Exhibit 5.1 10 Steps to Buying a New Car These 10 steps summarize the car-buying process discussed in this chapter. 1. Research which car best meets your needs and determine how much you can afford to spend on it. Choose the best way to pay for your new car cash, financing, or lease. Consult your insurance agent to learn the annual premium on various cars. 2. Check Web sites like Edmunds.com and TV and newspapers for incentives and rebates on the car you would like to buy. This could include a cash rebate or low-cost financing. 3. Decide on a price based on dealer s cost for the car and options, plus a markup for the dealer s profit, minus rebates and incentives. 4. Find the exact car for you in terms of size, performance, safety, and styling. Choose at least three target cars to consider buying. Get online quotes from multiple car dealers. 5. Test-drive the car and the car salesman. Test-drive the car at least once, both on local streets and on highways. Determine if the car salesman is someone you want to do business with. Is he relaxed, open, and responsive to your questions? 6. If you are trading in your old car, you will not likely get as high a price as if you sold it yourself. Look up your car s trade-in value at Edmunds.com or kbb.com. Solicit bids from several dealers. 7. Negotiate the lowest price by getting bids from at least three dealers. Hold firm on your target price before closing the deal. 8. Close the deal after looking not just at the cost of the car but also the related expenses. Consider the sales tax and various fees. Get the saleperson to fax you a worksheet and invoice before you go to the dealership. 9. Review and sign the paperwork. If you have a worksheet for the deal, the contract should match it. Make sure the numbers match and there are no additional charges or fees. 10. Inspect the car for scratches and dents. If anything is missing like floor mats, for example ask for a Due Bill that states it in writing. Source: Adapted from Philip Read, 10 Steps to Buying a New Car, http://www.edmunds.com/car-buying/10-steps-to-buying-a-new-car.html, accessed March 2011. 21992_bonus_exhibit_p001-086.indd 24
Exhibit 5.2 Finding the Best Car for You Start your examination of a car with an inspection of key points. Don t overlook the obvious: How easy is it to get people and things into and out of the car? Do the doors open easily? Is the trunk large enough for your needs? Does the car offer a pass-through or fold-down rear seat for larger items? Comfort and visibility: Are the seats comfortable? Can you adjust the driver s seat and steering wheel properly? What are the car s blind spots for a person of your height? Can you see all the gauges clearly? Can you reach the controls for the radio, CD player, heater, air conditioner, and other features easily while driving? Does it have the options you want? Then take the car for a test drive. Set aside at least 20 minutes and drive it on highways and local roads. To test acceleration, merge into traffic getting onto the freeway and try passing another car. If possible, drive home and make sure the car fits into your garage especially if you re interested in a larger SUV or truck! For a used car, test the heater and air conditioner. Then turn the fan off and listen for any unusual engine noises. Check out overall handling. Parallel park, make a U-turn, brake hard, and so on. Do the gears shift smoothly? If testing a standard transmission, try to determine if the clutch is engaging too high or too low, which might indicate excessive wear or a problem. As soon as you return to the car lot, take notes on how well the car handled and how comfortable you felt driving it. This is especially important if you are testing several cars. 21992_bonus_exhibit_p001-086.indd 25
Exhibit 5.3 Closing Costs: The Hidden Costs of Buying a Home The closing costs on a home mortgage loan can be substantial as much as 5% to 7% of the price of the home. Except for the real estate commission (generally paid by the seller), the buyer incurs the biggest share of the closing costs and must pay them in addition to the down payment when the loan is closed and title to the property is conveyed. Size of Down Payment Item 20% 10% Loan application fee $ 300 $ 300 Loan origination fee 1,600 1,800 Points 4,160 5,400 Mortgage and homeowner s insurance 675 Title search and insurance 665 665 Attorneys fees 400 400 Appraisal fees 425 425 Home inspection 350 350 Mortgage tax 665 725 Filing fees 80 80 Credit reports 35 35 Miscellaneous 200 200 Total closing costs $9,530 $11,130 Note: Typical closing costs for a $200,000 home 2.6 points charged with 20% down, 3 points with 10% down. Actual amounts will vary by lender and location. 21992_bonus_exhibit_p001-086.indd 26
Exhibit 5.4 Typical Principal and Interest Payment Patterns on a Mortgage Loan For most of the life of a mortgage loan, the vast majority of each monthly payment goes to interest and only a small portion goes toward principal repayment. Over the 30-year life of the 5%, $100,000 mortgage illustrated here, the homeowner will pay about $93,255 in interest. 6,000 Annual payment: $6,441.84 5,000 $4,966.50 $4,640.59 $4,886.10 Amounts ($) 4,000 3,000 2,000 $2,311.64 $1,801.25 $1,475.34 $4,130.20 $2,966.67 $3,807.29 $3,475.17 $2,634.55 $1,555.74 Amount to Principal Amount to Interest 1,000 0 1 5 10 15 20 25 Years Note: Dollar amounts noted on the graph represent the total amount of principal repaid and interest from the $6,441.84 annual payment made during the given year. 21992_bonus_exhibit_p001-086.indd 27
Exhibit 5.5 A Table of Monthly Mortgage Payments (Monthly Payments Necessary to Repay a $10,000 Loan) The monthly loan payments on a mortgage vary not only by the amount of the loan but also by the rate of interest and loan maturity. Rate of Interest Loan Maturity 10 Years 15 Years 20 Years 25 Years 30 Years 5.0% $106.07 $ 79.08 $ 66.00 $ 58.46 $ 53.68 5.5 108.53 81.71 68.79 61.41 56.79 6.0 111.02 84.39 71.64 64.43 59.96 6.5 113.55 87.11 74.56 67.52 63.21 7.0 116.11 89.88 77.53 70.68 66.53 7.5 118.71 92.71 80.56 73.90 69.93 8.0 121.33 95.57 83.65 77.19 73.38 8.5 123.99 98.48 86.79 80.53 76.90 9.0 126.68 101.43 89.98 83.92 80.47 9.5 129.40 104.43 93.22 87.37 84.09 10.0 132.16 107.47 96.51 90.88 87.76 Instructions: (1) Divide amount of the loan by $10,000; (2) find the loan payment amount in the table for the specific interest rate and maturity; and (3) multiply the amount from step 1 by the amount from step 2. Example: Using the steps just described, the monthly payment for a $98,000, 5.5%, 30-year loan would be determined as: (1) $98,000 / $10,000 = 9.8; (2) the payment associated with a 5.5%, 30-year loan, from the table, is $56.79; (3) the monthly payment required to repay a $98,000, 5.5%, 30-year loan is 9.8 $56.79 = $556.54. 21992_bonus_exhibit_p001-086.indd 28
Exhibit 5.6 Home-Buying Tips Keeping in mind the following tips will improve your chances of becoming a happy, successful homeowner. 1. Say no to no money down seminars. Many of these seminar experts most likely never bought or sold a piece of real estate in their lives but are getting rich off the backs of suckers. 2. Stay away from bad agents. Interview your agent and ask hard questions. Make sure that he or she is experienced. Consider signing a buyer s broker agreement, which gives both you and the broker responsibilities and reasonable performance expectations. 3. Don t wipe out your savings. While it makes sense to put down the largest down payment you can afford, it is important to keep your emergency reserves intact, hold money for closing costs, and set aside funds to handle possible repairs and future maintenance. You don t want to be putting such extras on your credit card! 4. Rely on professional advice. Pay attention to what your agent or mortgage broker tells you. Look up information on the Internet, read real estate books, and ask for a second opinion. Lawyers and accountants are excellent resources. 5. Avoid exotic financing. One of the biggest lessons of the recent financial crisis is that real estate prices don t always go up. And what you don t know about your mortgage can hurt you! Don t sign off on your mortgage until you understand every detail. Terms like indexes, margins, caps, and negative amortization should make you nervous. 6. Pick the right neighborhood. You ve heard that the three most important factors in valuing real estate are location, location, and location. This is no joke. Drive through a neighborhood, ask the police department about crime statistics, and talk to neighbors before you buy. 7. Stay away from the most expensive home in the neighborhood. While having the largest and most expensive home in the neighborhood might be appealing, it doesn t bode well for resale value. If you need three bedrooms, don t consider a five-bedroom that looks good but costs more and meets your needs less. 8. Don t pass up the home inspection. Home inspections are not a waste of time and money. Qualified home inspectors can find problems that most of us would miss. 9. Don t change the financial picture before closing. Just because your offer was accepted by the seller doesn t mean that you need to stay in buying mode. Your excellent credit report does not give you free rein to buy whatever you want. Borrowing too much more at this time could adversely affect the funding of a mortgage. 10. Plunging into debt after closing. After you become a homeowner, you ll be offered many deals on a home equity loan. Although it may be tempting to pull out all your equity and use this newfound money to buy all sorts of new toys, you should stick to a reasonable financial plan. More sources of debt should not cause you to ignore the need to cover the contingency of losing a job or setting aside money to meet an emergency. Source: Adapted from Elizabeth Weintraub, Top 10 Ways to Lose Your Home, http://homebuying.about.com/od/buyingahome/tp/072007losehome.htm, accessed March 2011. Used with permission of About, Inc., which can be found online at www.about.com. All rights reserved. 21992_bonus_exhibit_p001-086.indd 29