Economics Unit 5 (chapter 11) #2

Use Asset

Assets that depreciate (decrease in value) over time

• Ex: Automobiles

Depreciation

Decrease in value over time

*Vehicle Purchasing Process Starts With:

Determining transportation needs

• Budget for total cost include payment, gas, insurance, maintenance, and repairs

*Key Variable to Negotiate in Auto Loan:

Is the lowest insurance rate possible

Lease For Automobile

A financial agreement for the right to drive a car for a set period

*Loan Repayment Period

Should be shorter than the expected useful life of the asset

*Present Value of an Annuity Formula

Can determine maximum affordable car price

Before Purchasing a Vehicle Always Research:

Vehicle reliability and repair histories

*Ownership Options

Include cash purchase, financing (loan), and leasing

!Housing Payments-to-Income Ratio (General Budgeting)

The percentage of your gross monthly income that goes toward paying your monthly housing expenses

• Housing typically consumes 30-50% of monthly income

• Calculation: Monthly Housing Payments / Monthly Gross Income

*HUD (U.S. Department of Housing and Urban Development) Recommends:

Spending no more than 30% of pretax income on rent

*Landlords May Encourage:

Spending up to 50% of gross monthly income on rent

!Total Fixed Payments-to-Income Ratio (General Budgeting)

The percentage of your gross monthly income used to pay your housing costs plus all other monthly debts

• Calculation: (Monthly Housing Payments + Other Monthly Debt Payments) / Monthly Gross Income

Lease For Housing

Legal documents outlining rental terms and protecting both parties

Subletting

Refers to allowing someone not on the lease to live in the rental

Security Deposit

Typically cover potential damage beyond normal wear and tear

Pet Deposit

The average is approximately $400

Renter’s Insurance

Costs about $50 per year and covers personal property

*Benefits of Renting a Home

Include flexibility, no repair responsibilities, and freedom to move

*Benefits of Buying a Home

Include long-term stability, building equity, and tax advantages

Mortgage

A loan secured by real property (land and improvements)

Foreclosure

Occurs when lender takes possession after missed payments

Short Sale

Allows underwater homeowners to sell for less than mortgage balance

Closing Costs

Include loan origination fees, title insurance, appraisal fees, and prepaid items

Housing Equity

The difference between a home’s value and mortgage balance

Title Insurance

Insurance that protects against financial loss if someone later claims they legally own your property

Good Faith Estimate

A document showing your estimated mortgage loan costs, interest rate, and monthly payments

*The Typical Homeowner:

Buys and sells a home every 7 years

*Maintenance Costs

Average about 2% of home value annually

Multi-Family Housing Options

Include duplexes, condominiums, co-ops, and planned unit developments

!Front-End Mortgage Qualification Ratio (Mortgage Qualification)

The percentage of your gross monthly income that goes toward paying your monthly housing expenses

• FHA recommends spending less than 31% of monthly income on housing expenses

• Calculation: Monthly Housing Payments / Monthly Gross Income

!Back-End Mortgage Qualification Ratio (Mortgage Qualification)

The percentage of your gross monthly income used to pay your housing costs plus all other monthly debts

• FHA limit should be less than 43%

• Conventional mortgages often use a more stringent 36% limit

• Calculation: (Monthly Housing Payments + Other Monthly Debt Payments) / Monthly Gross Income