Personal Finance - Automobile and Housing Decisions

Open-end (finance) 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

Private Mortgage Insurance (PMI)

An insurance policy that protects the mortgage lender from loss in the event the borrower defaults on the loan; typically required by lenders when the down payment is less than 20 percent.

What is the most popular type of automobile lease?

Close-end lease

When you receive title to an individual unit and joint ownership of any common areas and facilities, you have purchased a _______________?

Condominium or Condo

Real Estate Short Sale

Sale of real estate propery in which the proceeds are less than the balance owed on a loan secured by the propery sold..

When purchasing a new or used car, what must you sign to make a legally binding offer to specify the offering price and all the conditions of your offer?

Sales Contract

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.

Money Factor

The financing rate in a lease; similar to the interest rate on a loan.

When should you consider refinancing your mortgage?

When interest rates drop

Biweekly Mortgage

A loan on which payments equal to half the regular monthly payment that are made every 2 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 is 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.

Adjustable-rate Mortgage (ARM)

A mortgage on which the rate of interest, and therefore the size of the monthly payment, is adjusted based on market interest rate movements.

Interest-only Mortgage

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

Graduated-payment Mortgage

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

Down Payment

A portion of the full 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.

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; intended to encourage loans to home buyers who have very little money available for down payments or closing costs.

PITI

Acronym that refers to a mortgage payment consisting of principal, interest, property taxes, and homeowner's insurance.

Closing Costs

All the expenses (including mortgage points) that borrowers ordinarily pay when a mortgage loan is closed and they receive title to the purchased property.

Convertible ARM

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 ARM

An adjustable-rate mortgage with just two interest rates: one for the first 5 to 7 years of the loan, and a higher one for the remaining term of the loan.

Sales Contract

An agreement to purchase an automobile that states the offering price and all conditions of the offer; when signed by the buyer and seller, the contract binds them to its terms

Cooperative Apartment (co-op)

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

Lease

An arrangement in which the lessee receives the use of a car or other asset in exchange for making monthly lease payments over a specified period

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.

Is it possible to terminate an automobile lease early and is it expensive?

Yes and it is very expensive

Are points paid on a mortgage to purchase a primary residence generally tax deductible as interest in the year they are paid?

Yes, unless refinancing

When purchasing a home when would you choose a fixed mortgage rate? When would you choose an adjustable mortgage rate?

when interest rates are low; when interest rates are high

Reasons why young adults may rent a home instead of buying

1. No funds for a down payment and closing costs 2. Unsettled in job or family status 3. Do not want additional responsibilities 4. Maybe able to afford a nice home later

Reasons why people lease a vehicle

1. Purchasing flexibility 2. Convenience of not dealing with significant repairs 3. Self-employed and writing off as a business expense 4. Drive a luxury vehicle of less

Customary ratios for a conventional mortgage stipulate that monthly mortgage payments cannot exceed what percentage of the borrows monthly income?

25% to 30% of the borrowers monthly growss (before-tax) income, and the borrower's total monthly installment loan payments (including the mortgage payment) cannot exceed 33% to 38% of the monthly gross income

Anchor

A behavioral bias in which an individual tends to allow an initial estimate to dominate the subsequent assessment regardless of new information to the contrary

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.

Multiple Listing Service (MLS)

A comprehensive listing, updated daily of properties for sale in a given community or metropolitan area; includes a brief description of each property with a photo and its asking price but can be accessed only by realtors who work for an MLS member.

Real Estate Settlement Procedures Act (RESPA)

A federal law requiring mortgage lenders to give potential borrowers a government publication describing the closing process and providing clear, advance disclosure of all closing costs to home buyers.

Mortgage Banker

A firm that solicits borrowers, originates primarily government-insured and government-guaranteed loans, and places them with mortgage lenders; often uses its own money to initially fund mortgages it later resells.

Condominium (Condo)

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

VA Loan Guarantee

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.

Mortgage Points

Fees (one point equals 1 percent of the amount borrowed) charged by the lenders at the time they grant a mortgage loan; they are related to the lenders supply of loanable funds and the demand for mortgages.

Buydown

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.

Growing-equity Mortgage

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

What is the greatest fixed cost involved with owning an automobile? What is the greatest variable?

Installment payments; fuel

Homeowner's Insurance

Insurance that is required by mortgage lenders and covers the replacement vale of a home and its contents.

Earnest Money Deposit

Money pledged by a buyer to show good faith when making an offer to buy a home.

As a homeowner, what does the federal government allow you to deduct when calculating your federal taxes? What is the only stipulation if you claim these deductions from your income?

Mortgage interest and property taxes; itemize your deductions

Closed-end Lease

Often called the walk away lease, b/c at the end of its term the lessee simply turns in the car (assuming mileage is not over the limits and the car is not abused)

Index Rate

On an adjustable-rate mortgage, the baseline index rate that captures interest rate movements.

Interest Rate Cap

On an adjustable-rate mortgage, the limit on the amount that the interest rate can increase each adjustment period and over the life of the loan.

Payment Cap

On an adjustable-rate mortgage, the limit on the monthly payment increase that may result from a rate adjustment.

Margin

On an adjustable-rate mortgage, the percentage points a lender adds to the index rate to determine the rate of interest.

Adjustment Period

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

Depreciation

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

Loan-to-Value Ratio

The maximum percentage of the value of a property that the lender is willing to loan.

Capitalized Cost

The price of a car that is being leased.

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 for the home buyer.

Foreclosure

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

Rent Ratio

The ratio of the average house price to the average annual rent, which provides insight into the relative attractiveness of buying a house versus renting in a given area of potential interest.

Residual Value

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

Fixed-rate Mortgage

The traditional type of mortgage in which both the rate of interest and the monthly mortgage payments are fixed over the full term of the loan.