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Car & Home Decision Part 2

Car & Home Decision Part 2. Financial Planning - Yates. Determining What’s Affordable: Lending Standards. 1. Financial history: Income stability Credit history 2. Ability to pay: Housing cost ratio at a maximum of 28% of gross income

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Car & Home Decision Part 2

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  1. Car & Home DecisionPart 2 Financial Planning - Yates

  2. Determining What’s Affordable: Lending Standards 1. Financial history: • Income stability • Credit history 2. Ability to pay: • Housing cost ratio at a maximum of 28% of gross income • Housing and other long-term debt ratio at a maximum of 36% of gross income 3. Appraised home value Yates

  3. Determining What’s Affordable: Other Factors • Calculation of your mortgage limit: • 28% rule (front-end ratio) • 36% rule (back-end ratio) • 80% rule (home-equity rule) • Prequalification, or knowing for sure what is affordable Yates

  4. Determining What’s Affordable: Other Factors (cont’d) • Accumulation of a down payment: • Down payment sources and “gift letters” • FHA, VA, and FmHA federally-backed loans require a lower down payment • Private mortgage insurance (PMI) • IRA loan of up to $10,000 for first-time homebuyer Yates

  5. Housing Step 2: Selection • The search process: • Use a traditional real estate agent • Use an independent or exclusive buyer-broker • Use the Internet to learn about buying a home • The inspection process: • Structural • Mechanical Yates

  6. Housing Step 3: Making the Purchase • Guidelines for renting • Negotiating a sales price • Signing the sales contract • Financing the purchase – the mortgage Yates

  7. Guidelines for Renting • Determine what you can afford. • Compare the location with shopping, employment, and schools. • Understand the lease. • Get every detail in writing. • Research the reliability of the landlord. • Acquire renter’s insurance. Yates

  8. Negotiating a Sales Price • Always haggle on the actual purchase price and counteroffers. • Include all contingencies. • Consider closing costs. • Offer earnest money. • Note: You may never see the seller because often the real estate agents carry the offers between parties. Yates

  9. Signing the Sales Contract • Always have a fixed price. • Do a title search. • Perform a pest or other inspection. • Make the contract contingent on receiving the proper financing. Yates

  10. Signing the Contract (cont’d) • Divide the utilities, insurance, taxes, and interest equitably with the seller. • Stipulate the condition of the dwelling upon transfer. • Include all other contingencies that may interfere with a satisfactory purchase. Yates

  11. Financing the Purchase • Shop for the lowest interest rate. • Determine where you want to finance. • Determine the length of the mortgage. • Choose the type of mortgage. • Note: Make sure you understand every aspect of the mortgage before you sign. This could be your largest purchase ever. Yates

  12. Sources of Mortgages • Mortgage bankers • Mortgage brokers Yates

  13. Conventional or Government-Backed? • Conventional • Veteran’s Administration (VA) mortgages • Federal Housing Administration (FHA) mortgages Yates

  14. Government-Backed Mortgages • Advantages: • Lower interest • Smaller down payment requirement • Less strict lending standards • Disadvantages: • More paperwork to qualify • Higher closing costs • Maximum lending limits Yates

  15. Types of Mortgages • Fixed-rate mortgage loans • Adjustable-rate mortgage (ARM) loans • Other mortgage loan options Yates

  16. Fixed-Rate Mortgage Loans • Assumable loans – allow for transfer of the mortgage with the home • Prepayment privilege – allows the payee to increase the monthly payment without a fee Yates

  17. Adjustable-Rate Mortgage (ARM) Loans • Initial rate – the first rate on the mortgage, usually short-term • Interest rate index – determines annual rate adjustment • Margin – the difference between the index rate and the quoted rate • Adjustment interval – the length of time between adjustments Yates

  18. Adjustable-Rate Mortgage (ARM) Loans (cont’d) • Rate cap – the maximum rate increase allowed either per year or over the life of the loan • Payment cap – the maximum allowable payment amount. Normally not a desired feature due to the risk of negative amortization. Yates

  19. Convertible Reduction-option Two-step Price level adjusted ARM Innovations Yates

  20. Other Mortgage Loan Options • Balloon payment mortgage • Graduated payment mortgage • Growing equity mortgage • Shared appreciation mortgage Yates

  21. Adjustable-Rate Versus Fixed-Rate Mortgages • Fixed-rate issues to consider: • Fixed payments • Lower interest rate risk • No risk of negative amortization • Adjustable-rate issues to consider: • Lower initial interest rate • May qualify for a larger loan due to lower monthly payments • With rising rates, rising payments Yates

  22. Mortgage Decisions:Term of the Loan • 15-year advantages: • Less total interest paid • Faster equity accumulation and payoff • Lower interest rate • 30-year advantages: • Lower monthly payments increase affordability and financial flexibility • Higher time value of money • Greater tax advantages due to interest payment deductions Yates

  23. Mortgage Decisions:Term of the Loan (cont’d) Two other considerations: • Time value of money • The effect of taxes Yates

  24. Housing Step 4:Post-purchase Activities • Time and money for upkeep and maintenance • Refinancing your mortgage: • 2% rule • Closing costs Yates

  25. Summary • Smart buying: Your automobile: • Step 1: Do your homework to narrow your car choice. • Step 2: Make your selection. • Step 3: Make your purchase. • Step 4: Maintain your purchase. • Step 5: Consider consumer protection and your car. Yates

  26. Summary (cont’d) • Choosing a vehicle: • Consider your needs versus your wants. • Look at the alternatives. • Fit your car into your budget. • Do your comparison shopping via the internet or publications. • Determine what is available in your price range. • Test-drive the exact vehicle you are considering. Yates

  27. Summary (cont’d) • Deal negotiation: • Take advantage of sales, but always negotiate the price. • Know the dealer’s cost of the vehicle. • Understand the various dealer markups. • Be aware of any rebate that may apply. • Evaluate financing. • Leasing alternatives: • Closed-end leases, or walk-away leases • Open-end leases • Alternatives Yates

  28. Summary (cont’d) • Smart buying: Your housing: • Step 1: Homework • Step 2: Selection • Step 3: Making the purchase • Step 4: Post-purchase Yates

  29. Summary (cont’d) • Choosing a housing type: • Decide on the fundamentals such as bathrooms, bedrooms, and closet space. • Decide on property size. • Compare other considerations like school systems, or proximity to shopping centers. • Buying versus renting: • Personal and lifestyle considerations • Financial considerations • Activities Yates

  30. Summary (cont’d) • Types of mortgages: • Fixed-rate mortgage loans • Adjustable-rate mortgage (ARM) loans • Other mortgage loan options • Sources of mortgages: • Mortgage bankers • Mortgage brokers • Conventional mortgages • Government-backed mortgages Yates

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