Personal Finance Questions: Home & Automobile Buying Decision

Question: Provide the most common one-time or initial costs involved in buying a house.
A down payment will be required
- Closing or settlement costs must be paid
- Other costs include points, loan origination fee, loan application fee, appraisal fee, title search, and title insurance
- In addition, there may be an attorney's fee, recording fee, credit report charge, termite and radon inspection fee, and a notary fee.


Question: List the four steps in the automobile decision
Step 1: Differentiate want from need.
Step 2: Do your homework.
Step 3: Make the purchase.
Step 4: Maintain the purchase.

Question: Rob Roy is toying with the idea of buying a used car every three years instead of leasing or buying a new one - Assuming he can find a one-owner with low miles in good condition, what advantages might he enjoy?
Today, there are many good used cars on the market because so many people are leasing new cars instead of buying them
- When the leases are up, the dealers put them on the 'pre-owned' lot
- In general, a used car costs less and requires less down payment
- A used car tends to decline in value much more slowly than a new car
- A used car can be a real money saver
- The savings from buying a used car instead of a new one every three years have been estimated to be between $1,500 and $2,000 per year, which will put more dollars in your pocket to spend on other things you want.

Question: List the factors that go into a monthly lease payment and tell how the dollar value of a lease is calculated
-the agreed-upon price
-any other up-front fees
-down payment plus any trade-in allowance or rebate
-value of the vehicle at the end of the lease
-rent or finance charges
-length of the lease
The dollar value of the lease is found by subtracting the projected value of the car at the end of the lease from the current market value upon signing the lease.

Question: Describe the keys to obtaining a 'good' lease
First, negotiate a fair agreed-upon value for the car
- Be sure to see that the warranty covers the entire lease period so you do not have to pay for major repairs
- Make sure that
'normal wear and tear' is defined in the contract and that you understand the termination fees
- Make sure you have adequate insurance protection
- Last, find a car that does not depreciate quickly and has a low rent or finance charge.

Question: What are the basic financing options when considering a new vehicle?
The basic options are to pay cash, trade evenly, borrow money, lease, trade up and pay the extra, trade down and get the difference.

Question: Write a paragraph giving at least five important tips on buying a new car
Find out the dealer's invoice price for the vehicle and negotiate a price
- Check out all rebates and discounts
- Get price quotes from several dealers
- Keep your trade-in negotiations separate from the main deal
- Compare financing from several sources before you sign the contract
- Think twice about adding extra options and agreements.

Question: Bridgette Rojeau has found a beautiful late model used car on a dealer's lot - It is just what she has always wanted - Give her seven tips on buying this dream car.
Check newspaper ads and used-car guides at a local library to know what is a fair price for the car you want
- Remember, prices are negotiable
- Look up factory repair recalls for this model
- Shop during daylight hours so you can see what you are getting
- Always take a long test drive, driving it in town and out on the road
- Check all workable parts that you understand yourself
- Have an independent mechanic inspect the car thoroughly before buying it and expect to pay him or her for it
- Ask questions about the previous owner and mechanical history of the vehicle
- Check to see if there is an original warranty.


Question: Why is it that you should not tell the salesperson what you want your monthly payment to be before you negotiate the final price on the car?
A good salesperson can make the car payment come out where you want it to be by either convincing you to lease instead of purchase or by stretching the term of the lease or the loan
- If you are financing the loan with the dealership and they know your APR, your payment, length of loan you desire, then using Time Value of Money skills they can easily calculate how much to charge you for the vehicle.


Question: Name six factors that will determine your monthly lease payment
- The agreed-upon price of the vehicle
- Upfront fees, such as taxes, insurance, or service contracts
- Your down payment plus any trade-in allowance or rebate
- The value of the vehicle at the end of the lease
- The rent or finance charges
- The length of the lease


Question: Leasing a car may make sense for some people but there are disadvantages to leasing - What are the disadvantages to leasing a car verses purchasing the car outright?
- When you lease the car you never build equity into the asset
- This limits your choices when the lease expires
- You either have to buy the car you leased at the purchase option or you have to get another car
- The problem is that you don't have a car to trade -in so most people end up leasing another car instead of buying
- When you purchase a car, you eventually build equity and own the car outright after you have paid off the loan
- Now you have choices where you can just keep the car with no more payments or trade the car in towards another car, reducing the financing needs for the new car.


Question: Name the steps in the housing decision
Step 1: Pre-shopping homework
Step 2: The selection process
Step 3: Make the purchase
Step 4: Post-purchase activities

Question: What are the common options for housing?
-Purchase a home.
-Buy into a cooperative.
-Purchase a condo.
-Rent an apartment.


Question: Give the major financial advantages of home ownership
Owning a home is one of the only true tax shelters left today
- You can deduct the mortgage interest, property taxes, and home equity loan interest (in most cases)
- You may find the monthly mortgage payment actually less than a monthly rental, thus improving your cash flow
- For most people, the home is the single largest investment they will make
- By following the smart buying principles most homes will appreciate in value while at the same time the mortgage is being reduced leaving a sizeable amount of equity over time
- Many people enjoy the independence and pride of ownership in their own home
- Remodeling and landscaping decisions, for the most part, are up to the owner's discretion and imagination.


Question: What are the main financial questions you should ask yourself prior to purchasing a home?
- What is the maximum amount the lender will allow me to have?
- Should I borrow up to this maximum?
- How big of a down payment can I afford?
- What type of mortgage best suits my needs?
- Do I have adequate income to pay all the bills and still maintain my standard of living and long term savings goals?


Question: Why is important to determine your housing needs not only for the present but also for the next several years?
The closing costs and selling fees associated with buying and selling a home are very high
- It is not realistic to think that a home will appreciate enough in a few years to recover these costs
- Having to sell a house after a few years may result in a sizeable capital loss.

Question: When is it advantageous to rent instead of buy?

Renting is a good plan when you plan to stay in the house less than three years
- If your job situation is not stable and you dislike the hassle of buying and selling, this may be the thing for you to do
- Also, if you do not have a down payment saved up, you have no other choice.

Question: What factors should be considered before signing a lease?
-Determine what you can afford (ideally less than 25% of your take-home pay).
-Make sure the location is right.
-Understand the lease and feel comfortable with it.
-Never agree to verbal promises
- Put all of them in writing.
-Determine if the landlord is reliable.
-Obtain renter's insurance before moving in.


Question: Why may it be a good idea for newlyweds to lease a few years before purchasing a home together?
There are several good reasons for newlywed couples to delay purchasing their first home together
- The closing and selling costs associated with purchasing and selling a home are substantial costs that generally can't be recovered if forced to sell within a few years
- Possibly living together for a while will identify if the marriage will work out for the long run, both from an emotional and financial perspective
- Possibly they can live cheaper in a leased home allowing them to pay off past debts and save up a larger down payment
- Possibly they will have a better idea of when they want to start a family which would have a big impact on the type of home they would need with children.


Regardless of what a potential borrower thinks he or she can afford, banks and other lenders impose a maximum amount that they will lend to a borrower based on the person's income and current debt levels -

Question: What three factors do lenders look at when evaluating a potential borrower?
- Financial history
- Ability to pay
- Appraised value of the home that the borrower is interested in buying


Question: Explain why the 28/36 percent rule is so important to understand.
A reputable lender wants to make sure that they will get their money back
- They do not want a borrower to be unable to comfortably afford to make their mortgage payments.
Statistics have shown that borrowers cannot comfortably afford to make debt payments more than the 28/36 percent rule allows
- Any more than this and the borrower cannot afford to enjoy their lives or save money for other goals
- The 28/36 rule allows for a safety buffer that allows the borrower to handle unplanned emergencies without forcing them to miss their mortgage payments
- Statistics show that borrowers within these debt limits default less often on their mortgages.


Question: Describe four ways to come up with the down payment money for buying a house
Saving the money while renting is a wise thing to do
- Ask for gifts/funds from friends and family
- Try to reduce the down payment by applying for a VA, FHA, or FmHA loan.
Look at selling any unnecessary assets or investments
- Set up a budget and savings plan to achieve this goal.


Question: Explain the recurring costs of home ownership and why you need to budget for them
Making sure that you can comfortably afford your house every month is very important.
The obvious recurring cost is your PITI
- Don't forget the PMI premiums also
- Monthly utility bills, landscape maintenance and snow removal costs can also add up
- Property taxes and homeowners insurance premiums increase every year effecting your escrow requirements
- Maintenance and repairs are an ongoing expense when owning a home.


Question: Why should you set a goal to eventually be able to put at least 20% down on purchasing a home?
Statistics show that a borrower who makes a large down payment defaults less often than one with a smaller down payment
- The risk-return trade-off means that mortgages with
% down will carry a lower APR and, generally, will not require PMI insurance
- This means that your monthly payment will be lower allowing you to save money on finance costs and use that money for other living or savings needs.


Question: An attorney will draw up a contract for the purchase of a house - What provisions should you have in it?
-the price, method of payment, buyer and seller, date on which buyer will take possession
-a clear legal description of the property
-legal title to the house must be free of all liens, encumbrances and who pays for search
-certification that house is free of termite or radon problems
-a contingent on suitable funding clause
-the proportion of utilities, insurance, taxes, and interest paid by buyer and seller
-condition of the house at point of transfer
-any other agreements

Question: Tell about the advantages of a shorter-term mortgage over a 30-year one.
A lower interest rate is common with a shorter term
- This move provides a discipline to force savings
- It will save quite a bit of interest over the life of the mortgage
- The equity is built up at a faster rate
- Last, the increased equity may allow you to trade up to a more expensive house later.


Question: What are some factors that determine whether a homeowner should refinance?
The typical rule of thumb is to refinance when interest rates fall by 2%
- You should ask yourself if you will live in the house long enough to offset the new closing costs
- Will the interest savings overcome the refinancing expenses involved? If so, it may be a good move in the long run.

Question: What are the common mortgage loan options?
-balloon payment
-graduated payment
-growing equity
-shared appreciation
-fixed rate
-adjustable rate


Question: List three pros of an assumable loan
-The buyer does not incur the costs of obtaining a new loan.
-The buyer may be able to obtain a lower interest rate.
-It is easier to sell the home.

Question: Are there any advantages in government-backed loans? Any disadvantages?
Yes, there are three advantages
- One, the interest rate typically is less
- Two, a smaller down payment is required
- Three, there are less strict financial requirements
- There are also three drawbacks
- One, there is more paperwork required to qualify for the loan.
Second, the closing costs are higher
- Third, there are limits on the amount of funding that can be obtained.

Question: What are the typical sources of mortgages?
The list includes commercial banks, S&Ls, credit unions, mutual savings banks, mortgage bankers, and mortgage brokers.