FIN 1115 01---Personal Finance Question Set #7

Nick took out a home equity loan to consolidate his credit card debt. What should he do with his credit cards? Select one: a. Cancel the credit cards and close the accounts b. Charge everything c. Don't use them until the home equity loan is repaid d. All of the choices are correct

c. Don't use them until the home equity loan is repaid This is good advice for ensuring that you do not dig yourself into further debt A home equity loan may be a good way to lower your overall payments and interest expense if you find yourself with a very large amount of credit card debt. However, this is only a band-aid fix and does not correct the underlying problem that exists with your spending habits. Not using the credit cards to keep from re-accumulating debt is wise. If you continue to find yourself in debt and can't make your payments on the HELOC it can lead to losing your home.

What is the first step in the auto-purchasing process? Select one: a. Do your homework b. Analyzing needs versus wants c. Determining what you can afford d. Comparison shopping

b. Analyzing needs versus wants Not knowing this information before hand can lead to purchasing a car that does not meet your needs.

What is a mortgage? Select one: a. The difference between what is owned vs. what is owed b. The legal document used to allow a lender to use real property as collateral c. All of the choices are incorrect. d. The transfer of a lease agreement to a new tenant

b. The legal document used to allow a lender to use real property as collateral The mortgage is then the loan that you pay down. Once paid off you assume full rights to the home.

Which of the following is not an advantage of buying a house versus renting? Select one: a. Increase in equity b. Tax Advantages. c. Maintenance d. All of the choices are correct.

c. Maintenance As the owner of the home you are responsible for all of the maintenance. This can be both expensive and time consuming. Maintenance is not an advantage of buying a house. The owner is responsible for all costs. When renting a major advantage is that you are not responsible for the maintenance. This is the landlords responsibility.

Car lease payments are usually Select one: a. higher than loan payments b. about the same as loan payments c. lower than loan payments d. never a good investment

c. lower than loan payments Although lease payments are typically lower they will often require a large up front security deposit. They are also lower because you are not taking ownership in the vehicle as you would with financing (purchase) the car.

Calculate the affordable monthly car payment for a person who has a gross monthly income of $3,000. This person has a $250 monthly student loan payment, rent is $500 per month, and they pay $200 a month in child support obligations. Select one: a. $330 b. $300 c. $250 d. $130

d. $130 Monthly Income is $3,000. Following the max debt to income rule of 36% this would allow them to have total monthly debt obligations of $1,080. Fixed monthly debt obligations are already $950. $1,080 minus $950 gives enough for a car payment of $130/month

When looking into buying or leasing a car, what criteria are compared when "doing homework"? Select one: a. New versus Used b. Price and Insurance Cost c. Reliability and Service Records d. All of the choices are correct

d. All of the choices are correct Step 3 of the decision process

Which of the following is not a step toward purchasing an automobile? Select one: a. Analyze needs versus wants b. Shop for financing c. Determine affordability d. Make a preliminary offer

d. Make a preliminary offer

Which of the following is a disadvantage of buying a home? Select one: a. The value of your house may increase b. You will gain equity by paying down your mortage c. Eventually, you will be able to live payment-free d. The value of your house may decrease

d. The value of your house may decrease If the value of your home decreases and then you need to move (new job, loss of job, outgrow the house, etc.) a market decrease in home prices can lead to taking a loss on the home. This happened to many people in 2008-2009. However, if you are not planning on moving you also have time for the market to come back. Although people that bought homes in 2007 at the height of the market would have seen the value of their home decrease dramatically in 2008-2009 if they still live in that house today it is likely again worth as much or more than when they bought it in 2007.

To avoid PMI you should have a down payment of at least 20% on the purchase of your home. Select one: True False

true PMI is private mortgage insurance and will be required if you owe more than 80% of the value of the purchase. So, I down payment of 20% will help avoid PMI. Or, once you have paid down the original loan to below 80% of the original purchase price you can formally request to the lender that they remove PMI.