CFP Exam Course 511 Module 3
Mortgage insurance
A policy that protects lenders against losses that result from defaults on home mortgages
Cash and cash equivalents
Low-risk assets that may be readily converted to cash
Statement of financial position
Also known as the net worth statement, is a profile of what is owned (assets), what is owed (liabilities), and your client's net worth on a specific date
Variable expenses
Amount varies from month to month such as electricity or household maintenance
Conventional mortgage loans
Are those made by commercial lenders in the private sector. These may also be called conforming loans, because they conform to Fannie Mae and Freddie Mac dollar limit requirements
Consumer debt ratio
Monthly consumer debt payments / monthly net income
Housing cost ratio
Monthly housing costs / Monthly gross income
Liquid assets
Assets that may be quickly accessed by the client without the risk of a significant loss to principal
Net-investment-assets-to net-worth-ratio
Net investment assets / Net worth
Invested assets
Included in this category are stocks, bonds, mutual funds, gems, gold, collectibles, investment real estate, fine art, ownership interests, in closely held businesses, vested pension benefits, and similar assets.
Personal use assets
Includes the client's residence, automobiles, boats, recreational real estate, and personal effects such as furnishings, clothes, jewelry, and similar assets.
Total debt ratio
Total monthly debt / Monthly gross income
Installment loan
Loan for which the client borrows a single amount of money and repays the balance with interest at stated intervals
Finance lease or equity lease or an open-end lease
Generally has a lower monthly payment than a closed-end lease but, at the end of the lease, the lessee may owe the lessor additional money if the asset rents or sells for an amount that is less than the value projected at the time the lease was initiated
Reverse mortgage
Home loan that allows senior citizens with limited income to stay in their homes. The payment stream is reversed, where the lender pays the homeowner a stream of income secured by a considerable amount of equity in the home.
Three major categories of assets
1. Cash and cash equivalents 2. Invested assets 3. Personal use assets
Expenses are categorized in four ways
1. Fixed 2. Variable 3. Nondiscretionary 4. Discretionary
Outflows should be divided into three things
1. Savings and investments 2. Fixed outflows 3. Variable outflows
Home equity loan
A client receives a lump sum in the amount of the loan. With this type of loan, borrowers repay the loan with equal monthly payments over a fixed term
Unsecured (signature) loan
A loan for which the client merely promises to repay the debt in exchange for the borrowed funds
Secured loan
A loan for which the creditor maintains a security interest in property, which serves as collateral for the debt
Single payment (bridge) loan
A loan that provides short-term, temporary financing that is repaid with interest in one lump sum at the end of the term
Fixed-rate loan
A loan with an interest rate that remains constant until paid in full
Balloon mortgage
A mortgage in which the borrower makes fixed payments, which are based upon the established interest rate for a long-term mortgage
Current ratio
Current assets / current (short-term) liabilities
Veterans Administration loans
Feature the same federal guarantee of repayment as that for FHA mortgages, but ____ are for service members. In certain cases, no initial down payment is required; in other words, the entire purchase price can be borrowed
Fixed expenses
Definite monthly amount such as medical insurance premiums
Current (short term) liabilities
Due within one year from the statement date, such as a promissory note.
Fixed cost lease or closed-end lease
One in which the lessee agrees to pay a stated monthly fee for the use of the asset for a specified time period
Graduated payment mortgage
Payable over a long time period, such as 30 years, and has a fixed interest rate. The payments are lower for the first few years of mortgage repayment (although they sometimes increase annually), then they adjust to a higher fixed payment that continues for the remainder of the loan.
The statement of financial position could be called the _________ on the CFP exam
Personal balance sheet
Home equity line of credit (HELOC)
Provides a set amount of credit from which funds may be drawn as needed.
Discretionary expense
Recurring or nonrecurring expense for a nonessential item or one more expensive than necessary
Nondiscretionary expense
Recurring or nonrecurring expense that is needed to maintain lifestyle such as mortgage payments, utilities, and taxes
Fixed outflows
Relatively predictable and recurring expenses over which the client does not have much control.
Cash flow statement
Reveals the client's cash receipts and disbursements over a specific period of time - monthly, quarterly, and often over one year. It summarizes the inflows and outflows of cash and reveals a client's pattern of spending, saving, and investing.
Interest-only mortgage
The homeowner tries to keep the mortgage payment at a minimum while hoping that the fair market value of the home will increase so that the principal amount will be paid off by the sale proceeds
Variable (adjustable) rate loan
The interest rate adjusts at various intervals throughout loan term, which makes them riskier
Adjustable-rate mortgages (ARMs)
The interest rate and payment may change every month, quarter, year, three years, or five years. ____ can allow for negative amortization to occur. This is the case when the agreed-upon monthly payment is less than the accruing interest charges and unpaid interest is added to the mortgage balance, increasing the debt
Net worth
The residual value after the value of liabilities has been subtracted from asset values. Assets-liabilities = net worth
Federal Housing Administration (FHA) mortgage loans
These mortgages appeal to buyers who may not meet the financial underwriting requirements for a conventional home loan. ____ has a very low initial down payment and a lower interest rate because of the federal government's guarantee of repayment
Long-term liabilities
Those due more than one year from the statement date.
Variable outflows
Those over which the client can exercise some degree of control, such as expenditures for food, transportation, clothes and entertainment.