Personal Finance Chapter 9

The Homeowner Protection Act requires that a PMI policy be terminated when the equity reaches ____% of the property value at the time the mortgage was executed.

22

Joe Smith earns $72,000 per year. His bank uses a rule that PITI must be equal to or less than one third of gross monthly income. If his home owner's insurance is $100 per month, roughly how much of a monthly payment can Joe afford including taxes over and above the $100 for insurance?

$1900

What are the disadvantages of owning a condominium?

-Less privacy -Monthly fees -Uncertain demand affecting property value

Common Housing Trade offs

-Lost earnings from interest on the money used for a down payment on a home or security deposit for an apartment. -The time and cost of commuting to work when you live in an area that offers less expensive housing or more living space. -Loss of home-buying tax advantages and equity growth when you rent an apartment to be close to your work. -The time and money you spend when you repair and improve a lower-priced home. -The time and effort involved when you have a home built to your personal specifications.

The 3 main advantages of renting

1. Mobility 2. Fewer Responsibilities 3. Lower Initial Costs

Interest rates drop, and by refinancing you can save $110 a month. If the closing costs on the new mortgage are $2,090, how long will it take you to recover your closing costs (as a result of the savings)?

19 months

Select all that apply Which of the following are the common terms (years) of home mortgages? 20 5 30 15 50 10

20 30 15 10

Second Mortgage

A cash advance based on the paid-up value of a home; also called a home equity loan.

Deed

A document that transfers ownership of property from one party to another.

Conventional Mortgage

A fixed-rate, fixed-payment home loan with equal payments over 10, 15, 20, 25, or 30 years.

Payments of anywhere from 10 to 30 years are _____ for mortgages.

Common

Renting is a fairly ____practice in the U.S. with about 35% of households living in rental units.

Common

The financial aspects to be considered when selecting an apartment to lease include monthly rent, length of lease, security ______, and cost of _____.

Deposit Utilities

Select all that apply Which of the following can affect mortgage affordability? Mortgage rates The type of home The length of the loan Your job title Your down payment The amount of income you earn

Mortgage rates The length of the loan Your down payment The amount of income you earn

Points

Prepaid interest charged by a lending institution for the mortgage; each discount point is equal to 1 percent of the loan amount.

Having a place to call your own, the stability of a residence and a personalized living space all contribute to a feeling of ______ of ownership of a home.

Pride

Short Sale

Sale of property in which the sales price is less than the remaining mortgage.

Calculate the costs associated with purchasing a home.

The costs associated with purchasing a home include: -The down payment -Mortgage origination costs -Closing costs- deed fee, prepaid interest, attorneys fees, payment for title insurance, property survey, an escrow account for homeowners insurance and property taxes.

Refinacing

The process of obtaining a new mortgage on a home to get a lower interest rate and payment.

Making needed repairs, painting the interior and exterior of the home and cleaning all rooms are strategies that can lead to a fast and financially favorable sale.

True

True or False Real estate agents will tell you that location is very important when selecting a property because there are different zoning laws in different areas.

True

True or False The importance of preparing your home for sale is that it can make for a fast and financially favorable sale.

True

True or False The services that a real estate agent can provide include suggesting an asking price, making potential buyers and other agents aware of your home, and screening potential buyers to determine whether they will qualify for a mortgage.

True

When calculating the number of months to recover your _____ costs on a refinance of a mortgage, you divide the closing costs by the monthly savings as a result of the new lower payment.

closing

Title Insurance

insurance that, during the mortgage term, protects the owner or the lender against financial loss resulting from future defects in the title and from other unforeseen property claims not excluded by the policy.

Schools, shopping, and recreation are some of the important ____ aspects of selecting an apartment.

location

When placing an offer on a house, you should first estimate the appropriate _____ price.

market

In addition to showing your home and marketing it to potential buyers, real estate agents can screen potential home buyers to see if they ____ for mortgage financing.

qualify

The factors that influence the asking price for a home include recent ____ prices of comparable homes in the area, demand for homes in the housing market, and available financing.

sale

Home equity loan interest is deductible regardless of what the loan proceeds are used for. However, default on the loan could mean ...

you lose the home in a foreclosure.

True or False Factors that impact the asking price for a home include recent asking prices of comparable homes in your area.

False

True or false Home equity loan interest is only tax deductible as long as the proceeds are spent on education with the risk being that a default on the equity loan could mean foreclosure.

False

Closing Costs

Fees and charges paid when a real estate transaction is completed; also called settlement costs.

Select all that apply What are the advantages of owning a condominium? Fewer maintenance responsibilities when compared to a house. Privacy Low financial commitment Tax benefits

Fewer maintenance responsibilities when compared to a house Tax benefits

Lifestyle

How you spend your time and money A person's pattern of living as expressed in his or her activities, interests, and opinions.

Select all that apply Which of the following are advantages of home ownership? Home ownership offers guaranteed price appreciation Income tax savings because of mortgage interest Income tax savings because of property tax deductibility The ability to borrow against the equity in the home

Income tax savings because of mortgage interest Income tax savings because of property tax deductibility The ability to borrow against the equity in the home

Security Deposit

Money paid to a landlord to cover potential cleaning costs at the end of the lease, as well as any damages the property suffered during occupancy

While most mortgage payments are fixed,_____ can be subject to increases over which the tenant has no control.

Rent

Zoning Laws

Restrictions on how property in area can be used

Select all that apply Which of the following are common sources of home mortgages? Savings and loans Credit unions Mortgage companies Stockbrokers Banks Insurance companies

Savings and loans Credit unions Mortgage companies Banks

A _____ deposit provides the landlord with funds to cover the cost of any damages done to the rental unit during the lease period.

Security

The costs of renting include

Security deposit Utilities Insurance

Which of the following captures the main factor to consider when refinancing a loan at a lower rate? The amount of extra cash you can take as a result of the refinancing The opportunity cost of keeping the old loan but borrowing more money The cost of refinancing versus the benefits (savings) of lower monthly payments The number of points to be paid on the refinanced debt

The cost of refinancing versus the benefits (savings) of lower monthly payments

Select all that apply The opportunity costs and common trade-offs of a housing decision include which of the following? The cost of utilities in the new home. The loss of home-buying tax advantages and equity growth when you rent an apartment to be close to your work. Interest lost on money used for down payment. Cost to commute to work when you live in area that offers less expensive housing. Cost of food to fill the refrigerator of the new home

The loss of home-buying tax advantages and equity growth when you rent an apartment to be close to your work. Interest lost on money used for down payment. Cost to commute to work when you live in area that offers less expensive housing.

True or false As a general rule, it may be wise to refinance when the interest rates on mortgages drop at least 1 percentage point below your current mortgage rate.

True

True or false Banks, savings and loans, credit unions, and mortgage companies are common sources of mortgage loans.

True

Lease

a legal document that defines the conditions of the rental agreement between the tenant and the landlord

An old adage that the three most important factors to consider when buying a home are location, location, and location means that the ____ plays an important part in determining market value.

area

Like many financial decisions, when making a housing decision, you should consider what you give up in time, ____, and money as a result of the decision.

effort

Disadvantages of Renting

few financial benefits restricted lifestyle legal details

When selecting an apartment, rent, length of lease, security deposit, and utilities are some of the _________ people should consider.

financial aspects

Escrow Account

money, usually deposited with the lending financial institution, for the payment of property taxes and homeowner's insurance.

When determining a price to offer for a home, you should estimate a market price and then _____ with the seller.

negotiate

Buying decisions make a_____ , about your lifestyle.

statement

Select all that apply Common sources of down payment funds to purchase a home include: the sale of investments a loan from a bank assistance from relatives personal savings

the sale of investments assistance from relatives personal savings

Condominium

An individually owned housing unit in a building with several such units.

Renting makes job transfers ___________.

easier

One of the reasons why renting offers fewer financial benefits than home ownership is that rent is not _____ deductible while the interest on mortgage payments is.

tax

You can save money selling your own home, but it requires an investment in _____ and effort.

time

Sublet

to have a person other than the original tenant take over the rental unit and payments for the remaining term of the lease

Private mortgage insurance (PMI) is required when the down payment is less than _____%. This is found in the discussion of determining the amount of your down payment.

20 or 22

Private mortgage insurance (PMI) is required when the down payment is less than:

20%

Cooperative Housing

A form of housing in which a building containing a number of housing units is owned by a nonprofit organization whose members rent the units.

Adjustable-rate mortgage (ARM)

A home loan with an interest rate that can change during the mortgage term due to changes in market interest rates; also called a flexible-rate mortgage or a variable-rate mortgage.

Rate cap

A limit on the increases and decreases in the interest charged on an adjustable-rate mortgage.

Payment Cap

A limit on the payment increases for an adjustable-rate mortgage.

Reverse mortgage

A loan based on the equity in a home, that provides elderly homeowners with tax-free income and is paid back with interest when the home is sold or the homeowner dies.

Mortgage

A long-term loan on a specific piece of property such as a home or other real estate.

Earnest Money

A portion of the price of a home that the buyer deposits as evidence of good faith to indicate a serious purchase offer.

Appraisal

An estimate of the current value of the property.

Buy-down

An interest rate subsidy from a home builder or a real estate developer purchased by the buyer that reduces a home buyer's mortgage payments during the first few years of the loan.

How could the tax benefit and risk of a home equity loan best be described? Interest is tax deductible but very expensive. The interest provides a tax shelter for investment income only, and if you have no investment income, you gain no benefit. Tax credits add to the cost of a home equity loan and default could mean you lose the home. Interest is tax deductible, but default could mean foreclosure.

Interest is tax deductible, but default could mean foreclosure.

What are the disadvantages of owning a condominium?

Less privacy Monthly fees Uncertain demand affecting property value

Your _____, needs, desires, and attitudes are reflected in your choice of a home.

Lifestyle

Analyze the costs and benefits associated with renting

The main benefit of renting are mobility, fewer responsibilities, and lower initial costs. The main disadvantages of renting are few financial benefits, a restricted lifestyle, and legal concerns.

Amortization

The reduction of a loan balance through payments made over a period of time.

True or false Even if you do not use a real estate agent to sell your home, you should use an attorney or title company to close the transaction.

True

True or false Some of the factors to consider when determining a price for a home include the owner's need to sell, the time the home has been on the market, and the features and condition of the home.

True

True or false Two external (market) factors that affect the price of a home are the current demand for housing and the financing options (i.e., interest rates) available.

True

True or false: A security deposit covers the cost of damages that may be done to a rental unit..

True

Explain the home-buying process.

When assessing the type of housing that would be best for you to purchase, use the home-buying process: 1. Determine home ownership needs 2. Find and evaluate a property to purchase 3. Price the property 4. Finance the purchase 5. Close the real estate transaction

Develop a strategy for selling a home

When planning to sell a home, you must decide whether to make certain repairs and improvements, determine a selling price, and choose between selling the home yourself and using the services of a real estate agent.

Evaluate available housing alternatives

When selecting a place to live, consider your needs, life situation, and financial resources. These factors will influence your selection of housing. Also, evaluate renting and buying alternatives in terms of financial and opportunity costs.

Select all that apply Renting increases mobility by: decreasing financial investment in a home. making it easier for people to get up and move. decreasing the amount of time one is required to be financially liable for housing. exclusively dealing in smaller spaces.

decreasing financial investment in a home. making it easier for people to get up and move. decreasing the amount of time one is required to be financially liable for housing.

The most common sources for a______ payment for a home purchase include personal savings, pension plan funds, sale of investments, and assistance from relatives.

down