Chapter 5 Review- Personal financial budgeting

Features of ARMs Adjustment period

on an adjustable-rate mortgage, the period of time between rate or payment changes

Process of choosing the right vehicle for you

- Research you purchase thoroughly, considering not only the market but also your personal needs -decide on a price based on dealer's cost for the car and options -Select the best vehicle for your needs -Test drive the car -Buy the asset after negotiating the best price and arranging financing on the best terms. Be sure you understand all the terms of the sale before signing any contracts -inspect the car for scratches and dents

what are mortgage points? How do they work & what do they do for the buyer/borrower?

- fees charged by lenders at the time they grant a mortgage loan -points are like interest in that they are a charge for borrowing money -they're related to the lender's supply of loanable funds and the demand for mortgages

How do you know if you can afford a home?

Home affordability Analysis- helps you determine the maximum price for a home purchase based on your monthly income & down payment amount after meeting estimated closing costs

Beware of negative amortization

Some ARMs are subject to negative amortization- when the principal balance on a mortgage loan increases because the monthly loan payment is lower than the amount of monthly interest being charged; some ARMs are subject to this undesirable condition

Why is loan to value important to understand in buying a home? How is it calculated?

-the maximum percentage of the value of a property that the lender is willing to loan -dividing the amount borrowed by the appraised value of the property, expressed as a percentage

Benefits of owning a home/apartment etc

-the security & peace of mind derived from living in one's own home -The felling of permanence and sense of stability -Tax shelter: you deduct both mortgage interest & property taxes when calculating your federal & state income taxes, thereby reducing your taxable income & thus your tax liability -Inflation hedge: represents an investment that provides a valuable inflation hedge. b/c homes generally appreciate in value at a rate equal to or greater than the rate of inflation

the size of the monthly lease payment is based on four variables:

1. The capitalized cost of the car (the price of the car you are leasing) 2. The forecast residual value of the car at the end of the lease 3. The money factor, or financing rate on the lease (similar to the interest rate on a loan) 4. the lease term- lease period as mentioned in the contract

Economics of renting or buying a place to live depends on four main factors:

1. housing prices and mortgage interest rates 2. tax write-offs for homeowners 3. the expected increase or decrease in home values over time 4. How many years you expect to stay in your home

VA loan guarantees

A guarantee offered by the U.S. Veterans Administration to lenders who make qualified mortgage loans to eligible veterans of the U.S. armed forces and their unmarried surviving spouses.

open-end lease

An automobile lease under which the estimated residual value of the car is used to determine lease payments; if the car is actually worth less than this value at the end of the lease, the lessee must pay the difference.

Examples of items included in closing costs for buying a home

Loan application loan origination fees mortgage points title search & insurance fees attorneys' fees appraisal fees other miscellaneous fees

Sources of mortgage loans

Mortgage bankers- a firm that solicits borrowers, originates primarily government insured & government-guaranteed loans, & places them with mortgage lenders; often uses its own money to initially fund mortgages it later resells Mortgage Brokers- a firm that solicits borrows, originates primarily conventional loans, & places them with mortgage lenders; the broker merely takes loan applications & then finds lenders willing to grant the mortgage loans under the desired terms

closed-end lease

Most popular form of lease, also called "walk away lease." At end of term, lessee simply turns in car assuming preset mileage has not been surpassed and the car hasn't been abused

What is PMI? How does it work and who is protected with it?

Private Mortgage Insurance typically required by lenders when the down payment is less than 20% Protects the lender from loss if the borrower defaults on the loan

Hidden costs of home ownership examples

Property taxes Insurance Maintenance add-ons

Rental Units

Range from duplexes and single- family homes to large, high-rise apartment complexes containing several hundred units people rent that are just starting out and have limited funds for housing, they may be uncertain as to where they want to live, or they just may prefer renting

Process of borrowing money for a home- using an agent

Using an agent real estate agents are professionals who are in daily contact with the housing market help you negotiate with the seller, obtain satisfactory financing, explicit legal advice, prepare the real estate sales contract Most real estate firms belong to a local Multiple Listing Service (MLS)- comprehensive listing, updated daily, of properties fir sale in a given community or metropolitan

Condominiums

a form of direct ownership of an individual unit in a multi-unit project in which lobbies, swimming pools, and other common areas and facilities are jointly owned by all property owners in the project

Other mortgage payment options biweekly mortgages

a loan on which payments equal to half the regular monthly payment that are made every two weeks

Mortgage Loan

a loan secured by the property: if the borrower defaults, the lender has the legal right to liquidate the property to recover the funds it's owed

Conventional Mortgage

a mortgage offered by a lender who assumes all the risk of loss; typically requires a down payment of at least 20 percent of the value of the mortgaged property

Types of mortgage loans- adjustable- rate mortgage

a mortgage on which the rate of interest, & therefore the size of the monthly payment, is adjusted based on market interest rate movements

Other mortgage payment options Interest- only mortgages

a mortgage that requires the borrower to pay only interest; typically used to finance the purchase of more expensive properties

Process of borrowing money for a home- Prequalifying & applying for a mortgage

prequalification- the process of arranging with a mortgage lender, in advance of buying a home, to obtain the amount of mortgage financing the lender deems affordable of the home buyer

Mortgage Interest and taxes handled through escrow accounts

principal, interest, property taxes, and homeowner's insurance Escrow accounts, where it accumulates until the lender pays property taxes & homeowner insurance premiums that are due

What is a short sale?

sale of real estate property in which the proceeds are less than the balance owed on a loan secured by the property sold

property taxes

taxes levied by local governments on the assessed value of real estate for the purpose of funding schools, law enforcement, and other local services

Features of ARMs -index rate

the baseline index rate that captures interest rate movements

How does leasing of a vehicle work? Benefits and things to be aware of when taking on a lease.

the lessee receive the use of car in exchange for monthly lease payments over a specified period of time Benefits- rising new car prices, the nondeductibility of consumer loan interest, lower monthly payments, driving a more expensive car for the same monthly payment and minimizing the down payment to preserve cash, the absence of a down payment Be aware that at the end of the lease you have nothing.

Features of ARMs -Payment caps

the limit on the monthly payment increase that may result from a rate of adjustment

Features of ARMs -Interest rate caps

the limits on the amount that the interest rate can increase each adjustment period & over the life of the loan

What is depreciation and why it is important?

the loss in the value of an asset such as an automobile that occurs over its period of ownership; calculated as the difference between the initially paid and the subsequent sale price

Single- family homes

the most popular choice, can be stand-alone homes or row houses or town homes that share a common wall; offer privacy, prestige, pride of ownership, and maximum property control

Features of ARMs -Margin

the percentage points a lender adds to the index rate to determine the rate of interest

What is a foreclosure?

the process whereby lenders attempt to recover loan balances from borrowers who have quit making payments by forcing the sale of the home pledged as collateral

Residual value

the remaining value of a leased car at the end of the lease term

Types of mortgage loans-Fixed- rate mortgage

the traditional type of mortgage in which both the rate of interest & the monthly mortgage payment are fixed over the full term of the loan

Process of borrowing money for a home- the real estate sales contract

After selecting a home to buy, you must enter into a sales contract. Must contain: 1. the names of buyers and sellers 2. a description of the property sufficient for positive identification 3. specific price and other terms 4. usually the signatures of the buyers and sellers also contain earnest money deposit, contingencies, personal property and closing costs Earnest money deposit- is the money you pledge to show good faith when you make an offer Contingency clause- a clause in a real estate sales contract that makes the agreement conditional on such factors as the availability of financing, property inspections, or obtaining expert advice

Process of borrowing money for a home- closing the deal

Real estate settlement procedures act (RESPA)- a federal law requiring mortgage lenders to give potential borrowers a government publication describing the closing process & providing clear, advance disclosure of all closing costs to home buyers

Benefits of Renting

Relative cost of renting called rent ratio- the ratio of the average annual rent, which provides insight into the relative attractiveness of buying a house versus renting in a given area of potential interest -They don't have the funds for a down payment and closing costs -they're unsettled in their jobs and family status -they don't want the additional responsibilities associated with home ownership -they believe they can invest the down payment so they can afford a nicer home they believe they should rent now and buy later when the housing market conditions or mortgage rates are more attractive

Other mortgage payment options graduated-payment mortgages

a mortgage that starts with unusually low payments that rise over several years to a fixed payment

Down Payment

a portion of the full purchase price provided by the purchaser when a house or other major asset is purchased; often called equity

Purchase option

a price specified in a lease at which the lessee can buy the car at the end of the lease term Most auto leases include a purchase option

FHA Mortgage insurance

a program under which the Federal Housing Administration (FHA) offers lenders mortgage insurance on loans having a high loan-to-value ratio; its intent is to encourage loans to home buyers who have very little money available for a down payment and closing costs

Convertible ARMs

an adjustable-rate mortgage loan that allows borrowers to convert from an adjustable-rate to a fixed-rate loan, usually at any time between the 13th and the 60th month

Two-step ARMs

an adjustable-rate mortgage with just two interest rates: one for the first five to seven years of the loan, and a higher one for the remaining term of the loan

Cooperative apartments

an apartment in a building in which each tenant owns a share of the nonprofit corporation that owns the building

lease versus purchase analysis

compare the total cost of leasing to the cost of purchasing a car over equal periods

Negative equity

meaning they owed more on their mortgage than their homes were worth

Other mortgage payment options Buydowns

financing made available by a builder or seller to a potential new-home buyer at well below market interest rates, often only for a short period

Other mortgage payment options Growing-equity mortgages

fixed-rate mortgage with payments that increase over a specific period. Extra funds are applied to the principal so that the loan is paid off more quickly

Homeowner's insurance

insurance that is required by mortgage lenders and covers the replacement value of a home and its contents