Finance Chapter 8: Home and Automobile Decisions

Chapter 8 (The Home and Automobile Decision)

• Before purchasing a house or car, research affordability, including down payments and monthly payments.
• Dealers often hold back a small percentage of the sale price.
• Buying with cash is the cheapest option.
• Shorter loan terms result in higher monthly payments.
• Closed-end leases, also known as walk-away leases, don't obligate the lessee to purchase the asset at the end of the lease term.
• The lessee can return the asset without further financial obligations.
• Fixed monthly payments, a pre-determined residual value, and mileage limits are specified in the lease.
• In an open-end lease, the lessee assumes the residual value risk.
• If the asset's market value at the end of the lease term is less than the expected residual value, the lessee is responsible for the difference.
• Open-end leases offer more flexibility concerning mileage and wear and tear compared to closed-end leases.
• Open-end leases are common in commercial leasing, especially where usage might be unpredictable.
• Leasing might be preferable if a closed-end lease is available.
• Purchasing new cars every 2-4 years is a financial choice with a driving obligation of 15,000 miles.
• The warranty is the first line of car protection.
• Lemon laws protect consumers from defective vehicles.

Loan Origination Fees

• An upfront fee charged by lenders to process new loan applications.

Appraisal Fees

• A charge for professional property evaluation, typically for real estate.

Title Search Fees

• A charge to examine public records verifying property ownership.

Recurring Costs

• Ongoing expenses needed to maintain operations (business, household, etc.).

PITI (Principal, Interest, Taxes, and Insurance)

• Common mortgage loan component.

Conventional Loans

• Mortgages directly from banks or savings and loans (S&Ls)

Government-Backed Loans

• Loans backed by government agencies.

FHA Loans

• Mortgages insured by the Federal Housing Administration.

VA Loans

• Mortgages guaranteed by the Department of Veterans Affairs, available to eligible veterans and spouses.

Fixed-Rate Mortgage

• A mortgage with a fixed monthly payment that doesn't change throughout the loan term.

Assumable Loan

• A loan that can be transferred to a new buyer.

Prepayment Privileges

• Allows early cash payments to be applied to principal.

Adjustable-Rate Mortgage (ARM)

• Mortgage with interest rates that adjust according to an index, such as 6 or 12-month U.S. Treasuries .

Margin

• The amount added to an index rate for an ARM.

Adjustment Interval

• How often the interest rate of an ARM adjusts.

ARM Innovation

• Convertible to a fixed-rate loan, options for reducing costs and combination options.

Specialty Mortgage Options

• Shared Appreciation Mortgage and Interest-only Mortgage.

Prepayment Penalties

• Fees charged if a loan is paid off early or refinanced.

Bait and Switch Costs

• Loan terms at closing differ from those agreed upon earlier.

Life and Health Insurance (Chapter 9)

• Health insurance protects against medical expenses.
• Life insurance protects families in case of death.
• High costs limit coverage and increase out-of-pocket medical expenses.
• Patient Protection and Affordable Care Act aims to provide health insurance.
• Life insurance is considered when surviving spouse and children need financial support after death.
• High costs necessitate evaluation of coverage options.
• Life insurance value exceeds estate tax free transfer threshold (consider tax implications).
• Use multiple evaluation approaches to calculate life insurance needs, accounting for lost income and return rate.

Cash-Value Insurance

• Combines life insurance with savings.
• Offers both death benefits and savings potential.
• Permanent types of cash-value insurance

Whole Life Insurance

• Pays a death benefit when the insured dies, turns 100, or reaches a specified age.
• Assets accumulate via cash-value accounts.

Nonforfeiture Rights

• Policyholder can convert the policy to a lower death benefit in exchange for cash value.

Universal Life Insurance

• Flexible premiums and varying benefits

Term Insurance vs Cash-Value Life Insurance

• Comparison of available insurance types.

Chapter 10, Property and Liability Insurance

• Homeowner's insurance protects against property damage (fire, theft).
• Separated policies were once needed for each peril, now packaged policies combine coverages
• HO-1, HO-2, HO-3, HO-4, HO-6, HO-8 are different homeowner policy types.

HO-1, HO-2, HO-3, HO-4, HO-6, HO-8

• Different types of homeowner's insurance with varying coverage.

Property Coverages Details

• Dwelling / Structure replacement cost, Other structures (sheds/ garages)
• Personal Property (items within the house), Loss of use (temporary living expenses)
• Personal Liability Insurance (injury to others or damage to property)
• Medical Payments (coverage for injuries to others)

Comparing Costs (Chapter 7)

• Traditional Net Cost (TNC) and Interest-Adjusted Net Cost (IANC) methods for calculating costs.

Patient Protection and Affordable Care Act (ACA)

• Legislation ensuring most Americans have health insurance.

Affordable Care Act

• Affordable Care Act (ACA) reformed the insurance industry, increasing access.

Increasing Access to Affordable Care

• Children can remain on their parents' insurance plans until 26.
• Significant changes to ensure appropriate coverage from insurance companies.
• Basic health insurance commonly combines hospital/surgical/ and physician expense coverage, and major medical expenses insurance.

Private Health Care Plan

• Company-offered healthcare plan.

Health Maintenance Organizations (HMOs)

• Health care management options.

Group Versus Individual Health Insurance

• Distinctions between group and individual healthcare plans.

Government Sponsored Health Care Plans

• State and federal programs like Medicare and Medicaid.

Medicare Parts A, B, C, D

• Different parts of federal healthcare program.

Controlling Health-care Costs

• Strategies for reducing costs.

Flexible Spending Accounts

• Pre-tax dollars for eligible healthcare expenses.
• Health Savings Accounts, Health Reimbursement Accounts, and High Deductible Plans are presented as methods for cost controls.

Choosing an Insurance Plan

• Different plans with varying financial obligations.

Disability Insurance

• Ensures income replacement in case of disability.

Chapter 17, Financial Life Events

• Financial life events—planning for retirement, illness, death, divorce.

Debt Management

• Debt management strategies for successful financial planning.

Reverse Mortgages

• Loan type available to homeowners aged 62 or older.

Preparing for Divorce

• Important steps to take for financial preparation.

Life Events Summary

• Summarizes different stages of life and financial management.

Explore the key concepts of financial decisions regarding purchasing homes and automobiles. This chapter covers affordability, leasing options, and the impact of loan terms on monthly payments. Understand the differences between closed-end and open-end leases and how they affect financial obligations.