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FIN 230 Ch. 4 & 5 (Chapter 5: Making Housing and Automobile Decisions,…

- - - - Households often have trouble distinguishing between real (inflation-adjusted) and nominal (unadjusted for inflation) changes in interest rates and rents
        
        Thus, when expected inflation drops, consumers buy homes to take advantage of apparently low nominal financing costs without realizing that future home price and rent appreciation rates will fall by comparable amounts.
        
        conservatism bias and social epidemic
        
        home prices are now increasingly outpacing inflation
    - - Single-family homes
      - Condominiums
      - Cooperative apartments:
      - Rental units
      - Gauging the General Attractiveness of Renting versus Buying a Home
        
        Renting ratio
        
        ratio of the average house price to the average annual rent in the area
      - Analyzing the buy or rent scenario
        
        (1) they don’t have the funds for a down payment and closing costs, (2) they’re unsettled in their jobs and family status, (3) they don’t want the additional responsibilities associated with homeownership, (4) they believe they can invest the down payment so they can afford a nicer home later, or (5) they believe they should rent now and buy later when the housing market conditions or mortgage rates are more attractive.
        
        (1) housing prices and mortgage interest rates, (2) tax write-offs for homeowners, (3) the expected increase or decrease in home values over time, and (4) how many years you expect to stay in your home.
  - - - Can write off mortgage payments from taxes
  - - - why do so many car buyers lease their cars?
        
        rising new car prices
        
        nondeductibility of consumer loan interest
        
        lower monthly payment
        
        driving a more expensive car with same monthly price
        
        Minimizing down payment cost to preserve cash
      - Monthly lease cost based on...
        
        The capitalized cost of the car (the price of the car you are leasing)
        
        The forecast residual value of the car at the end of the lease
        
        The money factor, or financing rate on the lease (similar to the interest rate on a loan)
        
        The lease term
    - - Lease
        
        where the lessee receives the use of a car (or other asset) in exchange for making monthly lease payments over a specified period
        
        Usually 2-4 years
        
        Closed end lease
        
        Give back with no abuse and exceeded milage
        
        Open end lease
        
        Residual based
        
        Residual value
    - - Ya pay about 150-250 dollas
        
        Might have a buying offer at the end: fixed price, market value, residual value
        
        You can also trade it back in, sell it on the open market if you can buy it based on residual value and sell it to get extra 1,000 or so
  - - - Real estate short sale
        
        Sale of real estate property in which the proceeds are less than the balance owed on a loan secured by the property sold
    - - Multiple Listing Service (MLS)
    - - Prequalification
        
        The process of arranging with a mortgage lender, in advance of buying a home, to obtain the amount of mortgage financing the lender deems affordable for the home buyer
    - - Home-buying strategies
        
        Don't wipe out your savings
        
        Pick the right neighborhood
        
        Stay away from the most expensive home in the neighborhood
        
        Interview your agent and ask hard questions
        
        Rely on professional advice
        
        Use traditional financing
        
        Be wary of terms like "indexes", "margins", "caps", and "negative amortization"
        
        Don't change the financial picture before closing
        
        Aka don't be like, "well while I'm out might as well buy a new car"
        
        Be sure to do the home inspection
        
        Be careful about taking on additional debt after closing
      - Earnest money deposit
        
        Money pledged by a buyer to show good faith when making an effort to buy a home
      - Contingency clause
        
        A clause in a real estate sales contract that makes the agreement conditional on such factors as the availability of financing, property inspections, or obtaining expert advice
    - - The Real Estate Settlement Procedures Act (RESPA)
        
        A federal law requiring mortgage lenders to give potential borrowers a government publication describing the closing process and providing clear, advance disclosure of all closing costs to home buyers
  - - - Amount of down payment
        
        Likely savings money
      - Size of the monthly loan payment you can afford
        
        How much you can afford to spend (remember transport needs, insurance)
        
        NO MORE THAN 20% of MONTHLY GROSS
      - Operating Costs
        
        Fixed
        
        Installment payments associated with the loan (or lease) used to acquire the car, insurance (lest ye wreck)
        
        Variable
        
        Gas, oil, tires, and other operating and maintenance
        
        Depreciation
        
        the loss in the value of an asset that occurs over its period of ownership
        
        Calculated as the difference between the price initially paid and the subsequent sale price
      - Gas, Diesel, Hybrid, or All-Electric
        
        Gas
        
        Diesal
        
        you’ll want to consider fuel economy when car shopping, comparable gas-fueled, internal combustion engines and diesel-powered cars tend to have similar fuel economy
        
        Generally, diesels are a bit noisier, have less acceleration but more power, and have longer engine lives than do traditional gas-powered cars.
        
        Hybrid
        
        which blend gas and battery power
        
        More economical and less polluting than gas- and diesel-powered vehicles but have high cost of battery replacement, generally higher repair costs, and typically higher initial purchase prices
        
        All Electric
      - New, Used, or Newly Used
        
        Franchise Dealerships
        
        Offer the latest-model used cars, provide financing, and will negotiate on price
        
        Superstores
        
        AutoNation, CarMax, and similar dealers offer no-haggle pricing and a large selection. They certify their cars and may offer a limited, short-term warranty
        
        Independent Used Car Lots
        
        Usually offer older (four- to six-year-old) cars and have lower overhead than franchise dealers. There are no industry standards
        
        Private Individuals
        
        Generally cost less, no dealer overhead, ask for maintenance records and the title
        
        Size, Body Style, and Features
        
        There’s usually a direct relationship between size, style, and feature and cost
        
        Consider performance, handling, appearance, fuel economy, reliability, repair problems, and the resale value
        
        Other Considerations
        
        Trading in or selling your existing car
        
        It’s generally a better deal to sell your old car outright. If you’re willing to take the time, you can usually sell your car for more than the wholesale price typically offered by a dealer on a trade-in
        
        Fuel economy
        
        The Environmental Protection Agency (EPA) mileage ratings are especially useful on new vehicles, which carry a sticker indicating the number of miles per gallon each model is expected to get for both city and highway driving. You can check out those ratings at www.fueleconomy.gov
        
        Safety features
        
        Government regulations ensure that these features are likely to be similar in new cars, but older used cars may not have some features such as side-impact airbags.
    - - Closing the Deal
        
        Sales contract
        
        states the offering price and all conditions of the offer
        
        legally binding when signed by the dealership rep and you
        
        May have to put down a deposit of 200 or more to show you're here in good faith
    - - Research
      - Select
      - Buy
      - Maintain
  - - - Commercial banks
        
        Source of interim construction loans
        
        Provides short term financing during the construction phase for individuals who are building or remodeling a home
        
        After the construction is done, then there is permanent financing in the form of a standard mortgage loan (which the bank then uses to repay the construction loan)
      - Thrift institutions
      - Mortgage bankers and brokers
        
        BANKERS are firms that solicits borrowers, originates primarily government insured and government guaranteed loans, and places them with mortgage lenders; often uses its own money to initially fund mortgages it later resells
        
        BROKERS are firms that solicits borrowers, originates primarily conventional loans, and places them with mortgage lenders, the broker merely takes loan applications and then finds lenders willing to grant the mortgage loans under the desired terms.
        
        Have a lot of connections that might get you a home when a commercial or thrift won't
        
        Often simplify the buying process, negotiate more favorable terms, making it faster
        
        Earn their income from commissions and origination fees paid by lender, costs typically passed to the borrower through the points of the loan
    - - Fixed rate
        
        Traditional type in which both the rate of interest and the monthly mortgage payment are fixed over the full term of the loan
        
        Most common: 30 year loan, 10, 15 gaining popularity
      - Adjustable rate (ARM)
        
        A mortgage on which the rate of interest, and therefore the size of the monthly payment, adjusts along with market interest rate movements
        
        Features:
        
        Adjustment period
        
        Period of time between rate changes is typically 6 mo to a year, but can be between three months to three years or more
        
        Index rate
        
        A baseline that captures the movement in interest rates, usually tied to six month US treasury securities, six month CDs, or average cost of funds to savings institutions
        
        Margin
        
        The percentage points that a lender ADDS to the index to determine the rate of interest on an ARM, usually a fixed amount over the life of the loan
        
        Interest rate cap
        
        Limits the amount the interest rate can increase over a given period. PERIODIC CAPS limit interest rate increases from one adjustment to the next (typically lenders cap annual rate adjustments at 1 to 2 percentage points) and OVERALL caps limit the interest rate increase over the life of the loan (lifetime interest rate caps are typically 5-8% points) Many ARMs have both periodic and overall interest rate caps
        
        Payment caps
        
        Limits on monthly payment increases that may result from a rate adjustment-usually a percentage of the previous payment. If your ARM has a 5 percent payment cap, your monthly can increase no more than 5% from one year to the next, regardless of what happens to interest rates
- - - - Cash management
        
        The routine, day-to-day administration of cash and near-cash resources, also known as liquid assets, by an individual or family
        
        Representatives Rates of Return (Summer of 2018)
        
        Interest checking account
        
        0.06%
        
        A substitute for cash. Offered by commercial banks and other financial institutions such as savings and loans and credit unions.
        
        Savings account/Money market deposit
        
        0.20%
        
        Savings accounts are available at any time, but funds cannot be withdrawn by check. Money market deposit accounts (MMDAs) require a fairly large (typically $1,000 or more) minimum deposit, and offer check-writing privileges.
        
        Cash
        
        0%
        
        Certificate of Deposit
        
        0.72% (one year)
        
        A savings instrument where funds are left on deposit for a stipulated period (one week to one year or more); imposes a penalty for withdrawing funds early. Market yields vary by size and maturity; no check-writing privileges.
        
        U.S. Treasury bill (T-bill)
        
        1.89% (three months)
        
        Short-term, highly marketable security issued by the U.S. Treasury (originally issued with maturities of 13 and 26 weeks); smallest denomination is $100.
        
        U.S. Savings bond (EE)
        
        0.10%
        
        Issued at a discount from face value by the U.S. Treasury; rate of interest is tied to U.S. Treasury securities. Long a popular savings vehicle (widely used with payroll deduction plans). Matures to face value in approximately five years; sold in denominations of $25 and more.
        
        Watching spending
        
        Write checks only at certain times of the week or month
        
        Avoid carrying your checkbook (or debit card) when you might be tempted to spend money for unplanned purchases
        
        If you’re going shopping, set a maximum spending limit beforehand
        
        Safeguards against impulsive acts and helps you keep track where your money is going
    - - While it helps with financing the federal debt
        
        It lowers returns on money kept in accounts
        
        It's also supposed to support investment and borrowing
        
        Lowering/increasing is done by the feds
        
        They allow the interest rate to be less than 1 percent interest on savings since 2008
        
        This reduced income to retirees and to pension funds, causing some to dip into their "principal"
        
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        However investors take up more risky investments in order to get a higher return
        
        Stock prices tend to rise with low interest rate because businesses gain more by expanding than saving money and collecting interest $$ so they hire more people, put money towards their shit basically
  - - - Provides them financial products
        
        Checking and savings accounts, credit cards, loans and mortgages, insurance, and mutual funds
      - And them financial services
        
        financial planning, securities brokerage, tax filing and planning, estate planning, real estate, trusts, and retirement
    - - Depository
        
        Accept deposits
        
        Collectively called bank (brick and mortar and internet)
        
        Commercial banks (brick and mortar and internet)
        
        Offers checking and savings accounts and a full range of financial products and services; the only institution that can offer noninterest-paying checking accounts (demand deposits).
        
        Savings and loans associations (S&Ls)
        
        Channels the savings of depositors primarily into mortgage loans for purchasing and improving homes. Also offers many of the same checking, saving, and lending products as commercial banks. Often pays slightly higher interest on savings than do commercial banks.
        
        Savings Banks
        
        Similar to S&Ls, but located primarily in the New England states. Most are mutual associations—their depositors are their owners and thus receive a portion of the profits in the form of interest on their savings.
        
        Credit Unions
        
        A nonprofit, member-owned financial cooperative that provides a full range of financial products and services to its members, who must belong to a common occupation, religious or fraternal order, or residential area. Generally small institutions when compared with commercial banks and S&Ls. Offer interest-paying checking accounts—called share draft accounts—and a variety of saving and lending programs.
      - Nondepository
        
        Don't accept deposits
        
        Today you can hold a credit card issued by a stock brokerage firm or have an account with a mutual fund that allows you to write a limited number of checks.
        
        Stock brokerage firms
        
        offer several cash management options, including money market mutual funds that invest in short-term securities and earn a higher rate of interest than bank accounts, special “wrap” accounts, and credit cards
        
        Mutual funds
        
        alternative to bank savings accounts. Like stockbrokers, mutual fund companies offer money market mutual funds.
        
        Other
        
        Includes life insurance and finance companies
    - - Deposit insurance
        
        A type of insurance that protects funds on deposit against failure of the institution; can be insured by the FDIC (Federal Deposit Insurance Corporation) and the NCUA (National Credit Union Administration)
        
        For example, a married couple can obtain as much as $1,500,000 in coverage by setting up several accounts:
        
        One in the name of each spouse ($500,000 in coverage)
        
        A joint account in both names (good for another $500,000, which is $250,000 per account owner)
        
        Separate trust or self-directed retirement (IRA, Keogh, etc.) accounts in the name of each spouse (good for an additional $250,000 per spouse)
        
        Deposit insurance for different types
        
        Commercial Bank
        
        FDIC
        
        $250,000/depositor through the Bank Insurance Fund (BIF)
        
        Savings and Loan Associations
        
        FDIC
        
        $250,000/depositor through the Savings Association Insurance Fund (SAIF)
        
        Savings Bank
        
        FDIC
        
        $250,000/depositor through the Bank Insurance Fund (BIF)
        
        Credit Union
        
        NCUA
        
        $250,000/depositor through the National Credit Union Share Insurance Fund (NCUSIF)
  - - - Checking and Savings Account
        
        Checking Accounts
        
        "Demand deposit"
        
        Types:
        
        Custom Checking
        
        Advantage Checking
        
        College Checking
        
        Advantage Plus Checking
        
        Savings Accounts
        
        "Time Deposit"
        
        Slightly higher interest
        
        Interest Paying Checking Account
        
        Now Account (negotiable order of withdrawal)
        
        Negotiable order of withdrawal accounts pays interest and may require a minimum balance in account (often between 500 and 1000)
        
        Money Market Deposit Account
        
        Account federally insured, has high minimum deposit requirement (usually 1000), pays highest rate of interest a bank pays on accounts with checking privileges. However, the monthly bank charges may be higher than the interest. Checks can only be written 6 a month
        
        Money Market Mutual Funds
        
        A mutual fund that pools the funds of many small investors and purchases high-return, short-term marketable securities. Offers higher interest and checking privileges.
        
        Asset Management Accounts
        
        The AMA is a comprehensive deposit account that combines checking, investing, and borrowing activities and is offered primarily by brokerage houses and mutual funds.
        
        AMAs appeal to investors because they can consolidate most of their financial transactions at one institution and on one account statement.
        
        AMAs are not covered by deposit insurance, although these deposits are protected by the Securities Investor Protection Corporation (SIPC) and the firm’s private insurance.
        
        Annual fees and account charges (e.g., a per-transaction charge for ATM withdrawals) vary. Automatically “sweep” excess balances—for example, amounts over $500—into a higher-return MMMF on a daily or weekly basis. When the account holder needs funds to purchase securities or cover checks written on the MMDA, the funds are transferred back to the MMDA. And if the amount of securities purchased or checks presented for payment exceeds the account balance, the needed funds are supplied automatically through a loan.
        
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    - - Electronic Funds Transfer Systems
        
        Debit Cards and Automated Teller Machines
        
        4.50 different ATM charge is becoming outdated
        
        If your bank belongs to an EFTS network, such as Cirrus, Star, or Interlink, then you can get cash from the ATM of any bank in the United States or overseas that is a member of that network
        
        EMV chips, named for its developers–Europay, MasterCard, Visa
        
        Preauthorized Deposits and Payments
        
        Bills and revenue
        
        Bank-by-Phone Accounts
        
        Bank customers can make various types of transactions by telephone, either by calling a customer service operator who handles the transaction or by using the keypad on a touch-tone telephone to provide instructions to the bank. After the customer provides a passcode to access the account, the system provides the appropriate prompts to perform various transactions, such as obtaining an account balance, finding out what checks have cleared, transferring funds to other accounts, and dispatching payments to participating merchants.
      - How to Keep Online Banking Secure
        
        Watch out for “phishing” attempts. (emails)
        
        Don’t use public Wi-Fi for private banking
        
        If you must access your bank account online while away from home, only do so using your cellular data plan without Wi-Fi or on Wi-Fi using a virtual private network (VPN).
        
        Keep your computer’s anti-virus software up-to-date.
        
        Use a bank that supports multifactor authentication.
      - Online and Mobile Banking and Bill Payment Services
        
        A recent study showed that the cost of a full-service teller transaction is about $1.00, an ATM transaction is less than 30 cents, and an Internet transaction is less than 1 cent.
    - - Notify the bank within 60 days of an incorrect transaction
    - - Safe deposit boxes
        
        A safe-deposit box is a rented drawer in a bank’s vault. Boxes can be rented for an average of about $30 per year, depending on their size
      - Trust services
        
        Bank trust departments provide investment and estate planning advice. They manage and administer the investments in a trust account or from an estate.
  - - - The Cost of a Checking Account
        
        What to Look for in a Bank Account
        
        Checkings
        
        Required minimum
        
        Service charge (monthly balance v daily balance based)
        
        Limits on # of transactions
        
        ATM access fees (their ATM and different ATMs)
        
        Overdraft protection
        
        Savings
        
        Federal Deposit Insurance
        
        Liquidity
        
        ATM, branch bank, or online transfer if there’s a real emergency
        
        No high transactions/low balance fees
      - Individual or Joint Account?
        
        One advantage of the joint account over two individual accounts is lower service charges. In addition, the account has rights of survivorship: for a married couple, this means that if one spouse dies, the surviving spouse, after fulfilling a specified legal requirement, can draw checks on the account. If account owners are treated as tenants in common rather than having rights of survivorship, then the survivor gets only his or her share of the account. Thus, when you’re opening a joint account, be sure to specify the rights you prefer.
        
        They can each open individual checking accounts (on which the other cannot write checks).
        
        They can open a joint account that requires both signatures on all checks.
        
        They can open a joint account that allows either one to write checks (the most common type of joint account).
      - General Checking Account Procedures
        
        The application form asks for basic personal information such as name, date of birth, Social Security number, address, phone, and place of employment. You’ll also have to provide identification, sign signature cards, and make an initial deposit.
      - Overdrafts
        
        automatic transfer program (savings to checking)
        
        Many banks offer an overdraft line of credit that automatically extends a loan to cover the amount of an overdraft.
      - Stopping Payment
        
        25-30 dollars if it's your fault, cost free if check/checkbook was stolen (cause it ain't your fault)
    - - Account Reconciliation
        
        Checks that you’ve written, ATM withdrawals, debit purchases, or other automatic payments subtracted from your checkbook balance haven’t yet been received and processed by your bank and therefore remain outstanding.
        
        Deposits that you’ve made and added to your checkbook balance haven’t yet been credited to your account.
        
        Any service (activity) charges levied on your account by the bank haven’t yet been deducted from your checkbook balance.
        
        Interest earned on your account (if it’s a NOW or an MMDA account) hasn’t yet been added to your checkbook balance.
    - - Cashier
        
        For people without a checking account: a check payable to a third party that is drawn by a bank on itself in exchange for the amount specified plus, in most cases, a service fee (of $5 to $10)
      - Traveler
        
        a check sold (for a fee of 1 to 2 percent) by many large financial institutions, typically in denominations ranging from $20 to $100, that can be used for making purchases and exchanged for local currencies in most parts of the world
        
        Counterfeit is popular so it's not the preferred choice
      - Certified
        
        a personal check that is guaranteed (for a fee of $10 to $15 or more) by the bank on which it is drawn
        
        It's a stamped check that has funds immediately removed from your account
    - - Determining How Much Interest You Will Earn
      - Certificates of Deposit
        
        A type of savings instrument issued by certain financial institutions in exchange for a deposit; typically requires a minimum deposit and has a maturity ranging from 7 days to as long as 7 or more years.
      - U.S. Treasury Bills
        
        A short-term (3- or 6-month maturity) debt instrument issued at a discount by the U.S. Treasury in the ongoing process of funding the national debt.
      - Series EE Bonds
        
        A savings bond issued in various denominations by the U.S. Treasury.
      - I Savings Bonds
        
        A savings bond, issued at face value by the U.S. Treasury, whose partially fixed rate provides some inflation protection
      - Managing Cash and Savings:
        Planning over a Lifetime
  - - - The Effects of Compounding
        
        discount basis
        
        security is sold for a price that’s lower than its redemption value
        
        The difference between the purchase price and redemption value is the amount of interest earned on the investment. Treasury bills, for instance, are issued on a discount basis
        
        direct payment
        
        ccurs when interest is applied to a regular savings account
      - Compound Interest Generates Future Value
        
        Compound interest is interest that is based on initial deposit plus the amounts gained with the addition of interest gained over time.
        
        Example: Purchase a $1,000, 6%, bond for $950. Interest received is $60 on an investment of $950. Effective rate of interest is $60 / 950 = 6.32%
      - Discount securities
        
        security is sold at a discounted price, i.e. less than redemption value. When redeemed, the difference is interest. Example is Treasury Bills or US Saving Bonds.
      - Direct interest
        
        Interest is added to account or paid directly
      - Simple interest
        
        Interest that is paid only on the initial amount of the deposit.
      - Effective rate of interest
        
        The annual rate of returned that is earned during the period the funds are held.
        
        Amount of interest earned/amount of money invested or deposited
      - Smaller banks give out higher interest than larger banks
        
        Currently avg. rate is 1.71%
      - Nominal (stated) rate of interest
        
        the promised rate of interest paid on a savings deposit or charged on a loan
      - the more frequently interest is compounded, the greater the effective rate for any given nominal rate.
    - - Starting Your Savings Program
        
        Build an emergency fund of liquid assets
        
        Use automatic transfer option to move funds to a savings account
        
        Continue transferring funds to build an investment fund
      - Saving is intended to preserve the value of money, ensure liquidity, and earn a competitive rate of return.