Personal Finance Final Exam

which of the following is NOT correct?

Using credit cards typically provides a "float" of up to 10 days -Credit cards can provide a float of up to 50 days

When Sam applied for a loan, he was assured that his rate would not change if he closed within 30 to 90 days. Sam had a(n) ______ on the interest rate

lock

float

the difference in time between when a transaction occurs and the time it is posted to a credit card account

perhaps the greatest disadvantage of using credit is

the temptation to overspend

Zachary lived in a neighborhood that was known for gang activity. One day, he noticed that his car had been vandalized. This damage would be covered under his

Comprehensive physical damage coverage.

How much does mortgage insurance cost?

Conventional mortgage insurance rates vary — usually, the lower your down payment and/or the lower your credit score, the higher the premiums. The rate you receive for your private mortgage insurance will depend on your credit score, the amount of money you have for your down payment, and insurer. But typically the premiums for private mortgage insurance can range from $30-70 per month for every $100,000 borrowed. So, if you bought a home with a value of $300,000, you might pay about $150 per month for private mortgage insurance. On FHA loans, there is an up-front MIP (mortgage insurance premium) and annual premium which is collected monthly.

A loan officer is examining whether or not to offer you a loan today. Specifically, she is examining your income and debts. Which of the five Cs of credit is the loan officer reviewing?

Capacity

The question "What are your assets and net worth?" relates to

Capital.

The question "Will you repay the loan?" relates to

Character.

Molly purchased a $1,500 dishwasher from Best Appliances. She will make 12 equal payments over the next year to pay for it. She is using

Closed-end credit.

The use of property or savings to secure a loan relates to

Collateral.

Henry was driving at dusk and hit a deer running across the road. His damage would be covered under his

Collision coverage.

Albert left his vehicle parked on the street in the front of his house when he went on vacation. While he was gone, his street flooded and his car was severely damaged. This damage would be covered under his

Comprehensive physical damage coverage.

Samantha was driving on the highway during a storm and hail dented her car. This damage would be covered under her

Comprehensive physical damage coverage.

If you think your identity has been stolen, which of the following actions does the Federal Trade Commission recommend you take immediately?

File a police report.

which of the following is NOT correct?

using credit can increase the amount of money that will be available to spend in the future

Cheyenne has a home insured for $300,000. It would cost $320,000 to rebuild her home. If she has home insurance that provides personal property coverage at 70% of value, how much of her household belongings would be covered?

$210,000 The coverage is $300,000 × 70% = $210,000.

Peter borrowed $225. He paid $20 interest and a service charge of $3.00. What is his finance charge?

$23.00

Jordan earns an annual salary of $45,000. If a lender uses 33% of monthly gross income as a guideline for the maximum PITI (principal, interest, taxes, and insurance), what is the maximum mortgage that Jordan can apply for?

$3,750.00 Jordan's monthly gross income = $45,000/12 = $3,750.

A credit card holder who pays off his balances in full each month is known as

A convenience user.

The Equal Credit Opportunity Act (ECOA) prohibits a lender from discriminating based on

All of these are prohibited.

What should a home buyer consider when evaluating a house?

All of these should be evaluated.

A direct loan for personal purposes, home improvements, or vacation expenses is called

An installment cash credit

When Nancy buys her house, the mortgage company will usually conduct a(n)

Appraisal.

Last month some of your friends were injured in an accident. Their total injuries were as follows: Coverage was 100/300/50. What was the total medical coverage in this accident? 100/300/50 coverage means that you have coverage of $100,000 bodily injury liability insurance per person, $300,000 total bodily injury liability insurance per accident, and $50,000 property damage liability per accident

D. $225,000 Since injuries are covered up to $100,000 per person and $300,000 for all injured parties in the accident, Brenda and Louis are fully covered. Raquel's coverage would be limited to $100,000. Total coverage = $85,000 + $100,000 + $40,000 = $225,000.

Consumer credit

Dates back to colonial times.

Which of the following is the document that transfers ownership of property from one party to another?

Deed ( is a contract)

A credit report includes

Detailed credit information

Opal is a real estate agent who represents the buyer as well as the seller. In some states, the buyers are required to sign a disclosure acknowledging that they are aware that Opal is working as a(n)

Dual agent.

Pauline just submitted an offer on her dream home. As evidence of good faith , she also included a(n)

Earnest money.

Home equity loans

Have interest that is tax-deductible.

When Ingrid was selling her house, she contacted Gabe, her real estate agent, to help her with the sale. Gabe's services included all of the following except

Home appraisal.

If you miss payments on a home equity loan, you can lose your

House.

. What are the different types of PMI?

In general, there are two types of mortgage insurance: mortgage insurance bought from the government, designed for those with FHA loans (this is called mortgage insurance premiums or MIP) or private mortgage insurance for conventional loans which is bought from the private sector (this is called private mortgage insurance or PMI). MIP for FHA and VA loans is run differently and managed internally than private mortgage insurance, and they have their own set of rules. Basically, the type of mortgage insurance required will depend on the type of mortgage loan you get.

The periodic charge for the use of credit is called

Interest.

Which is NOT true about the Fair Credit Reporting Act?

It gives borrowers the right to know why they are denied credit.

Which of the following should reduce your auto insurance premium?

Maintain good grades in college

Home equity loans should be used for

Major expenses such as home improvements or education.

When calculating the debt-to-equity ratio, the following is NOT included:

Mortgage balance.

Paul was driving his kids to a piano lesson in a 2005 minivan. While driving, he was hit by an uninsured motorist. Although Paul and his kids had only minor injuries, their vehicle was totaled. Based on this information, which of the following is correct?

Paul's uninsured motorist's protection should cover the cost of injuries for Paul and his kids.

which of the following is NOT a valid reason for borrowing?

Paying for everyday living expenses

Most tenants sign a lease. Which of the following is part of a lease agreement?

The conditions under which the landlord may enter the apartment.

Sam is comparing the costs of two loans. One is due in one year and the other is due in four years. Both have the same stated rate of interest. Which of the following is true?

The interest charges for the one-year loan will be lower than the interest charges for the four-year loan.

A line of credit is

The maximum dollar amount of credit the lender has made available to a borrower

Timothy was driving his friend Nick to football practice. While driving, he was hit by a driver who had coverage of 100/300/50. Tim and Nick each suffered some physical injuries. Based on this information, which of the following is correct?

The policy would provide a maximum of $100,000 for each person who was injured, and no more than $300,000 for total injuries of all parties in the accident.

Kelly selected a home and submitted an offer to the seller.

The seller may reject the offer and choose to provide a counteroffer.

FICO scores generally range from

350 to 850.

Sally was driving her own car and collided with a pickup truck. Sally sustained $125,000 in injuries, and her passenger sustained $10,000 in injuries. If her coverage was 100/300/50, what are the total medical expenses the insurance company would pay for this accident?

$110,000 Each person injured is covered up to $100,000. Sally's injuries would be covered to $100,000. Her passenger would be covered in full at $10,000. Total coverage = $100,000 + $10,000 = $110,000.

Acme Home Lending offers home equity loans up to 80% of the home value for its customers. If Sally Johnson has a home valued at $200,000 and a current mortgage of $50,000, how much can she borrow in a home equity loan from Acme?

$110,000 Maximum home equity loan = Home value × 80% - Mortgage balance = $200,000 × 80% - $50,000 = $110,000.

Carrie bought a house five years ago for $150,000. At that time she borrowed $140,000 from her bank. Her PMI will automatically be dropped when her mortgage balance drops to

$117,000. Per the Homeowners Protection Act, PMI must be terminated automatically when a home owner's equity reaches 22% of the property value at the time the mortgage was executed. The mortgage would then be $150,000 × (1 - .22) = $117,000.

Brett bought a house five years ago for $150,000. At that time he borrowed $140,000 from his bank. The house is now worth $162,000. The current value of his mortgage must be no higher than --- for him to request termination of his PMI policy.

$126,360.

Timothy Carter went out to eat with his girlfriend at a fancy restaurant. When he tried to pay the bill with his Mastercard credit card, he was told that the restaurant accepted only cash or American Express. His waiter suggested that he use the ATM across the street to withdraw cash using his credit card. Tim did as suggested and didn't pay attention to any fees until he received his credit card statement one month later. He was shocked to see the total fees (3% cash advance), and his APR was increased to 21%. Given the cost of the meal ($125) plus the associated fees, how much did his meal cost him?

$130.94. Cash advance fee = 3% × $125 = $3.75 Interest for one month = 21% APR × $125/12 months = 26.25/12 = $2.19 Total cost for one month = $3.75 + $2.19 = $5.94 Total cost for meal + fees = $125 + 5.94 = $130.94

Rachel Johnson went to the ATM to withdraw $300 cash with her debit card. She inadvertently pulled out her credit card instead, not realizing the expenses for cash advances. If her credit card company charges a cash advance fee of 3% and interest at 24% APR, what are the total fees she will pay for her mistake?

$15 Cash advance fee = 3% × $300 = $9 Interest for one month = 24% APR × $300/12 months = 72/12 = $6 Total cost for one month = $9 + $6 = $15

If Vince charged $200 on his credit card with 18% APR and he paid his balance in full within the grace period, how much was he required to pay?

$200.00 No interest is charged during the grace period.

Hannah has liabilities totaling $30,000 (excluding her mortgage of $100,000). Her net worth is $45,000. What is her debt-to-equity ratio?

.67

Rachel Johnson has net monthly income of $2,500. She has a monthly auto loan payment of $275, a student loan payment of $150, and a credit card minimum payment of $50. What is her debt-payments-to-income ratio?

19%

Experts suggest that the debt payments-to-income ratio should be a maximum of

20%

a typical grace period offered by many credit card issuers is

20-25 days

If you are denied credit, you can contact the credit bureau and ask for a copy of your credit report. The bureau cannot charge a fee for this service as long as you ask to see your files within of notification that your credit application has been denied.

60 days.

Can I avoid paying for mortgage insurance?

7. Can I avoid paying for mortgage insurance? Typically, if you put down 20 percent or more when you buy a home, you can typically avoid paying for private mortgage insurance on a conventional loan (not an FHA loan). Otherwise, there are a few loan options that do not require mortgage insurance: In 2016, Bank of America launched a partnership with Self-Help Ventures Fund and Freddie Mac for a new mortgage product called the"Affordable Loan Solution" mortgage. It's a conforming loan for low- and moderate-income home buyers that allows a down payment of 3% and does not require mortgage insurance. Qualified veterans can apply for a VA loan that allows up to 100 percent financing (that's a $0 down payment) and does not require mortgage insurance. They may only require an upfront funding fee that certain veterans may be exempt from. Some credit unions can waive private mortgage insurance on some loans for strong applicants. Some lenders offer non-conforming and portfolio options that accept down payments as little as 10-15% and do not require PMI. Physician loans typically do not require PMI if the down payment is less than 20%. Another option to avoid paying PMI, referred to as "piggybacking," is taking out a smaller loan for enough money to cover the 20% down payment so that you can avoid paying private mortgage insurance. The downside here is that the smaller loan will typically have a higher interest rate than the interest rate on the mortgage loan. But you can typically deduct the interest on our federal tax return. You will also need to consider whether you can afford to pay a second loan for a set number of years in addition to your mortgage payment. Contact your tax adviser or financial planner for more info. If you are paying PMI on a conventional loan, you can request to cancel it (see below) once you've built up enough equity in your home. To stop paying your mortgage insurance policy on an FHA loan, you can refinance to a conventional loan once you have enough equity in your home. You'll also want to make sure your credit score is high enough to qualify, and that interest rates make financial sense for you. Contact your lender if you have questions about the mortgage insurance on your FHA loan.

Which of the following electronically subtracts money from your savings or checking account to pay for goods and services?

A debit card

Which of the following is an example of open-end credit?

A department store credit card

Which of the following is NOT associated with credit cards?

A down payment on a home

If you are selling your house by owner, you should still enlist the assistance of

A lawyer or title company to assist with the contract, closing, and other legal matters.

Which of the following is an example of closed-end credit?

A mortgage loan.

A prearranged loan for a specified amount that a consumer can use by writing a special check is known as

A revolving check credit

Ursula wants to have an interest rate that can increase or decrease during the life of her loan. She should look for a(n)

ARM.

Before taking out a loan, you should ask yourself whether you can meet all of your essential expenses and still afford the monthly loan payments. This can be determined by

Adding up basic monthly expenses and subtracting this total from take-home pay, plus figuring out what to give up to make the monthly loan payment.

In auto insurance medical payments coverage applies to medical expenses of

Anyone who is injured in your vehicle, including you.

What step can you take if your credit application is denied?

Ask the reasons why you were denied credit.

Which of the following is an account used to pay property taxes and homeowner's insurance?

Escrow

Private mortgage insurance (PMI)

Must be terminated automatically when the homeowner's equity reaches 22% of the property value at the time the mortgage was executed.

Veronica has had a variable-rate mortgage for several years. Unfortunately, the monthly mortgage payments have not covered her interest owed. As a result, her home equity is decreasing because of

Negative amortization.

Major factors that affect the affordability of your mortgage include all of the following except

Size of the home.

When does mortgage insurance "fall off" the loan?

Once the borrower has built up a certain amount of equity in the house, typically 20% equity, private mortgage insurance usually may be canceled — which will reduce your mortgage payment and allow you pay less money every month. The lender usually won't automatically cancel PMI until you've reached 22 percent equity based on the original appraised value of the home, or unless you contact them to request cancellation at 20 percent of the current market value. So if you own a home with a value of $100,000 and have paid down $20,000 in principal, you can request to cancel your PMI. Be sure to contact your lender once you've hit 20 percent equity.

What is PMI?

PMI, also known as private mortgage insurance, is a type of mortgage insurance from private insurance companies used with conventional loans. Similar to other kinds of mortgage insurance policies, PMI protects the lender if you stop making payments on your home loan. PMI can be arranged by the lender and provided by private insurance companies. If you are required to pay private mortgage insurance, it typically makes up a portion of your monthly mortgage payment, in addition to your principal, interest, property tax, and homeowners insurance. Similar to interest, property tax, and homeowners insurance, payment of your PMI does not build equity in your home.

Trenton wants to buy a house but can provide only a 10% down payment. He probably will be required to have

PMI.

Which of the following items should be shredded to protect yourself from identity theft?

Papers with personal information

Which of the following is often considered to offer the least expensive loans (loans with low interest)?

Parents or family members.

Why do I need a PMI policy?

Private mortgage insurance minimizes the risk for lenders to offer loans to borrowers who don't have a 20% down payment and therefore have less equity in their homes once they are purchased. This equity would help pay the loan balance in the event you default and go into foreclosure. Your lender requires you to have private mortgage insurance so that if you can no longer make payments on your home, the lender will still get paid (through the private insurance policy). PMI basically safeguards the lender in the event of borrower default. It does not protect you, the borrower, if you fall behind on your mortgage payment. If you fall behind on your payments, your credit score could suffer or you could lose your home through foreclosure.

Madeline had a severe allergy attack and crashed her car into a telephone pole while sneezing. The damage to the telephone pole would be covered under Madeline's

Property damage liability coverage.

Patrick has an old car and wants to keep his insurance costs down, but he wants coverage in case he damages the property of others, including street signs and telephone poles. In order to minimize the financial impact of an accident he may cause, he should, at a minimum, carry which type of insurance?

Property damage liability coverage.

Credit bureaus get their information from all of the following sources except

References.

Which of the following is an advantage of renting?

Renters have fewer responsibilities for maintenance than home owners.

A cash advance

Requires you to pay interest every day until you repay the cash advance

Jim wants to make an offer to buy an older house. At this point, he should

Set up a home inspection.

A loan that must be repaid in total on a specified day, usually within 30 to 90 days, is

Single lump-sum credit.

Finance charge = Interest + Service charge = $20 + $3.00 = $23.00.

Tenants cannot take tax deductions for mortgage interest and property taxes.

Who is required to have PMI?

Typically on a conventional loan, if your down payment is less than 20 percent of the value of the home, lenders will require you to carry private mortgage insurance. Usually, you pay those mortgage insurance premiums until you have enough equity in your home to have a loan-to-value ratio (LTV) — this is simply the amount of money you borrowed divided by the value of the property you bought — of 80 percent. For example, let's say you bought a home with a value of $100,000 and put a down payment of 10%, or $10,000, and got a $90,000 loan to pay the rest. Your LTV in this case would be $90,000 divided by $100,000, or 90 percent. The longer you pay down your mortgage, the lower your loan-to-value (LTV) will become. On government loans, mortgage insurance is normally required regardless of the LTV.

If a loan is being paid in installments instead of one lump sum at the end of the loan period, the actual rate of interest

Will be higher than the stated rate.

APR is the percentage cost of credit on a(n) ______________ basis.

Yearly

Which of the following is a valid reason for using credit?

all of these are valid reasons for borrowing

Various states are trying to reduce the time and cost of settling vehicle injury cases. One alternative is

Using the no-fault system. A no-fault insurance claim, sometimes called a personal injury protection (or PIP) claim), is one you make with your own automobile insurer for payment of medical bills, lost earnings, and certain other out-of pocket damages after a car accident. A key component of the no-fault scheme is that you are not permitted to get compensation for pain and suffering as part of your claim. You can only step outside the no-fault rules and file a liability claim (or personal injury lawsuit) against the at-fault driver if your medical bills reach a certain level—or if your injury is deemed sufficiently serious—under your state's threshold. For example, your state's no-fault law might prohibit a personal injury claim against the at-fault driver unless your medical bills exceed $3,000 or you suffer a broken bone. Let's take an example. Let's say that you got into a car accident in New York. The other driver was at fault, you broke your right leg in the accident, and you incurred $7,500 in medical bills. In order to step outside the no-fault system and bring a claim directly against the at-fault driver in New York, your claim must meet the "serious injury" threshold in place under state law. That means, as a result of the car accident, you've experienced any of the following: significant disfigurement bone fracture permanent limitation of use of body organ or member significant limitation of use of body function or system, or substantially full disability for 90 days. Since your injuries qualify under this definition (because of your broken leg), you can file a third-party liability claim or personal injury lawsuit directly against the at-fault driver, demanding compensation for all categories of losses, including pain and suffering (which, again, isn't available in a no-fault or PIP claim). But if you suffered only minor injuries that don't qualify as "serious" under New York's threshold, you're limited to a claim under your own PIP coverage. One last note: No-fault car insurance applies only to car accident injuries; for vehicle damage resulting from a car accident, you're typically free to pursue a claim against the at-fault driver.

When do I pay PMI premiums?

When you are required to pay your private mortgage insurance premium depends on your specific loan policy. But typically, paying your mortgage insurance premiums monthly happens right along with your mortgage payment for your current loan (you can just send one payment to the lender). Lenders may also have a policy that allows you to pay your PMI on a lump sum basis either in cash at closing or finance the premium in your loan amount.

Before buying goods and services on credit, a consumer should consider all of the following except

Whether the good or service will be worth more because it was purchased with credit instead of cash.

. How long do I need to have mortgage insurance?

You are typically required to pay a private mortgage insurance premium on a conventional loan for as many months or years it takes to build enough equity in your home to equal 20 percent of your home's value and have a loan-to-value ratio of 80 percent. For many homeowners with FHA loans, a mortgage insurance premium (MIP) is required for the life of the loan policy, which is up to 30 years. Again, MIP for an FHA loan is different than PMI on a conventional loan. Contact your lender if you have questions about the mortgage insurance premium on your FHA loan.

All of the following are warning signs of debt problems except

You pay your credit card bills in full each period.

when misused, credit can result in

all of the above

which of the following can result from a failure to repay a loan?

all of the above may result from the failure to repay a loan.

many people expect

their incomes to increase to make it easier to make payments on past credit purchases