to renting Ø Flexibility to relocate relatively easy Ø No unexpected housing expenditures (broken AC) Ø Advantages to owning Ø Stable payments over time Ø Tax advantages Ø More freedom in personalizing property Ø Capital appreciation Bennie D Waller, Longwood University

Renting versus Buying Bennie D Waller, Longwood University

Rent/Buy Worksheet Bennie D Waller, Longwood University

If you decide to buy Ø Know your credit and shop for the best rates Ø Get prequalified – it may give you an advantage when negotiating prices. Ø Get referrals for brokers or real estate agents Ø Ask lots of questions Ø Be careful of dual agency relationships with brokers Ø Get property inspected by licensed home inspector. Use the report to negotiate property price. Ø Earnest money - sends signal of seriousness Ø Get your own closing attorney to represent your interests Bennie D Waller, Longwood University

If you decide to buy Ø What is the maximum amount the bank will lend me? Ø Financial history Ø Ability to pay Ø Appraised home value Ø Ø 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 Ø Maximum PITI 28% of gross income Ø Maximum debt including PITI 36% of gross income Ø 20% down payment Ø 80% Loan to Value (LTV) Bennie D Waller, Longwood University

If you decide to buy Ø Comparison shop Ø Traditional real estate agent Ø Independent or exclusive buyer-broker Ø Get it inspected Ø Make an offer and haggle Ø Contract Ø Earnest money Ø Closing Ø Settlement or closing statement Bennie D Waller, Longwood University

Borrowing ratio example Maximum loan amount 6% FRM with monthly amortization, 30 years 28% ratio 36, 000 3, 000 Annual Income Monthly Income 840 100 PITI (28%) Monthly taxes 1, 080 250 PITI and other debts (36%) Monthly car payment 100 640 Monthly insurance Income for PI 100 630 100 430 Monthly credit card payment Monthly student loan payment Income for PITI Monthly taxes Monthly insurance Gross income for PI $106, 746. 63 Maximum amount of loan $71, 720. 39 Maximum amount of loan Bennie D Waller, Longwood University

Down payment is a prohibitive factor 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 Ø With 20% you will have to pay private mortgage insurance Bennie D Waller, Longwood University

Terms of mortgage Ø Factors to consider Ø Interest rate Ø Size of monthly payment Ø Term of mortgage Loan Amount Interest Years 100, 000 6. 00% 30 100, 000 6. 00% 15 Monthly Payments Total Payments 599. 55 215, 838. 19 843. 86 303, 788. 46 Interest 115, 838. 19 203, 788. 46 Bennie D Waller, Longwood University

Maximum mortgage loan Bennie D Waller, Longwood University

Maximum mortgage loan Bennie D Waller, Longwood University

Maximum mortgage loan Bennie D Waller, Longwood University

Principal/Interest 30 year FRM at 6% 700, 00 500, 00 400, 00 Principal 300, 00 Interest 200, 00 100, 00 1 15 29 43 57 71 85 99 113 127 141 155 169 183 197 211 225 239 253 267 281 295 309 323 337 351 Monthly Payment 600, 00 Month Bennie D Waller, Longwood University

Length of mortgage Ø 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. Ø 30 -year mortgage typically has lower rate and provides tax benefits for longer period of time. Ø Interest rates should not be the only deciding factor when considering mortgage term. Bennie D Waller, Longwood University

Length of mortgage Bennie D Waller, Longwood University

Sources of mortgages As with all consumer loans, there a multitude of sources. Ø Banks, S&Ls, credit unions, mortgage companies, mortgage brokers. Ø Government-backed loans are available (VA loans) Ø As with any loan, know your ability Ø Pull your credit and shop around. Ø Ask many questions about rates, points, terms Bennie D Waller, Longwood University

Types of mortgages Ø Fixed rate mortgage (FRM) Ø Monthly payment does not change over term of loan Ø Generally higher rate relative to ARM Ø Allows for more stability in financial planning Ø Adjustable rate mortgages (ARM) Ø Interest rate tied to some benchmark and will fluctuate Ø Initial “teaser” rate may be unreasonably low and then adjusted upward. Ø ARM margin – the amount over the index rate that the ARM rate will be set (prime+5%) Ø ARM interval (how often is rate adjusted) Ø ARM caps – limit on amount rate can increase during any given period Bennie D Waller, Longwood University

Other mortgage options Ø Balloon – payment typically amortized over a long period of time but with lump sum payment required at some point. Ø Graduated payment – initial lower payments but increase over time before leveling level off Ø Growing equity – designed to allow mortgage to be paid off early. Ø Bridge (construction) loans - Bennie D Waller, Longwood University

Subprime Mortgages Ø Subprime mortgages—mortgages taken out by borrowers with low credit scores. Ø Predatory lenders take advantage of these lenders. Ø Abusive loans—high-cost loans with little chance of paying off Ø Avoid predatory loans with knowledge. Bennie D Waller, Longwood University

Predatory Lending Practices Bennie D Waller, Longwood University

Refinancing your existing mortgage Ø Refinancing is when you pay off an existing mortgage with a new mortgage (can be with same institution). Ø 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? Ø 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. Ø Be careful not to squander the equity in your home. Bennie D Waller, Longwood University

Short sales Ø A short sale is when the selling price will not cover the outstanding mortgage on the property. Ø A seller attempting a short sell will need approval from the financial institution holding the existing mortgage. Ø 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. Ø The seller may still be responsible for the difference between the selling price and mortgage balance. Bennie D Waller, Longwood University

If you decide to rent Before signing a lease or rental agreement, be sure to: Ø Make sure you can afford the rent (a lease is a contract) Ø Understand the terms of the lease and all restrictions. Get everything in writing. Ø Make a list and take video/pictures of any items that are of concern. Provide a copy to landlord and get signature. Ø Purchase renter’s insurance for personal property and liability protection. Bennie D Waller, Longwood University

Addressing problems Ø Keep a record of all communications Ø First contact the individual/firm from whom you purchased the asset. Ø Next, contact the company. Larger companies have a department for such issues. Ø If by phone, don’t be emotional. State the facts calmly. Don’t make threats. Ø If in writing, send either an email or registered letter to ensure you have a record. Ø File a complaint with regulating authorities or organizations such as the BBB. Ø Lawsuit Bennie D Waller, Longwood University

Thank You Bennie D Waller, Longwood University