Financial Planning Professor Durkin Continuing Case Part II: Pages 280- 283 Created By: Kyle Verrette
Summary: Cory and Tisha requested another meeting with me. They are requesting assistance with their cash management, credit use, and major purchases. Cory and Tisha currently currently have several major credit cards. These credit cards include Visa, MasterCard, Discover, and American Epress, as well as several store cards. They still receive several tempting credit card card o!ers in the mail, even though they have several credit cards already. They have a total credit card "alance o# $%,&''. The minimum monthly payment #or each o# these credit cards average $('. )owever, they usually pay $%'' each month on their credit card "alances. Cory and Tisha are anious a"out moving out o# their apartment and purchasing their *rst home. They are currently not on the same page a"out purchasing a home. Cory would li+e to wait "ecause he is interested in getting a new car that has #ewer miles. This is "ecause their current current car is older and has high mileage. Even though they are anious a"out purchasing a new car and home they are limited on #unds. They have several options availa"le a vaila"le to them, which will reduce their epenses. Cory and Tisha are a"le to reduce their monthly credit card epenses as well as other miscellaneous epenses. The couple is a"le to a!ord a maimum o# $&'' a month #or an auto loan. )owever, this does not count #or the increase in their insurance premium i# they do purchase a new car.
Questions: %. As a result result o# a recent corporate merger, merger, Tisha Tisha is eligi"le eligi"le to join join a credit union. hat are the advantages and disadvantages o# doing so instead o# remaining with a commercial commercial "an+ Tisha is a"le to join a credit credit union due to a recent corporate corporate merger merger at her "an+. Tisha is wondering what advantages credit unions have over regular regular commercial commercial "an+s. Credit unions have several advantages over regular commercial "an+s. or eample, credit unions have lower #ees, lower rates on loans, and they have higher rates on savings. )owever, one disadvantage they have is the convenience #actor. #actor. Many credit unions are not located around the country. or this reason, they have limited ATM/s. The convenience #actor is one advantage commercial commercial "an+s have over credit unions. Commercial Commercial "an+s are a"le to o!er the convenience #actor that credit unions are una"le to. Commercial "an+s are a"le to o!er more ATM ATM locations and they are also a"le to access their account in#ormation anywhere "y using the "an+s mo"ile app. Commercial "an+s do o!er the convenience #actor, however, the customer ends up paying #or it due to the "an+s high #ees. 0everal other
disadvantages associated with commercial "an+s are high #ees and high interest rates on the loans they o!er.
1. 0hould 0hould they consider consider online online "an+ing"an+ing- hat are are the advantages advantages and disadvantages when compared to traditional "an+ing services2e#ore answering this question 3 would *rst as+ the Dumont/s to please ela"orate on the question. This is "ecause the question does not speci#y whether they are considering online "an+s or online "an+ing. 3# they were were considering online online "an+ing such as using the mo"ile app and online we"site 3 would indeed have them consider this option. This is "ecause having online "an+ing allows them to chec+ their transaction history. history. They are a"le to see their "alances, see i# a chec+ cleared, and trans#er #unds at any time. They are a"le to access online "an+ing 1456 the "an+ does not have to "e open to have access to this resource. Another advantage o# online "an+ing is that the Dumont/s are a"le to apply #or an 37A and loans at the com#ort o# their home. )owever, one major disadvantage associated with online "an+ing is identity the#t. The Dumont/s need to ensure that they +eep all o# their passwords secure, so that no one is a"le to access their accounts. 3# the Dumont/s were to consider online "an+s then they are several advantages and disadvantages associated with them. )aving an online "an+ means that there are no "ric+ or mortar locations. 8nline "an+s "a n+s will usually o!er higher rates. This is "ecause the *ed costs are lower than regular
commercial commercial "an+s. 8ne disadvantage o# online "an+s is that the Dumont/s would loose the convenience #actor. #actor. 0ince the "an+ is "ased online, they would not "e a"le to go into the "an+ "a n+ and as+ them questions a"out their account. They would also not "e allowed to acquire a"out possi"le loans.
&. The Dumont/s/ Dumont/s/ commer commercial cial "an+ was recent recently ly "ough "y a large, large, out9 o#9 state "an+. 2ecause required required minimum "alances and "an+ #ees have increased, the Dumont/s have considered shopping #or a new "an+. hat #actors should they considerhen loo+ing #or a new "an+ the Dumont/s should consider the Three C/s. The three three C/s are cost, convenience, convenience, and consideration. The Dumont/s should *nd a "an+ that has low monthly #ees and low required required minimum "alance. These #ees are associated with the *rst C, cost. The convenience #actor also plays a vital part when shopping #or "an+. This is "ecause the Dumont/s need to see how many locations the "an+s o!er, the hours, and the di!erent services services each "an+ o!ers. The third C that the Dumont/s should consider when choosing a "an+ is consideration. Consideration depends on how much personal attention the "an+ is a"le to o!er you. you. 3t is important that the Dumont/s choose a "an+ that addresses all o# their concerns and needs. 4. The Dumont/s Dumont/s have have as+ed as+ed your advice advice on using using a CD, money money mar+et mutual #und, or asset management account #or their emergency emergency #und. hat is the "est choice- hy- 3s there another type o# account they should consider- hy is the "alance "etween liquidity and return so important with an emergency #und-
The Dumont/s are interest interest in several di!erent di!erent "an+ing accounts. They are considering considering a CD, money mar+et mar+et mutual #und, or an asset management account. Each one o# these accounts has numerous advantages and disadvantages. disadvantages. Advantages to a CD account account are that it has a *ed interest rate and it is D3C insured. 0ome disadvantages associated with a CD, would "e that the Dumont/s would "e penali:ed i# they withdraw money #rom their CD account a ccount prematurely. 3# the Dumont/s do decide to get a CD then they should consider also creating a savings account. This is "ecause i# the Dumont/s need access to #unds then they would "e penali:ed i# they withdraw money #rom their CD. 0o, in order o rder to avoid #ees and "e a"le to access money then they should put money aside into a savings account. The second account that the Dumont/s are are considering is a money mar+et mutual #und. There are several advantages with this account. These advantages include; high interest rates, chec+ writing privileges, relatively relatively sa#e, liquid, and limited ris+ due to short maternity o# investments. Even though there are many advantages there are some disadvantages. These disadvantages include; administrative #ees, minimum initial investments, and minimum chec+ amount, and the account is not #ederally secured. The third option the Dumont/s are are considering is an asset management account. There are many advantages and
disadvantages associated with this account. 0everal disadvantages associated with an asset management account are that it requires a minimum "alance o# $%(,'''. There are also higher #ees associated with the asset management account. The account is also not D3C secured. )owever, there are also many advantages to asset management account. These advantages include high return, unlimited chec+ writing, monthly summary statements, and automatic coordination o# money management. Considering these three di!erent accounts, the "est option is the money mar+et mar+et mutual #und. )owever, 3 would also a lso recommend that the Dumont/s open a savings account. This is "ecause the Dumont/s would "e a"le to have easy access to their #unds incase o# emergencies. emergencies. (. hich provides provides the higher a#ter a#ter99 ta yield; yield; The Dumont/s % percent "an+ savings account or a #ederal and state ta9 #ree money mar+et #und yielding .1( percent- The Dumont/s are in the %( percent #ederal marginal ta "rac+et. The Dumont/s are currently currently in the %( %( percent #ederal #ederal marginal ta "rac+et. The Dumont/s are loo+ing into an account that will provide them with the highest interest rate. The savings account has a % percent interest interest rate. The Dumont/s need to "e a"le to *nd the a#ter ta income. 3n order to calculate the a#ter a #ter9ta 9ta income then 3 would need to ta+e the interest and then su"tract the marginal ta o# %(<. or eample, the equation would "e =%<9%(<>. ?(<@. Another option would "e the state ta9#ree money mar+et mar+et #und with a ta yield o# .1(<. Even though this option is ta9#ree ta9#ree it does not o!er
the Dumont/s the "est interest. The "est option is the .?(< associated with the savings account. Even though this num"er would "e decreased due to state ta it would still earn more interest than the state #ree money mar+et #und. 0o, ultimately the "est option is the % percent "an+ savings account "ecause it will have a higher return.
. 3n Chapter Chapter ( it was recomm recommended ended that that you Bpay yoursel yoursel## *rst. Tisha is not sure sure how to do this "ut li+es li+es the idea o# Bsaving money without having to thin+ a"out it. ive her some advice a"out ways to Bautomate her savings. s avings. Tisha li+es li+es the idea a"out "eing a"le to save money. 0he was recommended recommended that she should use the Bpay yoursel# *rst option. This option will allow her to save money and distri"ute her payroll payroll chec+ into various accounts. All Tisha has to do is get the account num"er and routing num"er #or each account that she was to distri"ute into. Tisha is a"le to pay hersel# "ac+ "y depositing money into a CD and money mar+et mutual #und each o# these accounts will allow her to earn interest. Another option is that Tisha could purchase savings "onds and allow them to mature and earn interest over time. 8ne last option that Tisha could consider is "y trans#erring money into a savings account or vacation #und. This would then allow her to save #or a #amily vacation. Even i# Tisha deposits $%'9 1' each pay cycle into each a savings account it will allow her to start earning interest and get in the ha"it o# saving
money. 3t will ta+e time to "e a"le to save a su"stantial amount o# money, "ut over time the "alance will "uild.
6. 2ecause 2ecause o# his concern concern over B*nancial B*nancial surprise surprises, s, Cory wants wants to learn more a"out identity the#t. hat practices should he and Tisha #ollow to protect protect themselvesthemselvesCory is interested in learning a"out procedures procedures to ta+e, which will protect him #rom #raud and possi"le identity the#t. The Dumont/s should consider investing in a shredder. shredder. A shredder will allow the Dumont/s to shred any documents with any a ny account num"ers, telephone num"ers, social security num"ers, and a nd credit card o!ers. 3 would also suggest s uggest that the Dumont/s chec+ their credit reports. reports. They are a"le to do so "y accessing accessing three di!erent di!erent credit report report agencies. These agencies include Tran/s union, Equi#a, and Eperian. sing these agencies will allow them to get a credit report. hen they receive their credit report it is important that they ensure there are are no red Fags. They need to ensure that all closed accounts do not appear open on the credit report. report. The Dumont/s should also +eep a record record o# all a ll o# their account num"ers. They should store all o# their their documents in a loc+ed loc+ed *re"o. *re"o. This will allow them to secure their documents and ensure that no one is a"le to gain access a ccess to their person in#ormation. 8ne last recommendation recommendation #or the Dumont/s is to "e VE7G VE7G care#ul giving out personal in#ormation, especially over the phone and 3nternet.
?. The Dumont/s ta+e9 home pay =a#ter ta deductions deductions #or the taes taes and "ene*ts@ is approimately $,'4( monthly. Current nonmortgage de"t payments equal $H%% =i.e., $4'( auto, $%'' miscellaneous credit, $%H student loan, and $1%' #urniture@. #urniture@. Calculate and interpret their de"t limit ratio. Assume they could purchase another auto with a $&'' monthly payment. Calculate and interpret their revised de"t limit ratio. hat advice would you give the Dumont/s a"out purchasing another vehicle The Dumont/s are considering considering purchasing another vehicle. vehicle. 0o, 3 calculated their de"t limit ratio and see i# it is *nancially smart #or them to purchase another vehicle. The Dumont/s are a re currently currently ta+ing home approimately $,'4( per month. )owever, they have a nonmortgage de"t payment o# $H%%. 0o, in order to calculate there de"t ratio "e#ore the car 3 too+ their monthly de"t and divided it "y their income =H%%5'4(> %(<@. ithout purchasing a second car the Dumont/s have a %(< de"t ratio. hich is good "ecause they want to "e around the %(9%?< rang. )owever, they should try to stay "elow 1'< "ecause it is a little high. 3 then calculated their de" ratio with them purchasing a second car. car. 3 too+ their monthly de"t and added the $&'' #or their new monthly payment o# the car and then divided it "y their monthly income =H%%I&''5'4(>1'<@. =H%%I&''5'4(>1'<@. The Dumont/s would have a 1'< de"t ratio ratio i# they purchased a second car. car. 1'< is a little high they should try to stay around the %(9%?< de"t ratio. The Dumont/s should consider purchasing another car with a lower monthly payment. This is "ecause the Dumont/s may not have income to cover maintenance on the car "ecause 1'< o# their income would "e going towards paying o!
de"t. 3t is important to note that the de"t does not include their mortgage payment. H. Concerne Concerned d that they might might depend on credit credit too much, much, Tisha Tisha and Cory have as+ed you a"out the typical warning signs o# ecessive ecessive credit use. Jist *ve to eight o# those signs. hat alternatives should they consider i# they occasionally cant pay their "ills on time The Dumont/s are worried worried a"out their credit credit score and are are wondering what several warning signs o# ecessive credit credit use are. There are are multiple warning warning signs o# ecessive ecessive credit use. use. or eample, i# the Dumont/s ta+e advantage o# the "an+s overdra#t privileges, ta+ing out cash advances, only paying the required minimum "alance, depleting their savings account in order to pay credit, and having their credit limits on their credit cards nearly maed out. )owever, there are several ways that the Dumont/s are a"le to improve their credit score and decrease their de"t. They are a"le to do so "y esta"lish a "udget. 3# the Dumont/s esta"lish a "udget then they are a"le to identi#y +ey areas were they are a"le to cut epenses. 8ther ways that the Dumont/s can improve their credit is "y paying more than the required minimum "alance that is due. 3# the Dumont/s stop using their credit cards and stop applying #or more credit then this will also allow them to improve their score and decrease their de"t. %'. Tish sha a an and Cor Cory y ar are wor worrried ied th that thei heir cr credi edit car card d co company pany might increase their credit card interest rate so much that they will not "e a"le to a!ord their monthly payments. Eplain their rights under the CA7D Act o# 1''H.
Tisha and Cory are are concerned concerned a"out not "eing a"le to a!ord their monthly payments with an interest rate increase on their credit card. )owever, under the CA7D Act o# 1''H their credit company is required required to give the Dumont/s a 4(9day notice "e#ore they increase their interest rate. This grace period will allow the Dumont/s to shop around #or other credit card companies that o!er a lower interest rate. 3 would suggest that they go onto 2an+rate.com. This we"site will suggest several di!erent credit card companies. 3t will also provide each cards interest interest rate, "ene*ts, and annual #ee, and other necessary in#ormation. This we"site will allow them to compare each credit and see what one is the "est option #or them. %%. 3n anti antici cipa pati tion on o# pur purchas chasin ing g a hom home, Cor Cory and and Tish sha a hav have e "een advised to chec+ their credit report. hy- hat are the roles o# the credit "ureau, the credit report, and the 3C8 score in determining determining creditworthiness and the cost o# credit- )ow can they get their credit report- hat are the Dumont/s alternatives i# they *nd erroneous erroneous in#ormation in their credit report3t is important that the Dumont/s chec+ their credit report "e#ore purchasing a home. 3t is recommended recommended that they chec+ their credit report yearly. 7eceiving an annual credit report will allow them to "ecome #amiliar with their credit rating. 3# their credit score is low then they +now, that they have wor+ to do to increase their score. )aving a low credit score would "e a major red Fag. This is "ecause they will receive a higher interest rate #rom lenders i# they apply #or a mortgage. There are three di!erent credit9reporting credit9reporting agencies that
will "e a"le to assist Cory and Tisha. They are a"le to get their credit report "y using Tran/s Tran/s union, Equi#a, or Eperian. 8nce they contact one o# these agencies, a gencies, they will "e a"le to provide p rovide the Dumont/s with their credit credit score. The report will will also allow them to highlight any errors. Errors on their credit report can consist o# any open "an+ accounts that have "een closed and unresolved loans. 3# there are any errors errors on the report then they need to contact the credit "ureau immediately. %1. hat hat are are the the B*v B*ve Cs Cs o# cred crediit- De* De*ne and and ep epla laiin eac each, h, "ased on the in#ormation provided a"out the Dumont household. The B*ve Cs o# credit credit are character, character, capacity, capital, collateral, collateral, and condition. Character Cha racter re#ers to the Dumont/s creditworthiness. creditworthiness. Character is a"le to identi#y the Dumont/s spending ha"its. 3t is also a"le to identi#y whether they pay their monthly "ills on time. 3# they continue to pay their monthly payments then their creditworthiness creditworthiness will "e increased. This would "e a good sign #or the lenders. Capacity loo+s at the Dumont/s a"ility to repay. repay. 3t also loo+s at their education, occupation, income, sta"ility o# employment, and their age. The third C, Capital re#ers to the si:e o# their *nancial holdings. 3t eamines their savings and chec+ing accounts as well as their investments. 3# the Dumont/s have more money esta"lished in their accounts then it is a"le to increase their creditworthiness. creditworthiness. Collateral is the net C. Collateral re#ers to the portion o# a "orrower/s assets that they have attached to their loans. The assets act as a security s ecurity
"lan+et #or the lenders. 3# the Dumont/s apply collateral to their loan then they will receive a lower interest rate. This is "ecause they +now that there is security attached to the loan. The last C, Condition re#ers to the current state o# the economy. The ( th C identi*es whether the Dumont/s are a"le to repay their de"t, due to the current *nancial situation. 3# there were high unemployment then lenders would "e more s+eptical and may reconsider giving the Dumont/s a low interest rate. %&. Cor Cory and and Tish sha a are are conv convin inc ced that hat Bg Bgoo ood d de" de"tt mean eans Bcheap de"t. )elp them identi#y one or two sources o# credit that would "e categori:ed as inepensive, more epensive, epensive, or most epensive. here here would payday loans *t- hy The Dumont/s are convinced convinced that Bood de"t means means Bcheap de"t, "ut this is not the right meaning. An eample o# Bgood de"t could "e student loans. The Dumont/s do indeed have student loans, so this could "ene*t their credit score. There are several didn/t sources that the Dumont/s could use in order to receive a loan. The Dumont/s could consider as+ing #amily mem"ers #or a loan. As+ing a #amily mem"er #or a loan will allow the Dumont/s to pay little to no interest. )owever )owever there is some ris+ associated with as+ing as+ ing a #amily mem"er #or a loan. 3# the Dumont/s are late or miss a payment then the #amily mem"er could "ecome angry. Another option is to have collateral attached to the loan. Attaching collateral to the loan gives the lender more security. The loan will also "e cheaper "ecause the lender will give the Dumont/s a cheaper interest rate. The Dumont/s
have also "een considering a payday loan. )owever, the Dumont/s should stay away #rom payday loans "ecause they have a high interest rate. Along with a high interest rate there are also many #ees attached to the loan. A payday loan would "e a "ad option #or the Dumont/s. This type o# loan is usually #or individuals with "ad credit. %4. Disc Discu ussi ssions ons ov over lunc lunch h whe wherre Tis Tish ha wor wor+ +s o# o#ten tur turn tto o Bma+ing ends meet. 8ne cowor+er has "een to a credit counselor, while another is currently currently processing a de"t consolidation loan application. Are these alternatives help#ul #or those who can/t pay their "ills- hat two #undamental strategies are imperative #or someone recovering #rom credit overuse These alternatives alternatives are not help#ul #or the Dumont/s. Dumont/s. The Dumont/s should consider staying away #rom "oth TV ad/s and word o# mouth #rom #riends and #amily. This is "ecause word o# mouth #rom #riends and #amily is not the "est option to gain *nancial in#ormation. Everyone/s *nancial situation is di!erent. 0o, the Dumont/s current current *nancial situation may not "e the same as their #riends. This means that they may not "e eligi"le #or the same type o# "ene*ts or loans. The "est option #or the Dumont/s is to consider tal+ing tal+ing with a *nancial advisor. advisor. The Dumont/s could also consider contacting the "etter "usiness "ureau #or a re#erence. Contacting a *nancial epert will help the Dumont/s esta"lish a "udget, which will allow the Dumont/s to pay their monthly "ills. hile spea+ing with a *nancial epert the Dumont/s could also tal+ with them a"out de"t consolidation. The advisor will "e a"le to eamine the Dumont/s
current current *nancial situation and see i# they should consider consolidating their loans. )owever, it is important that they spea+ with an epert "e#ore applying #or a consolidation loan. 3# the Dumont/s consider ta+ing their #riends and #amilies advice it could negatively a!ect their *nancial situation. %(. )elp elp Co Cory and Tish sha a app applly the the #our #our ste steps o# the smar smartt "uying process to decide whether or not to replace their car. hat sources o# consumer in#ormation might "e use#ul to them3t is crucial that Cory and Tisha apply the #our step smart "uying process. This process will help them determine determine i# they should consider purchasing a new car. The #our9step process includes; 0tep %; Di!erentiate want #rom need, 0tep 1; Do your homewor+, 0tep &; Ma+e your purchase, and *nally 0tep 4; Maintain your purchase. Throughout these #our steps it is crucial that the Dumont/s ma+e ma+e a must have list vs. a wish list. This will help narr na rrow ow down the Dumont/s car search. 3t is also a lso important that the Dumont/s continue to do their homewor+ throughout the process. They need to continue comparing prices at other dealerships. This will help the Dumont/s get the "est price. A#ter the Dumont/s do their homewor+ and they "elieve they are getting a good deal, then they should ma+e the purchase. Throughout this whole process the Dumont/s need to ensure that they negotiate well. 3t is important that they maintain their negotiating power throughout the process. 3# they
continue their negotiating power then they will "e a"le to receive the "est *nancial deal. %. A re recent cent TV adv adverti ertise seme ment nt o!er o!ere ed a le lease ase opt optiion #or #or $1 $1(H a month on a car that "oth Tisha and Cory li+e. li+e. 3t *ts their "udget, "ut they are unsure o# the contract o"ligations. hat criteria should they consider to determine i# leasing is their "est alternativealternative- hat cautions would you give them a"out an open9 end lease compared to a close9 end lease3t is important that the Dumont/s are cautious when listening to TV advertisements. This is "ecause there are various quali*cations that the Dumont/s may need to quali#y #or in order to have the option #or a $1(H monthly lease. )owever, i# the Dumont/s do consider leasing a new car they need to consider several advantages and disadvantages associated with a lease. ith a lease the Dumont/s would "e eligi"le to get a new car every #ew years. There would "e minimum to no maintenance #ees. 8ne disadvantage with a lease is that the Dumont/s would have a set num"er o# miles and i# they go over their miles then the Dumont/s will have to pay the di!erence. ith a lease the car has to "e returned in pristine condition. 0ince the Dumont/s have several +ids this may not "e the "est option. This is "ecause children children may cause some wear and tear tear on the vehicle. They may spill a drin+ in the car, rip the seats, or even scratch the paint. The Dumont/s would lia"le to cover all damages. The car dealership may not even even allow the Dumont/s to return return the car i# it is in "ad condition.
3# they do consider leasing a vehicle then the Dumont/s have to decide on a closed9 end or open9 end lease. A closed9 end lease has no *nancial o"ligation at the end o# the lease. They are a"le to wal+ away a#ter the lease ends. The Dumont/s just need to ensure that they stay within the mileage requirements requirements and +eep the car in good condition. A close9 end lease allows a llows #or normal wear and tear. tear. 3t does not allow #or scratched paint, ripped seats, or drin+5 #ood stains on the interior. interior. )owever, it is important to tal+ with the dealership and understand what the eact stipulations are #or wear and tear. tear. There are also various #ees associated with leasing a vehicle. The Dumont/s would have to pay #or registration, tag #ees, and #or a down payment. Another option is #or an open9 end lease, "ut this option is more popular with commercial commercial "usiness. This is "ecause it allows #or more mileage throughout the lease. The "usiness will also have the option o ption to purchase the vehicle at the end o# the lease. )owever, this option does not allow the Dumont/s to wal+ away #rom the lease. The Dumont/s will have to pay #or the depreciation on the vehicle. %6. 3# Cor Cory and and Tisha isha deci decide de to pur purcha chase rathe atherr than than lease ease another car, what #actors must they consider when comparing new9 and used9 car purchases- hat #actors should they consider in determining whether to sell their car outright or trade it in toward their net purchase There are are several #actors that Cory Cory and Tisha need to consider when purchasing a new car. car. They need to "e a"le to see how much they
can a!ord. 8nce they are a"le to determine determine how much they can a!ord then they need tal+ and see what they would consider paying #or a monthly car payment. pa yment. 0everal #actors they need to consider, i# the Dumont/s purchase a new car then it is important to +now that the car will immediately loose value once it leaves the dealership/s lot. )owever, with a new car there is a warranty. The warranty will cover unepected repairs. There will also "e less maintenance #ees associated with a new car. Also one last #actor that the Dumont/s need to consider is that many lenders will give them a lower interest rate i# they purchase a vehicle. The Dumont/s have also considered purchasing a used car. car. hen purchasing a used car there is no warranty. warranty. 0o, the Dumont/s should consider esta"lishing a savings account #or unepected maintenance and repairs. The Dumont/s will also not receive a low interest rate i# they purchase a used car. Cory and Tisha are also considering trading in their current current car or selling it. 3# the Dumont/s do not "elieve that they will receive receive a good amount in trade in then they should consider selling the vehicle. )owever, there there is a lot more hassle associated with selling a vehicle. 3t is usua usually lly hassle #ree when trading in the vehicle "ecause you do not have to worry a"out paperwor+. hen trading in a vehicle there is a lot less hassle. Even though the Dumont/s may not receive the amount epected in a trade in, there is no hassle or ris+. There is a ris+ #actor associated associated with selling the car. car.
The individual purchasing purchasing the car could give the Dumont/s a #raudulent chec+. 2ut, there are some advantages to selling the vehicle. 3# the Dumont/s do not need the car #or a down payment then they could save the car and sell it when they are ready. 3# they sell the car they might also get more money #or the car then i# they traded it in. %?. Cor Cory and and Tish sha a #ou #ound nd a use used d car car that that costs sts $% $%1,'' ,'''. The They y can *nance through their "an+ #or (.6( percent interest interest #or a maimum o# 4? months. The rate #or new car *nancing is 4.(' percent #or ' months or 4.&( percent #or 4? months. 3# they could *nd a compara"ly priced new vehicle, how much would they save per month in interest charges i# they *nanced the vehicle #or 4? monthsCory and Tisha are considering purchasing a car. car. They #ound a used car that costs $%1,'''. $%1,'''. They are see+ing assistance to gain #urther in#ormation a"out either purchasing purchasing a new car or a used one. 3# the Dumont/s consider purchasing a used car then the lenders would o!er them an interest rate o# (.6( percent #or 4? months. The monthly payment #or the used car would "e $1?'.4(. 3# the Dumont/s consider purchasing a new car then the lenders would o!er them a 4.(' percent interest rate #or ' months or a 4.&( percent interest interest rate #or 4? months. 3# the Dumont/s considered purchasing a new car #or ' months with a 4.(< interest rate, then the monthly payment would "e $11&.61. 3# the Dumont/s decided to *nance a 4?9month loan with 4.&(< interest interest than the monthly payment would "e $161.?&. The Dumont/s are interested in
+nowing how much they would save per month in interest charges i# they *nanced the vehicle #or 4? months. 3n order to *nd the monthly saving 3 too+ the monthly payment #or the used car o# $1?'.4(. Then 3 too+ the monthly payment #or the 4?9month loan o# $161.?& and su"tracted them. The equation would show, =1?'.4(9 161.?&> 6.%@. 0o, the Dumont/s would save $6.% in interest interest per month. 8nce 3 *gure out how much they would save each month 3 multiplied the 6.% "y 4?. The Dumont/s would save $&(.(% over the 4?9month loan. %H. Cons Consiideri dering ng the in#or n#orm matio ation n iin n Kue Kuest stiion %?, h how ow much uch interest would "e saved i# the Dumont/s *nanced the used vehicle #or & months, instead o# 4? months, i# the rate remains the same The Dumont/s are considering considering *nancing a used car #or & months, rather than 4? months. They have as+ed me to calculate how much they would save in interest i# they chose the &9month loan over the 4?9month loan. 3# the Dumont/s *nanced a car #or $%1,''' with a (.6(< interest rating over & months they would save $&?.' over the li#e o# the loan. 3# they were to *nance a &9month loan then their monthly car payment would "e $&&.6% per month. )owever, i# they chose to stay with the 4?9 month loan, then they would "e paying $1?'.4( per month. They monthly payment would "e lower, "ut they would also save a total o# $&?.' in interest over the li#e o# the &9month loan.
1'. 3n revie eviewi wing ng the sam sample ple aut auto o loa loan n co contac ntact, t, Cory Cory and and Ti Tish sha a questioned the term Bsecured loan. They also were unsure o# the terms Bde#ault, Brepossession Brepossession, , and Bde*ciency payment clause. Eplain these terms. hat can they do to avoid repossession0ecured loan is a loan that/s guaranteed "y a speci*c asset. or eample, the Dumont/s could attach collateral to the loan. An eample o# collateral could "e a down payment on a car or their home. The Dumont/s are also wondering what de#ault means. The de*nition o# De#ault means that the Dumont/s #ailed to ma+e a scheduled interest or principal payment. The Dumont/s are also interest in understanding what repossession means. 7epossession 7epossession occurs i# the Dumont/s de#aulted on their loan. The lenders will then claim any assets in order to help recover the de"t o# the loan. or eample, the lenders could repossess the Dumont/s vehicle. The lenders would then ta+e the car to an auction and use the money they got #rom the car and apply it towards their de#aulted loan. De*ciency payment clause is a loan requirement stating that i# the Dumont/s de#ault on their secured loan, not only can the lenders repossess whatever is secured, "ut also, i# the sale o# the asset does not cover what is owed, then the Dumont/s will still "e responsi"le #or the "alance o# the loan. The Dumont/s could consider several actions to help avoid repossession. The Dumont/s could consider esta"lishing a "udget to ensure that they ma+e their monthly payments and they do not de#ault on their loans. )owever, i# they
do not have the income to a!ord the monthly payments, then the Dumont/s could consider *ling #or "an+ruptcy. "an+ruptcy. Another option they could consider is to sell the asset and use that money to repay the loan. The Dumont/s could also contact the lender and tal+ with them a"out their *nancial trou"les. The lenders may "e a"le a "le to provide them with several di!erent courses o# action to help resolve their *nancial situation. 1%. 3n a #ew #ew years, ars, Tish sha a and and Co Cory might ght want want to con consi side derr a home equity loan to *nance a car purchase or to help pay #or Chad/s or )aley/s college costs. hat are the advantages and disadvantages o# using this credit source as opposed to the typical auto or student loan- 0peci*cally, what are the ta consequences The Dumont/s are considering considering ta+ing out a home equity loan in order to purchase a car and help their children pay #or college. The Dumont/s are wondering what the advantages and disadvantages are associated with a home equity loan. There are several several advantages with a home equity loan. )ome equity loans are more secure than regular consumer loans. 0ince the loans are secure the interest rate associated with the loan is also lower. lower. This is "ecause lenders consider them less ris+y. Even though there are many advantages to a home equity loan there are also several disadvantages. 0ome disadvantages are that the Dumont/s would "e putting their home up as collateral. The Dumont/s should "e care#ul "ecause i# they are not *nancial responsi"le then they could ris+ losing their home. 3# the Dumont/s do de#ault on their monthly
loan payments then the "an+ will put their home up #or auction. They will use the amount they they get #or auction and pay o! the remaining "alance on the car loan as well as the college loan. 8nce they reach the *nal stage o# the li#e cycle they will "e close to retirement retirement and it is important that they have a home secured "y then. There are also several #ees associated with the home equity loan that they need to consider as well. 3# the Dumont/s are *nancial responsi"le and they +eep a "udget then a home equity loan is something they should consider. consider. This is "ecause they could save money with a lower interest rate associated with the home equity loan. There are several ta consequences that the Dumont/s should consider as well. The interest on a home equity loan is ta deducti"le up to a maimum o# $%'','''. 0o, #or every dollar o# interests the Dumont/s pay on their home equity loan, their income is lowered "y $%. 11. Jast Jast9w 9we ee+, e+, the the loca locall ne newsp spap aper er mort ortgage gage rate ate col column umn reported that the rate #or a &'9 year *ed9rate *ed9rate mortgage was &.?? percent, while the rate #or a 69year "alloon payment mortgage was &.4( percent. A %9year A7M was availa"le #or &.1( percent. Assuming a loan amount o# $%1',''', calculate the payment #or each mortgage. Aside #rom the signi*cant di!erences di!erences in the mortgage payment amounts, what other #actors should the Dumont/s consider when choosing their mortgage- hat are the advantages and disadvantages o# an interest9 only mortgage The Dumont/s saw a local ad in the newspaper. newspaper. The ad reported that a *ed rate mortgage o!ered a &.??< interest rate, 69year "alloon payment o!ered a &.4(< interest rate, and a %9year A7M o!ered a
&.1(< interest rate. The Dumont/s are considering the loan amount to "e $%1',''' over a &'9year span. The Dumont/s were wondering wondering which option had the lowest monthly payment. actoring in each loans total amount, time, and interest rate 3 was a"le to *nd the monthly payment. or a % year arm the monthly payment is $(11.1(. The monthly payment #or 69year "alloon payment is $(&(.(% and the monthly payment #or a *ed rate mortgage is $(4.&. The lowest monthly payment #or a &'9year loan would "e #or the interest only mortgage. The Dumont/s should consider three three major #actors choosing their mortgage. These #actors include; Joan amorti:ation, interest rate, and the length o# the loan. 3# the Dumont/s only have a %(9year loan compared to a 1(9year loan then they would "e a"le to save a signi*cant amount o# money in interest. sing loan amorti:ation the Dumont/s would "e a"le to save money overtime in interest. This is "ecause it could allow them to repay their loan in a shorter period o# time. The Dumont/s have several di!erent di!erent types o# mortgages mortgages that are availa"le to them. or eample, eample, there is a 69year "alloon mortgage, one9year arm mortgage, and an interest inly mortgage. Each o# these mortgages has their advantages and disadvantages. A disadvantage with a 69year "alloon payment is that i# the Dumont/s
do not re*nance their loan, then they could end up having a payment to pay. The %9year A7M A7M would not "e a via"le option #or the Dumont/s. Dumont/s. They are arley young and already have a couple o# children, so they currently currently have a strict "udget. ith a one year arm the interest rate is a"le to Fuctuate and with any change in the interest rate it could "e trou"le some #or the Dumont/s. The third option that the Dumont/s can consider consider is the interest interest only loan. Jenders o!er low interest rates and the monthly payment is also less than a regular principal payment. 8ne major disadvantage to an interest only loan is that the Dumont/s would still "e earning interest #rom the loan. This could potentially cause the Dumont/s to spend more money over the li#e o# the loan.
1&. 2ase ased on on th their gr gross mo monthly in income o# o# $6 $6,''' an and monthly de"t repayments o# $H%%, what is the maimum mortgage amount #or which Cory and Tisha could currently quali#y- Monthly real estate ta =T@ and homeowners insurance =3@ are estimated at $%6' per month. Calculate the mortgage amount using "oth the 1? percent quali*cation rule and the & percent quali*cation rule. se 4 percent pe rcent as the current rate o# interest and assume a &'9year, &'9year, *ed9 rate mortgage. The Dumont/s currently currently have a monthly income income o# $6,''' and they also pay $H%% in loan payments per month. They are also epecting to pay $%6' in homeowners insurance. The mortgages loan maturity is 46.64 a year with a 4 percent interest interest rate. sing the 1? percent quali*cation rule, the Dumont/s would "e eligi"le #or a
$&64,H4?. $&64,H4?. The monthly payment payment on this loan would would "e $%6H'. $%6H'. 3 was also a"le to calculate the total mortgage and monthly payment using the & percent quali*cation rule. The Dumont/s would "e a"le to quali#y #or a total mortgage o# $&'%,414. This mortgage would "e a &'9year, *ed rate mortgage. The monthly payment #or the &'9 year loan would "e $%,4&H. The Dumont/s should consider the mortgage that quali*es them #or a total mortgage o# $&'%,414. This is "ecause they would "e paying less money per month on a mortgage payment. The money they save on a cheaper house can "e used #or an emergency #und. The emergency #und could "e used #or unepected repairs or maintenance in the home. 14. )ow has has Co Cory/s ry/s stud stude ent loan loan a!e a!ected cted his his cr creditw ditwor ortthine hiness ss in applying #or a mortgage- hat is the relationship "etween L3T3 and consumer credit when calculating the & percent quali*cation ruleCory is wondering how his student loans are a!ecting his creditworthiness creditworthiness during his loan process. Many lenders may use the & percent quali*cation rule to determine determine his credit worthiness. The lenders loo+ to see i# Cory has more than & percent o# his income allocated to repaying de"t. This de"t can include, car loans, mortgages, credit card de"t, and personal loans. Cory still has outstanding student loans, "ut student de"t is considered Bgood de"t to lenders. 0o, his student loans will not a!ect his creditworthiness. creditworthiness. )owever, it is impacting his L3T3. L3T3 is an acronym #or Lrincipal, 3nterest, Taes, and 3nsurance. Cory is
currently currently paying $%4&H in L3T3. 2ut, this amount does not include his monthly student loan payment o# $%H a month. )is L3T3 is a!ected "ecause once 3 add $%H to his current L3T3 then the amount will "e increase to $%&( =%4&HI%H>%&(@. =%4&HI%H>%&(@. Even though his student loans will not negativity a!ect his creditworthiness it will indeed a!ect his L3T3. 1(. Com Compar pare the the Dum Dumont/ ont/s s mon montthly hly mor morttgage gage pay payment ent ##or or L3T3 3T3 in question 1& with their current monthly rent and renter/s insurance cost o# $%,&''. 0hould Cory and Tisha consider purchasing a house that would require their maimum quali*cation mortgage loan amount- De#end your answer. answer. The Dumont/s have two options that they are are a"le to choose #rom. They can choose either the loan loan that is o!ered #rom #rom the 1? percent percent or & percent percent quali*cation rule. rule. The 1? percent percent quali*cation rule rule o!ers the Dumont/s a a mortgage o# $&64,H4?. The monthly payment associated with this loan would "e $%6H'. The Dumont/s currently currently pay $%&'' in rent and renter insurance per month. 3# they choose this option it would "e an etra $4H' a month #or the loan itsel#. itsel#. This does not include the homeowners insurance o# $%6' per month. This option would not "e *nancially smart #or the Dumont/s to consider. They were also a"le to quali#y #or the & percent quali*cation rule. ith this quali*cation the Dumont/s epected monthly mortgage payment would "e $%,4&H over &' years. hile the Dumont/s total mortgage would "e $&'%,414. $&'%,414. They are also epecting to pay $%6' a month in homeowners insurance. 0o, it
would not "e there option to choose the more epensive home. This is "ecause they would "e limited with their availa"le #unds. 3# there was an increase in one o# their "ills or an interest rate increased then they may not "e a"le to o!ered their monthly mortgage payment. 2y choosing the total mortgage o# $&'%,414, it allows the Dumont/s to have more Fei"ility in their monthly "udget.
1. iven th the ma maimum mo mortgage qu quali*cati ation am amount determined determined in Kuestion 1&, calculate a 1' percent down payment. 3# closing costs average ( percent o# the cost o# the house, how much will the Dumont/s need on the day o# closing)ow does this compare with the $%&,''' in the stoc+ mar+et mar+et inde mutual #und account #or their house down payment The Dumont/s are considering considering putting a 1'< down payment on their their home purchase. 3# the Dumont/s *nanced a &'9year loan #or $&'%,414 then they would have to put $',1?4.?' #or a total down payment. The Dumont/s will also have to pay (< closing costs on their new home purchase. 3n order to calculate the total closing cost 3 too+ the mortgage o# $&'%,414 and multiplied it "y (<. The (< is what they have to pay towards the closing costs. The total amount o# closing costs calculated to $%(,'6%.1'. $%(,'6%.1'. 8nce 3 #ound the amount the Dumont/s need to spend is closing costs and #or a down payment 3 added them together. together. This came to a total amount o# $6(,&(.''. $6(,&(.''. The Dumont/s will need to pay $6(,&( the day o# closing. They currently have $%&,''' in savings that they are a"le to put towards the closing costs.
16. si sing the the mon month thlly L L33 pay payme ment nt #or #or the the ma maim imum um mort ortgage gage quali*cations amount in question 1&, calculate the total cost o# the Dumont/s home i# the mortgage is not paid o! early- )ow much o# this cost is interest3# the Dumont/s *nance a &'9year mortgage #or $&'%, 414 their monthly payment would "e $%4&H.''. $%4&H.''. The Dumont/s are wondering how much they would "e paying in interest i# they do not pay o! their &'9year mortgage. 3n order to calculate the interest 3 *rst had to calculate the total costs o# the mortgage. 3 was a"le to *nd the total costs "y multiplying the monthly payment "y &' months =%4&H&'> =%4&H&'> (%?,'4'@. A#ter 3 calculated the Dumont/s total costs, 3 then too+ the total costs and su"tracted the loan amount. The total costs are (%?,'4' and su"tracted &'%,414, which then gives me the total interest. The equation 3 used is =(%?,'4'.''9 =(%?,'4'.''9 &'%,414.''> 1%,%@. The Dumont/s would "e paying $1%,% over the li#e o# the &'9year loan. 3# the Dumont/s pay o! their loan early then the Dumont/s would "e a"le to save a su"stantial amount o# money in interest.
1?. Tish sha a wou woulld llii+e to to con consi side derr a %(9 ye year mortg ortgag age e so so tha thatt the house would "e paid #or "e#ore )aley enters college. Eplain how the #actors o# monthly payment, total interest paid, time value o# money, and taes impact this decision. Tisha is considering considering a %(9 year mortgage. Tisha Tisha would rather have a %(9 year mortgage "ecause their house would "e paid o! "e#ore )aley enters college. 3# Tisha decides to *nance a mortgage at %(9
year rather then &' years then their monthly mortgage payment would "e increased. 0everal advantages to a %(9year loan are that the Dumont/s would "e a"le to pay o! the loan #aster and they would "e a"le to save money. money. This is "ecause a %(9year mortgage o!ers lower interest and taes. The Dumont/s would only have to pay interest, taes, taes, and a monthly payment #or %( years, rather than &' years. 3# the Dumont/s "elieve that they would "e a"le to a!ord a higher monthly payment then a %(9 year mortgage would "e the "est option. or eample, eample, i# the Dumont/s do indeed *nance a %(9year mortgage with a *ed rate o# .''&1&& percent then the monthly payment would "e $??'.4&. )owever, i# they decided to stay with a &'9year loan then the Dumont/s would "e loo+ing to paying a *ed payment o# $(4.&. 0o, overall the Dumont/s would have to pay a higher monthly mortgage, "ut it could "e "ene*cial. This is "ecause they could save money money in interest interest and their home would "e paid o! o ! "e#ore )aley "egins college.
1H. 2rie rieFy e eplai plain n the the conce oncept pts s o# o# one one99 ti time, recur ecurrring, ing, and maintenance and operating costs to Cory and Tisha. )ow should they consider three categories o# costs when shopping #or their home The Dumont/s should consider the three three major categories when when purchasing a home. These categories include; one time costs, recurring recurring costs, and maintenance and operating costs. 0everal one time costs include down payment and closing costs. The Dumont/s
also need to consider several recurring recurring costs. 7ecurring 7ecurring costs would include L3T3 costs. L3T3 costs are principal, interest, interest, taes, and insurance. These costs occur multiple times throughout the loan repayment process. process. The third category o# costs when shopping #or their home are the maintenance and operating costs. Maintenance and operating costs could include a new water heater, new appliances, lawn care, electrical repairs, and plum"ing repairs. There are are a lot o# unepected unepected maintenance "ills when purchasing purchasing a home. )owever, the Dumont/s could consider several alternatives to help decrease maintenance and operating costs. hen the Dumont/s are in the "uying process the Dumont/s could request a list o# recent maintenance repairs done at the home. The Dumont/s could also as+ the sellers o# the home to replace old5 "ro+en "ro+en appliance. This will help the Dumont/s decrease their maintenance maintenance costs. 3t is important that the Dumont/s consider these three categories o# costs when purchasing a home.
Recommendations: There are are several recommendations recommendations that 3 would suggest to the Dumont/s. 8ne recommendation would "e that the Dumont/s should esta"lish a "udget. This will allow them to trac+ their epenses. Esta"lishing a "udget will also allow the Dumont/s to +now how much they are currently currently spending in de"t per month. A "udget would also a lso allow them to cut epenses when needed. A second recommendation recommendation 3
would ma+e to the Dumont/s is to consider getting online "an+ing. 8nline "an+ing is a #ree resource resource that is o!ered "y "an+s. 8nline "an+ing allows the Dumont/s to +eep trac+ o# their current "alance. 3t would also allow them to trans#er #unds when needed and see whether a payment was made. Another suggestion 3 would ma+e to the Dumont/s is to consider getting a part time jo". )aving a second jo" will "e another source o# income, which would allow them to have a sa#ety cushion i# they are short one month. The etra source o# income could also allow the Dumont/s to get a &9month loan, rather than a 4?9month loan. 0ince it would cost more per month to get a &9month loan the etra source o# income could allow them to reconsider this idea. A &9month loan would allow the Dumont/s to $&?.' over the li#e o# the loan in interest. The last recommendation recommendation 3 would ma+e to the Dumont/s is to consider applying #or a home equity loan. 3# the Dumont/s esta"lish a "udget and pay their monthly loan payment then a home equity loan would "e "ene*cial #or their current *nancial situation. This is "ecause the Dumont/s would "e a"le to save money each month in interest, it is ta deducti"le, and it is secure.
