Making

Automobile and
Housing Decisions

MANILA BUSINESS COLLEGE

 Prayer Before Class
Lord, we offer to you our class today.
We pray that through your Divine Guidance,
we would learn how to listen attentively to the inputs of our
teacher.
May we appreciate his effort in imparting his knowledge to
us.
May we participate actively in the discussions and
activities, so we could learn more while having fun.
May we value each other’s contributions as a building block
towards harmony and peace.
 Prayer Before Class
Grant that as we interact with one another, we recognize
the fact that all our learning activities should be
accomplished for Your greater glory.
Grant that we recognize YOU in each of our classmates
and teachers.
As we learn at home, we pray that You keep us safe from
harm and illnesses.
And we would be able to apply correctly what we have
learned from school.
All these we ask in Your powerful name.
Amen.
 Learning Goals
Implement a plan to research and select a new or used
automobile
Decide whether to buy or lease a car
Identify housing alternatives, assess the rental option,
and perform a rent-or-buy analysis

Evaluate the benefits and costs or home ownership and

estimate how much you can afford for a home

Describe the home-buying process

Choose mortgage financing that meets your needs
 Buying an Automobile
1. Research thoroughly
2. Select based on needs
3. Negotiate price

Arrange favorable financing

Understand terms of sale before

purchase
4. Maintain and repair after purchase
 Choosing a Car
Factors Affordability
to Operating costs
Consider
Gas, diesel, or hybrid

New, used, or “nearly new”

Size, body style, and features

 Choosing a Car
Affordability
• Amount of down • Size of the
payment: come monthly loan
from savings; do payment you can
not deplete afford: no more
emergency fund than 20% of
monthly income
 Choosing a Car
Operating Costs
• Car payments
• Insurance, license, fuel, oil, tires and other
operating and maintenance outlays
• Biggest Fixed: installment payments
• Biggest Variable: depreciation (loss in
value that occurs over the period of
ownership)
 Choosing a Car
Operating Costs
• Depreciation: difference between the price
paid for the car and what you can sell it for
• Paid $20,000 for an automobile that can
be sold 3 years later for $14,000
• Cost $6,000 in depreciation
 Choosing a Car
Gas, Diesel, or Hybrid
Hybrids:
• for those who are “green” who are
concerned about the environmental impact
of the fuel their car uses
• Blend gas and battery power
• More economical and less polluting than
gas- and diesel-powered vehicles
 Choosing a Car
Gas, Diesel, or Hybrid
Hybrids:
• Disadvantages include high cost of battery
replacement, more sluggish acceleration,
generally higher repair costs, and typically
higher initial purchase price
 Choosing a Car
New, Used, or “Nearly New”?
• Buy a new car
• Buy a used car so as to have a better
model – used luxury car such as BMW,
Lexus or Mercedes – rather than a less-
expensive brand of new car, such as a
Ford
 Choosing a Car
Size, Body Style and Features
• Type of car: style category e.g. family of
five can buy a mid-size or full-size sedan,
station wagon, minivan, or compact or full
size SUV
• Performance, handling, appearance, fuel
economy, reliability, repair problems, and
resale value
 Choosing a Car
Size, Body Style and Features
• Options include automatic transmission,
bigger engine, air conditioning, high
performance brakes, a CD or iPod/MP3
player, clock, power windows, power
seats, electric door locks, leather seats,
navigation systems, rear window defroster,
and special suspensions
 Choosing a Car
Other Trading in or
Considerations: selling present car

Fuel economy

Safety features
 The Purchase Transaction
• Doing some comparison
shopping
– Bids from at least three
dealers
• Negotiating price
– Sticker price
versus
dealer’s cost
– Rebate versus low-cost
financing
 The Purchase Transaction
“Sticker price” on a
new car:
Manufacturer’s
suggested retail
price for the car
with its listed
options
 The Purchase Transaction
Closing the deal
– Sales contract that
specifies the
offering price and
all conditions of
offer
 Leasing A Car
Leasing usually offers:
• Lower monthly payments
• More expensive car for same payments
• Lower down payment

When leasing a car, you At the end of

pay for its use during a lease, you
specified period of time have nothing
 The Leasing Process

Closed-end lease Open-end lease

• “walk away” • payment based
from car when on car’s residual
lease is over value
• upon return, pay
• most popular
difference if car’s
worth is less than
estimated
 Leasing a Car
Lease Payment Calculation Based on:
Capitalized cost (price) of the car

Forecasted residual value at end of lease

Money factor (financing rate) on lease

Lease term
Lease versus Purchase
Analysis
More or less costly to lease?

When the lease ends…

Return the car?

Buy the car?

 Car Leasing in the Philippines
Pros of leasing a car
1. Enjoy driving a new car every now and
then
2. Possible buying options after leasing
agreement expired
 Car Leasing in the Philippines
Cons of leasing a car
1. Penalties for the car damaged parts
2. Pay extra for exceeded mileage
3. It is not possible to customize the car
4. Cancel a lease agreement is not easy
 Car Leasing in the Philippines
Some car leasing companies in the
Philippines:
• Nissan Car Lease Philippines
• Viking Rent A Car Services
• Avis Philippines
• Budget Rent a Car
• Hertz Philippines
 Car Leasing in the Philippines
Services offered by car leasing companies:
• self-drive
• chauffeur-drive
• airport transfer
• city transfers
• one-way rental
 Car Leasing in the Philippines
Services offered by car leasing companies:
• shuffle service and tours
• weddings and special events, and
• personal or corporate long-term car lease
 Meeting Housing Needs:
Buy or Rent?
• The largest single investment you will
undertake in your lifetime will probably be
the purchase of a house.
• List your preferences and classify them
according to whether their satisfaction is
essential, desirable or merely a “plus”
 Meeting Housing Needs:
Buy or Rent?
Single family
homes Most popular type

Offers more privacy and

property control
 Condominiums

Form of ownership for apartments,

townhouses, or cluster housing

Title to unit and jointly own common

areas

Monthly homeowner’s fee in addition

to mortgage payments
Cooperative Apartments
“Co-op”
Tenants own shares in nonprofit
corporation that owns building

lease units from corporation

Assessed fees based on space occupied

covers service, maintenance, taxes, and

mortgage on entire building
 Rental Units
Appropriate without a down payment
for
those: unsettled in job or family status

who do not want home ownership

responsibilities

who feel current conditions are

unattractive for home ownership
 The Rental Option
Contract Protects Contract Specifies
• lessor = owner • Monthly rent and
due date
• lessee = one who • penalties for late
leases payment
• length of lease
Know your rights and agreement
responsibilities before • deposit
requirement
signing!
• renewal options
Rent or Buy Analysis
Benefits of Owning a Home
Personal satisfaction

Tax shelter

Inflation hedge
Benefits of Owning a Home
Personal
Satisfaction
• Security and peace
of mind
• Feeling of
permanence and
sense of stability
Benefits of Owning a Home
Tax shelter
• Deduct both mortgage
interest and property taxes
when calculating income
taxes, thereby reducing
taxable income, and thus
tax liability
Benefits of Owning a Home
Inflation hedge
• Represents an
investment that
provides a valuable
inflation hedge
• Investment potential
The Cost of Home Ownership
Down payment

Points and closing costs

Mortgage payments
Property taxes and insurance

Maintenance and operating

expenses
 Down Payment
• Represents buyer’s equity
• Paid at time of closing
– Typically 5% to 20% Loan to
of purchase price Value
– If less than 20%, lender may Ratio
require private mortgage
insurance (PMI)
• Protects lender of buyer defaults
 Down Payment
• Specifies the maximum
percentage of the value of a
Loan to property that the lender is willing
Value to loan
Ratio
• If the loan-to-value ratio is 80%,
the buyer will have to come up
with a down payment equal to
the remaining 20%
 Points…
• Premium paid for obtaining
lower mortgage rate 1 point = 1% of
– pay at closing the loan amount
• One-time fee charged by lender
– increases effective rate of interest
• From 0–3 points assessed on mortgage
 …and Closing Costs

• Loan application, origination fees

Expenses • Points
to close on • Title search, insurance
a home
may • Attorney fees
include • Appraisal fees
• Costs, such as inspections,
credit report, property survey,
filing fees
Closing Costs – the Hidden
Costs of Buying a Home
The Mortgage Payment (PITI)

P = Principal Go to lender to
I = Interest repay mortgage
T = Taxes Collected by lender
and held in escrow
I = Insurance account
The Mortgage Payment (PITI)

Lender determines maximum monthly payment

Typical Affordability Ratios

Monthly Total of all monthly

mortgage installment loan
payment < 25– payments < 33–38%
30% of monthly of monthly gross
gross income income
The Mortgage Payment (PITI)
Example:
If your monthly gross income is $4,500, what
would your maximum monthly mortgage
payment be if the lender's affordability ratios
stipulate that your mortgage payment not
exceed 25% nor your total installment
payments exceed 33% of your monthly gross
income?
The Mortgage Payment (PITI)
Mortgage payment should not exceed:
$4,500 x .25 = $1,125

Total installment payments should not

exceed:
$4,500 x .33 = $1,485
Monthly Mortgage Payments for
$10,000 loan
 Property Taxes &
Insurance

Each month Homeowner may

lender collects pay these directly
1/12 of annual • provides more
amount and flexibility and
places in escrow opportunity to
account earn interest
Property Taxes & Insurance

Each month lender collects 1/12 of

annual amount and places in
escrow account

Homeowner may pay directly which

provides more flexibility and
opportunity to earn interest
Maintenance & Operating
Expenses

Consider upkeep expenses

Painting
Repairs
Lawn maintenance
Consider operating expenses
Utilities
 Real Estate Short Sales
Short sale - proceeds of the sale are less
than balance owed on the mortgage

Foreclosure - borrower
cannot make mortgage
payments so lender
repossesses property
 Using an Agent
Agents, usually employed
by seller, are paid a
commission if they make a
sale
The Home-Buying Process
Prequalify and apply

Enter into a sales contract

Provide an earnest money

deposit

Contingency clause
 Closing the Deal

Title check necessary to ensure title is

clear, free of liens

Closing statement provides details of

costs for both buyer and seller
 Financing the Transaction
Sources Commercial banks
of
mortgage Thrifts
loans
Mortgage banks

Mortgage brokers
 Types of Mortgage Loans
Fixed Rate Mortgage
• Interest rate and monthly payments (PI) fixed
for life of loan
• Taxes and insurance not fixed, so total
payment (PITI) can increase

PITI: Principal, interest, property taxes, and homeowner’s insurance

Types of Mortgage Loans

Adjustable Rate ARM Features

Mortgage (ARM) • Adjustment
• Interest rate varies, period
so monthly • Index rate
payments vary • Margin
• May cause • Interest rate
negative caps
amortization • Payment caps
 Negative Amortization
If monthly loan payment is lower than
the monthly interest charged then
principal balance will increase
• could result in a larger
mortgage balance on the
next loan anniversary
than on previous one
 Other Types of ARMs
Convertible Two-step ARMs
ARMs • have two interest
• allow rates:
borrowers to – one for initial 5-7 years
convert to – Higher one for
fixed-rate remaining loan period
loan
Other Mortgage Payment
Options
Interest-only

Graduated-payment

Growing-equity

Biweekly

Buy-downs
Types of Mortgage Loans
Conventional mortgage - lender
assumes all risk of loss
• Usually requires 20% down
payment
– If lower than 20% then PMI required
Types of Mortgage Loans
FHA mortgage VA loan
• payments insured • payments
by Federal Housing guaranteed by
Administration Veterans
• lower down Administration
payment, interest • one-time loan with
rates, closing costs no down payment
Refinancing
• New lower rate can reduce
monthly payment
• Can reduce total borrowing
costs in home financing

May pay closing costs on new loan!

Mortgage Refinancing Analysis
 Financial Planning Exercise

• Jamie Eunice has just graduated from

college and needs to buy a car to
commute to work. She estimates that she
can afford to pay about $450 per month for
a loan or lease and has about $2,000 in
savings to use for a down payment.
 Financial Planning Exercise

• Develop a plan to guide her through her

first car-buying experience, including
researching car type, deciding whether to
buy a new or used car, negotiating the
price and terms, and financing the
transaction.
 Financial Planning Exercise

• You may convert the dollar amounts to

Philippine pesos using the prevailing
exchange rates.
 References
• Gitman, Lawrence J., Joehnk, Michael D.
and Billingstey, Randall. (2014).
Investment Management with Personal
Finance, 2014-2016 Edition. Singapore:
Cengage Learning Asia Pte Ltd.
• https://philkotse.com/car-buying-and-
selling/car-leasing-in-the-philippines-all-
about-its-pros-cons-4352