Chapter 8
Major Expenditures and Personal Financial Management: The Home and Automobile Decision
Smart Buying (p. 234)
Just as you work hard to save your money, you should also make the effort when spending it. That means that you should get the most for it and make well thought-out spending decisions. Smart buying is a controlled process in which your final selection isn't only the best product for the best price, but a product that you need and a purchase that fits in with your monthly budget. The Consumer Resources Handbook (which is downloadable) has an excellent section on smart buying, giving tips on getting the most for your money, handling your own complaints and writing complaint letters. You'll also want to check out Worksheet G.16 ``Before You Buy" at the back of the book.
Addressing Your Transportation Needs (p. 237)
Next to buying a house, your car is probably your largest investment. It's also something that most people do every few years. There are a number of excellent sources aimed at helping you get the best deal possible. One is ``How To Get A Great Deal On A New Car" published by the Center for the Study of Services and the FTC Fast Facts ``Buying A New Car." They also have a publication titled ``Keys to Vehicle Leasing." If you'd like more on the new leasing regulations try the FTC's article `` Look Before You Lease" and the FRB's ``Consumer Guide to Vehicle Leasing." In addition, Worksheet G.20 at the back of the book provides help in making a lease versus purchase decision. Car and Driver also has a ``Buyers Guide" on its web site. Two other great sources of car buying information are Edmund's Automobile Buyer's Guide and Microsoft CarPoint. Also look to Worksheet G.17 for ``Tips on Buying a Used Car" and Worksheet G.18 at the back of the book for ``Tips on Buying a New Car."
Housing Step 1: Preshopping Homework (p. 246)
For many individuals, buying their own home is their primary goal in life. In addition, it is generally the biggest investment they will ever make. The first step in home buying is to decide what you're looking for. That includes both what fits your needs and what you can afford. To help you there is a home affordability calculator on the Homebuyer's Fair web site. Worksheet G.21 at the back of the book also provides help in determining how large your mortgage payment will be. In addition, the MSN.MicroSoft site has a HomeAdvisor section titled ``Getting Started" aimed at helping you understand the home buying process and getting prepared. In making the rent versus buy decision, also make sure you work through Worksheet G.22 at the back of the book. If you're confused by some of the home buying jargon, try the Mortgage Terms Dictionary. Finally, to determine how big a mortgage you can qualify for, work through Worksheet G.23 at the back of the book.
Housing Step 2: The Selection Process (p. 260)
MSN.MicroSoft's web site has a good section on Getting Started which covers deciding if you're ready to by, determining your price rang and deciding how an agent can help you. Kiplinger's Personal Finance Magazine also has an excellent article dealing with the selection process titled ``Buying a Home in a Buyer's Market." Kiplinger's Personal Finance Magazine also has a great article on finding and using a buyer's broker titled ``Finding a Buyer's Broker."
Housing Step 3: Making the Purchase (p. 261)
Once you've decided which house or apartment you'd like to live in, the next step becomes making the purchase, or in the case of renting an apartment, signing the lease. Once again, the Microsoft Money Insider has a great section titled ``Final Steps" which deals with negotiating the right price and inspecting the house. You can also find Current Mortgage Rates available online from HSH Associates and at the Bank Rate Monitor. If you're interested in an adjustable rate mortgage, but don't quite understand them, try the Mortgage Market Information site ``What Is an Adjustable Rate Mortgage?" In addition to these sources, the Consumer Information Center has a whole section of electronic pamphlets on Housing - Sales & Financing. In addition, CNNfn has an online mortgage calculator. Finally, one of the best sources for mortgage calculators is Kiplinger Online, which has 16 different ``home calculators." It has calculators that answer questions like ``How much can I borrow?" ``How big will my payments be?" ``Which is better: fixed or adjustable?" and `` Which is better: 15 or 30 year term?" Another great mortgage calculator can be found on Hugh Chou's web site.
Housing Step 4: Postpurchase Activities (p. 271)
The postpurchase activities include upkeep and maintenance along with refinancing decisions. To learn more about upkeep and maintenance, go to the Consumer Information Center web site which has a whole section of electronic pamphlets on Home Maintenance. With respect to refinancing, Kiplinger Online, has a ``home calculator" designed to answer the question ``Am I Better Off Refinancing?" To learn more about this subject, read the article ``A Road Map for Refinancers" in the March 1996 issue of Kiplinger's Personal Finance Magazine. Also, make sure you work through Worksheets G.24 and G.25 at the back of the book.
Text Suggested Sites
Hot Topics: When it comes to buying a car or making an auto or housing decision, there is an overwhelming amount of information on the internet. If you're looking to buy a car, the place to start is ``How To Get A Great Deal On A New Car" published by the Center for the Study of Services and the FTC Fast Facts ``Buying A New Car." After that try Car and Driver's ``Buyers Guide" along with Edmund's Automobile Buyer's Guide and Microsoft CarPoint. When it comes to buying a house, two great starting places are Homebuyer's Fair and the Mortgage Market Information Services. It has all you need on interest rates, and the latest news on mortgages, and some great mortgage related articles by nationally syndicated columnist James DeBroth. If you enjoy any of these sites, make sure you bookmark them.
Chapter Articles from Kiplinger's
Kiplinger On-Line: There is a wealth of information including things like news of the day, business forecasts, stock quotes, calculators, and yields and rates available at Kiplinger On-Line.
Kiplinger's Personal Finance Magazine: Kiplinger's Personal Finance Magazine is also available on line. It is an excellent source of information dealing with all aspects of personal financial planning.
Searching Kiplinger's Personal Finance Magazine: You can also enter keywords and search through the archives of Kiplinger's Personal Finance Magazine.
You'll also want to try the Kiplinger's Online Calculator which has a section of calculators designed to help you with calculating the cost associated with buying an auto or home.
Here are several articles that deal with the topics covered in this chapter that you might find interesting:
``Don't Buy a New Car- Lease It"
``Moving Up: How to Buy and Sell a Home"
``Home Sweet Home, The Best Tax Shelter Keeps Getting Better"
``What to Ask Before You Remodel"
``Buying a Home in a Buyer's Market"
Also take a look at these Kiplinger Calculators:
``Autos: Should I lease or purchase?"
``Autos: How much will my monthly payments be?"
``How much will my payments be?"
``How much will adjustable rate payments be?"
``Which is better: fixed or adjustable?"
``Should I pay points to lower the rate?"
``Which is better: 15 or 30 year term?"
``How advantageous are extra payments?"
Sites Related to the Chapter Vignette: Johnny Depp and Buying a House.
After starring in the movie Ed Wood, which was about the offbeat director of Beli Lugosi's last movie, Plan 9 From Outer Space, Johnny Depp, who played Ed Wood, became infatuated with Lugosi. In fact, Depp was so fascinated by Lugosi that he bought Lugosi's old house. It's the kind of place you can get lost in with 28 rooms and 7,430 square feet. On the other hand actor Anthony Edwards, who plays Dr. Mark Green on ER calls an aluminum Airstream Excella 1000 trailer his home. Needless to say, the home buying decision is a very personal one. By the way, if you're looking for a good movie, Ed Wood is one. There's also a listing of the Critics' Top 100 Movies of All Times on the web -- there's even a listing of the Readers' Top 100 Movies of All Times, in addition to current reviews on the Mr. Show Biz web site. You can also tune into the latest movie trailers at the Screening Room.
Chapter 8 Exercises
Exercise 8.1: Complaining Effectively. You aren't always going to be satisfied with what you've purchased. As a result you'll need to know how to complain effectively and thereby increase the probability that your complaint will be handled in a way that satisfies you. Look the Consumer Resources Handbook which is downloadable and has a section on complaining effectively. Read through that section. What are three steps that you should follow in complaining effectively when you have a problem.
Exercise 8.2: Writing a Complaint Letter. If you have a complaint, complain about it. Where should you look if you have the brand but cannot find the name of the manufacturer? What should you say in your letter? What should you do next? Let's assume you just bought a new ``Glamor Vacuum Cleaner" at your local ``Best Vacuum Store" and it doesn't pick up dirt. Read through the section ``Writing a Complaint Letter in the Consumer Resources Handbook which is downloadable and write a complaint letter.
Exercise 8.3: Mail Orders. For many individuals, mail ordering is the primary method of buying goods. Fortunately, there are Federal rules governing mail orders. Specifically, Federal mail order rules require companies that take consumers' orders by mail to do what? Read through the "Shopping from Home" section in the Consumer Resources Handbook (which is downloadable) to help in completing this assignment.
Exercise 8.4: Telemarketing. For many individuals, telemarketing is tough to turn down. While many legitimate businesses use the telephone to make their sales, it's easy for fraudulent companies to abuse the phone. What are four tips for smart telephone shopping. Read through the ``Telemarketing" sub-section under ``Shopping from Home" of the Consumer Resources Handbook (which is downloadable) to help in completing this assignment.
Exercise 8.5: Door-to-Door Sales. Door-to-door sales can be tough to turn down. Unfortunately, after you've made the purchase you might want out of the sale. Fortunately, that's not too difficult provided you follow the proper steps. Give four tips (as listed in ``Door-to-Door Sales" section of the Consumer Resources Handbook) for dealing with door-to-door sales. Within how many days following the sale should you be sure to notify the company in writing by if you wish to cancel? If you were not given the cancellation form at the time of sale, what should you do? Read through the ``Door-to-Door Sales" section of the Consumer Resources Handbook to help in completing this assignment.
Exercise 8.6: Buying a Car - Calculating Monthly and Total Payments. It's important to know how much your monthly and total payments are going to be when you buy a car. Use the Microsoft CarPoint Loan Calculator to determine what your monthly payments and total costs will be. Assume the new car will cost $22,000 (it may be easier just to type in the 22000 than to click and drag the diamond shaped slider), the interest rate is 9%, the loan term is 48 months, and the down payment is 20%. What are the monthly payments and total costs? What happens when the interest rate rises to 10%? Now bring the loan term down to 36 months, what are the results?
Exercise 8.7: Am I Better Off Renting? Determine whether you should buy or rent using the Kiplingers ``Am I Better Off Renting?" Calculator. Assume your monthly rent costs are $650, monthly renters insurance is $15 per year, and rent increases at 5% per year. Assume the both the purchase price and appraised value for the house are $125,000. The house is expected to appreciate at 3% per year, your savings rate is 4%, your state and federal tax rate is 38%, and you anticipate not selling or paying off the loan for 7 years. The loan amount, if you bought the house would be $100,000, and you would finance with a 30 year 7% loan with 1% dicount points and 0% origination fee. Other loan costs are $1,000. Property taxes would be $2,000 per year, annual maintenance would be $700, homeowners insurance $600 and selling cost would be 10% of the selling price. How many years would you have to stay there before owning become less expensive than renting? (Hint: look at the graph for the answer.)
Exercise 8.8: Watching Home Prices Rise. A record 67% of Americans own their own homes, and steady increases in value are credited with fueling not only a real sense of prosperity but also a willingness to spend that is driving our humming economy. Look at the article, ``Building Wealth at Home" from Kiplingers Personal Finance. What are the The two most important ingredients for a strong housing market -- and the rising values they ensure? Follow the article through by clicking on to the next section at the bottom and go to Home Prices Where You Live. Go to your state and determine what the projected value of a typical house is in 2010, how much did housing prices rise by from 1999 to 2010?
Exercise 8.9: Are You Better Off Refinancing? Analyze a loan refinancing decision using the Kiplinger Online ``home calculator" designed to answer the question ``Am I Better Off Refinancing?" Regarding your existing loan assume: original loan amount: $100,000; original term in years: 30; years already paid: 7; balloon years: 0; and interest rate: 8.8%. Regarding your new loan assume: term in years: 30; balloon years: 0; discount points: 1.25%; origination fee: 0%; other loan costs: $700; and interest rate: 7.25%. Regarding your property: appraised value: $130,000; yearly property taxes: $2,000; and yearly homeowner's insurance: $600. Finally, regarding yourself: your savings rate: 4%; your state and federal tax rate: 35%; and years before you sell: 7 years. What are the results? Should you refinance? What are your total monthly payments with the original loan and the new one?