Personal Finance
Bennie Waller
[email protected]
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
 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 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
 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 situation
Bennie D Waller, Longwood University
Before you buy
Bennie D Waller, Longwood University
Transportation needs
 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 costs
Bennie D Waller, Longwood University
Transportation needs
 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.
Bennie D Waller, Longwood University
Transportation needs
 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
 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?
 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?
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 = 4x12=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;
 Maintenance costs – more for used cars
 Operating costs  Insurance - 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.org
Bennie D Waller, Longwood University
Used car tips




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.
Bennie D Waller, Longwood University
Financing alternatives
 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 rates
Bennie D Waller, Longwood University
Financing alternatives
 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.
Bennie D Waller, Longwood University
Housing options
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.
Bennie D Waller, Longwood University
Housing Options
A House:
Most potential for capital appreciation.
Cooperatives and Condominiums:
Homeowner’s fee
Planned unit developments
Apartments and other rental housing
Bennie D Waller, Longwood University
Housing
 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?
Bennie D Waller, Longwood University
Housing costs
 If purchasing a home, you are likely to incur significant onetime 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
 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
 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 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
 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 interests
Bennie D Waller, Longwood University
If you decide to buy
 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)
Bennie D Waller, Longwood University
If you decide to buy
 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 statement
Bennie D Waller, Longwood University
Borrowing ratio example
Maximum loan amount
6% FRM with monthly amortization, 30 years
28% ratio
36% ratio
36,000
3,000
Annual Income
Monthly Income
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
100
630
100
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
 With 20% you will have to pay private mortgage insurance
Bennie D Waller, Longwood University
Terms of mortgage
 Factors to consider
 Interest rate
 Size of monthly payment
 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
Interest
300.00
200.00
100.00
0.00
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
 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.
Bennie D Waller, Longwood University
Length of mortgage
Bennie D Waller, Longwood University
Sources of mortgages
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, terms
Bennie D Waller, Longwood University
Types of mortgages
 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 period
Bennie D Waller, Longwood University
Other mortgage options
 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 -
Bennie D Waller, Longwood University
Subprime Mortgages
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.
Bennie D Waller, Longwood University
Predatory Lending Practices
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Refinancing your existing mortgage
 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.
Bennie D Waller, Longwood University
Short sales
 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.
Bennie D Waller, Longwood University
If you decide to rent
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.
Bennie D Waller, Longwood University
Addressing problems
 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.
 Lawsuit
Bennie D Waller, Longwood University
Thank You
Bennie D Waller, Longwood University