FIN 1010 Test 2

types of mortgages

-fixed rates, fix payment -interest only -adjustable rate, variable payment

risk of cosign a loan

-may have to pay up to the full amount of the debt as well as any late fees or collection costs -can collect the debt from you without first trying to collect from the borrower -will appear on your credit record

problematic financial businesses

-pawnshops -check-cashing outlets -payday loan companies -rent-to-own centers -car title loan companies

comparing financial institutions

-where can i get the best return on my savings -how can i minimize the cost of checking and payments services -will i be able to borrow money if i need it

warning signs of debt problems

-you make only the minimum monthly payment on credit cards -you're having trouble making even the minimum monthly payment on your credit card bills -the total balance on your credit cards increases every month -you miss loan payments or often pay late -you use savings to pay for necessities such as food and utilities -you receive second and third payment due notices from creditors

$120,410 (2950*.38-160-210=751 Enter in financial calculator: 751 PMT, 0 FV, 8/12 I/Y, 12*30=360 N, CPT PV PV=102348.90 102348.90/.85 = 120410)

. Estimate the affordable home purchase price for the following situation (see Exhibit 7-6). Using 38% guide line Monthly gross income, $2,950 Down payment to be made, 15 percent of purchase price Other debt (monthly payment), $160 Monthly estimate for property taxes and insurance, $210 30-year loan at 8 percent

The mortgage: Exhibit 7-6 housing affordability amounts; You can use a financial calculator to calculate monthly mortgage payment.

...

type of endorsements

1. blank - is just your signature 2. restrictive - consists of the words "for deposit only" followed by your signature 3. special - allows your to transfer a check to someone else with the words "pay to the order of" followed by your name and signature

types of checks

1. certified check - is a personal check with guaranteed payment 2. cashier's check - is a check issued by a financial institution 3. traveler's check - allows you to make payments when you are away from home

Financial services AND ECONOMIC CONDITIONS

1. changing interest rates 2. rising consumer prices

five c's of credit

1. character - the borrower's attitude toward his or her credit obligations 2. capacity - the borrower's financial ability to meet credit obligations 3. capital - the borrower's assets or net worth 4. collateral - a valuable asset that is pledged to ensure loan payments 5. conditions - the general economic conditions that can affect a borrower's ability to repay a loan

types of financial institutions

1. commercial banks - offers a full rang of financial services to individuals, businesses, and government agencies 2. savings and loan associations - traditionally specialized in savings accounts and mortgage loans 3. mutual savings bank - is owned by depositors and specializes in savings accounts and mortgage loan 4. credit union - user owned, nonprofit, cooperative financial institution that is organized for the benefit of its members

NOT types of financial instituions

1. money market fund - a savings investment plan offered by investment companies, with earnings based on investments in various short-term financial instruments 2. life insurance companies 3. brokerage firms 4. credit card companies 5. finance companies 6. mortgage companies

types of housing

1. single family dwellings - include previously owned houses, new houses, and custom built houses 2. multi unit dwellings - are dwellings with more than one living unit, duplex, townhouse 3. condominiums - an individually owned housing unit in a building with several such units 4. cooperative housing - a form of housing in which a building containing a number of housing units is owned by a non profit organizations whose member rent the units 5. manufactured homes - made then transferred 6. building a home

QUIZZES

4, 5, 6, 7

REVIEW TERMS

4, 5, 6, 7

debt payment to income ratio

?

6.50 ($13/$200)

A $200 savings account that earns $13 interest in a year has a yield of ____________ percent (APY).

character

A bank that is looking at your past payment records on your loans is most likely examining which aspect of the 5 Cs of lending?

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

A cash advance

False

A certificate of deposit is usually considered to be very liquid.

False

A commercial bank is the same thing as a credit union.

financial benefits

A common advantage associated with home ownership is:

$70,000 (Present market value of Michael's home = $150,000. Michael can borrow up to 80 percent of the market value, or $120,000. Michael still owes $50,000 mortgage on his home. Therefore, he can borrow a maximum of $70,000 ($120,000 - $50,000).) )

A few years ago, Michael Tucker purchased a home for $100,000. Today, the home is worth $150,000. His remaining mortgage balance is $50,000. Assuming that Michael can borrow up to 80 percent of the market value, what is the maximum amount he can borrow for a home equity loan?

a mortgage loan

A good example of closed-end credit is:

True

A loan from a pawnshop will be more expensive than one from a bank.

True

A restrictive endorsement will usually include the words "for deposit only."

certificate of deposit

A saver will usually earn the highest rate with which one of the following types of savings plans?

credit

advantages: goods and services fast and for emergencies disadvantages: temptation to overspend

overdraft protection

an automatic loan made to checking account customers to cover the amount of checks written in excess of the available balance in the checking account

net presents value of a consumer purchase

annuals savings then find present value - cost =

credit card

borrow money to be repaid later

unit price

divide the cost by the number of units

Checking account selection factors

exhibit 4-9 pg 126

closing cost

fees and charges paid when a real estate transactions is completed, aka settlement costs

automobile operation costs

fixed vs variable cost

chapter 7 bankruptcy

individual is required to draw up a petition listing his or her assets and liabilities

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

leasing

is a contractual agreement with monthly payments for the use of an automobile over a set time period, usually 3-5 years

Sources of quick cash

liquidate savings or borrow 1. savings account 2. certificate of deposit 3. mutual fund 4. other investment credit card cash or personal load

cash advances

loan billed to credit card

monthly payment amount

multiple the factor from 7-7 (exhibit pg 231) by the number of thousands of the loan amount

closed end credit

one time loans that the borrower pays back in a specified period of time and in payments of equal amounts

choosing a credit card

page 146

buying a motor vehicle

page 196-197

Consumer credit protections laws

pages 169-170

points

prepaid interest charged by the lender

credit scores (FICO scores)

reflects the information in your credit report determined by: -the number and type of accounts you have (credit cards, auto loans, mortgages, etc.) -whether you pay your bills on time -how much your available credit you are currently using -whether you have any collection actions against you -the amount of your outstanding debt -the age of your accounts

Financial services

savings - safe storage of fund (time deposits) payment - transfer money for daily activities (demand deposits) borrowing - can be short or long term

Renting versus buying housing: you can compute rental costs and buying cost; advantages and disadvantages of renting and buying

starts on 220

home equity loans

term 22

term versus interest cost

the longer the term the more in interest rates you pay

annual percentage rate (APR)

the percentage cost of credit on a yearly basis. The APR yields a true rate of interest for comparisons with other sources of credit

Annual percentage yield (APY)

the percentage rate expressing the total amount of interest that would be received on a $100 deposit based on the annual rate and frequency of compounding for a 365 day period

consumer credit

the use of credit for personal needs (not home mortgage)

finance charges

total dollar amount paid to use credit

debit card

used in computerized banking transactions usually checking accounts

15%

your monthly net income is $2,400. Your monthly debt payments include your student loan payment, a gas credit card and they total $360. What is your debt payments - to - income ratio? (report as percentage such as 16%, no decimal place)

False

An escrow account is designed to reduce the cost of a mortgage.

$2,350 (Purchase requirement = Membership fee / Discount rate = $235 / 0.10 = $2,350)

An online buying club offers a membership for $235, for which you will receive a discount of 10 percent on all brand-name items you purchase. How much would you have to buy to cover the cost of the membership?

Total annual variable cost: $3,660 (Total variable costs = [(Annual mileage / Miles per gallon) × Gas price per gallon] + Oil changes and repairs + Parking and tolls = [(14,880 / 24) × $3.5] + $790 + $700 = $3,660)

Based on the data provided here, calculate the items requested: 1. Annual depreciation $ 3,000 2. Annual mileage 14,880 3. Current year's loan interest $ 720 4. Miles per gallon 24 5. Insurance $ 890 6. License and registration fees $ 135 7. Average gasoline price $ 3.50 per gallon 8. Oil changes/repairs $ 790 9. Parking/tolls $ 700

Leasing (You should choose the option with the lower total cash outflow, which in this case is leasing.)

Based on the previous calculations, would you recommend buying or leasing?

$50 (With ATM or debit cards, you must act quickly in order to avoid full liability for unauthorized charges when your card is lost or stolen. Under the federal Electronic Fund Transfer Act, your liability is: $0 if you report the loss or theft of the card immediately and the card has not been used up to $50 if you notify the bank within two business days after you realize the card is missing up to $500 if you fail to notify the bank within two business days after you realize the card is missing, but do notify the bank within 60 days after your bank statement is mailed to you listing the unauthorized withdrawals, or unlimited if you fail to notify the bank within 60 days after your bank statement is mailed to you listing the unauthorized withdrawals.)

Brenda lost her debit card. When she realized it was gone, her account had $173 in unauthorized charges. She notified her financial institution within two days. How much is she potentially liable for?

NOT TO SELF

Can use a financial calculator to calculate car loan payment and total interests paid

6.69

Canned fruit—13 ounces for 87 cents (cents per ounce)

.24

Cereal—15 ounces for $3.60 (cents per ounce)

True

Consumer credit refers to the use of credit for personal needs (except a home mortgage) by individuals.

$32,910 (Total cash outflow = Down payment + (Lease payment × Number of payments) + End-of-lease charges = $2,100 + ($620 × 48) + $1,050 = $32,910)

Continue: What is the total cash outflow for leasing?

56.5 (Operating cost per mile = Total annual operating costs / Annual mileage = $8,405 / 14,880 = $0.565, or 56.5 cents per mile)

Continued: Calculate operating cost per mile (cents per mile). Operating cost includes the variable cost and the fixed cost.

$1562 (359.38*60-20000)

Continued: How much interest will you pay totally during the 5 years?

$123,280

Continued: How much is your total interest payment for this loan in 30 years? (Hint: the difference between your total payments and loan amount)

$1357

Continued: If you did a 15 years loan instead of a 30 years loan, what is your monthly payment? 15 years loan has a interest rate 2.75%

No (This ratio exceeds the recommended 20 percent figure. Therefore, Louise is overextended. Her maximum monthly loan and credit card payments should not be over $272 (20 percent of $1,360).) )

Continued: Is Louise living within her means?

$4,745 (Total fixed cost = Depreciation + Loan interest + Insurance + License and registration fees = $3,000 + $720 + $890 + $135 = $4,745)

Continued: Total annual fixed cost

$200

Continued: What if she had made the purchases with her credit card (not cash advance)and paid off the bill in full promptly?

$3 ($200 x .18 x 1/12 = $3)

Continued: What was the interest for one month at an 18% APR? (hint: use monthly rate to calculate interest)

$207 ($200 + $4 + $3 = $207)

Continued: What was the total amount she paid? Remember: Sidney paid the balance in full when the bill arrived.

$44,260

Continued: how much is your total interest payments for the 15 years loan?

$12,270 (Total annual cost of renting (monthly rent payments × 12 months) + renter's Insurance + Interest lost on security deposit = ($1,000 × 12 months) + $250 + $20 = $12,270.)

Crystal is looking for a new apartment. What are her total annual costs associated with renting? Monthly rent $1000 Annual renter's insurance $250 Annual interest lost on security deposit $20 Value of apartment $150,000

$55 (The finance charge is the total dollar amount you pay to use credit. It includes interest costs and sometimes other costs, such as service charges, credit-related insurance premiums, or appraisal fees.)

Dave borrowed $500 for one year and paid $50 in interest. The bank charged him a $5 service charge. What is the finance charge on this loan?

as evidence of good faith by a homebuyer

Earnest money is used:

Financial Institutions and banking services

Exhibit 4-1 page 108

91.67

Facial tissue—300 tissues for $2.75 (cents per 100 tissues)

$17,900 (Total annual cost of buying = (annual Mortgage payments + annual Property taxes + annual homeowner's insurance + Maintenance and repairs) - (Growth in equity + Tax savings + Annual appreciation) = {$19,200 + $4,800 + $1,200 + (1% × $300,000)} - {$3,000 + $2,800 + (1.5% × $300,000)} = $28,200 - $10,300 = $17,900)

Given the information here, what is the annual cost of owning? Tax saving $2,800 Estimated annual appreciation 1.5% home value Home Value $300,000 Annual Mortgage payment $19,200 Annual property tax $4,800 Annual homeowner insurance $1,200 Estimated maintenance cost 1% home value Growth in equity $3,000

$13.25 ($883 x .015 = $13.25)

Henry Garrison starts the month with a balance on his credit card of $1,000. The average daily balance for the month including purchase is $883. The average daily balance for the month excluding new purchase is $750. The bank charges 1.5 percent per month and uses the average daily balance including new purchases method. What would Henry's finance charges be for the month?

$0

If Vince charged $200 on his credit card with 18% APR and he paid his balance in full within the grace period, how much is the finance change?

True

If a check is lost or stolen, you should use a stop-payment order.

False

If you cosign and the debt is not paid off, that fact does not become a part of your credit record.

False

If you declare a Chapter 7 bankruptcy, you do not have to pay alimony, child support, or educational loans.

10

If you have declared personal bankruptcy, that fact may be reported by credit bureaus for ____________ years.

$221 (Cost of credit = Down payment + (Payment amount × Number of payments) - Cash price = $70 + ($35 × 24) − $689 = $221)

John Walters is comparing the cost of credit to the cash price of an item. If John makes a down payment of $70 and pays $35 a month for 24 months, how much more will that amount be than the cash price of $689?

20.1 ($1,670 / $83 = 20.12)

Kelly and Tim Browne plan to refinance their mortgage to obtain a lower interest rate. They will reduce their mortgage payments by $83 a month. Their closing costs for refinancing will be $1,670. How many months will it take them to recover the cost of refinancing?

27.2% (Louise's Gross Income = $2,000 Less: Income taxes = -400 Less: Social Security Tax = -160 Less: IRA contribution = -80 Net take-home pay = $1,360 Her monthly payments on VISA, MasterCard, Discover Card, and a car loan add up to $370 per month. Louise's debt payments to income ratio is 370 to 1,360, or 27.2 percent.)

Louise McIntyre's monthly gross income is $2,000. Her employer withholds $400 in federal, state, and local income taxes and $160 in Social Security taxes per month. Louise contributes $80 per month for her IRA. Her monthly credit payments for VISA, MasterCard, and Discover card are $35, $30, and $20, respectively. Her monthly payment on an automobile loan is $285. What is Louise's debt payments-to-income ratio?

contingency clause

Madeline wants to purchase a larger house. However, she has not yet sold her current home. She may want to include a(n) ________ in her offer.

False

Making transactions using a credit card will immediately reduce your bank balance.

1. Failing to put unneeded funds in an investment plan 2. Having insufficient liquid assets to pay current bills 3. Using savings or borrowing to pay for current expenses 4. Overspending due to impulse buying and over using credit

Many people make mistakes when managing current cash needs. Which of these are made mistakes?

$76,000 (Step 1) $45,000/12 = $3,750 Step 2) $3,750 x .38 = $1,425 Step 3) $1,425 - 750 - 250 = $425 Step 4) ($425 as payment, calculate PV $60,801 Step 5) $60,801/(1 - .2) = $76,000 (rounded))

Michelle Duncan wants to know what price home she can afford. Her annual gross income is $45,000. She owes $750 per month on other debts and expects her property taxes and homeowners insurance to cost $250 per month. She knows she can get a 7.5%, 30year mortgage so her mortgage payment factor is 6.99. She expects to make a 20% down payment. What is Michelle's affordable home purchase price? Round your answer to the nearest $100.

True

Money market funds are not covered by federal deposit insurance.

7

Most of the information in your credit file may be reported for only ______ years.

location

Most real estate professionals believe that the most important factor in selecting a home is

.98

Motor oil—2.0 quarts for $1.96 (cents per quart)

Certified check

Nora bought a used car and was told that she needed a personal check with guaranteed payment. She obtained a

$14.63 (Input: PV -3000, PMT 258, N 12, FV 0, CPT I/Y Interest rate is 0.48795% interest= 3000*0.48795%)

Shelly Sanders gets a loan for $3,000 and repays the loan in 12 monthly payments of $258 per month. what is the amount of interest included in her first payment? (Hint: calculate monthly interest rate first, then calculate first month interest charge)

$4

Sidney took a $200 cash advance by using checks linked to her credit card account. The bank charges a two percent cash advance fee on the amount borrowed and offers no grace period on cash advances. Sidney paid the balance in full when the bill arrived. What was the cash advance fee____?

$162,000 (Suzanne is eligible for coverage for her individual account ($200,000) plus half of the joint account ($212,000). Since her total deposit is $412,000 and FDIC covers $250,000 she is at risk (uncovered) for $162,000.)

The Federal Deposit Insurance Corporation insures deposits up to $250,000 per person per financial institution. Suzanne has $200,000 in an individual account and $424,000 in a joint account with her husband Ted in the same institution. How much of Suzanne's money is not covered by FDIC insurance?

True

The money market fund offered by investment companies is a relatively liquid financial service.

Capital

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

30

This morning, you received a phone call regarding a debt you allegedly owe. If you dispute this debt, you must write to the debt collector and request verification of the obligation. How many days do you have to send this letter?

pawnshop

To avoid high fees for loans, a person should avoid borrowing from a

Certain assets receive some protection

Under Chapter 7 of the U.S. bankruptcy code,

ARM

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

$33,880 (Total cash outflow = Down payment + (Loan payment × Number of payments) - Ending vehicle value = $5,800 + ($810 × 48) − $10,800 = $33,880)

Use the following data: 1. Down payment (to finance vehicle) $ 5,800 2. Down payment for lease $ 2,100 3. Monthly loan payment $ 810 4. Monthly lease payment $ 620 5. Length of loan 48 months 6. Length of lease 48 months 7. Value of vehicle at end of loan $ 10,800 8. End-of-lease charges $ 1,050 What is the total cash outflow for buying? Ignore time value of money.

$236, 152

What amount would you have if you deposited $2,500 a year for 30 years at 7 percent (compounded annually)?

1. Paying only the minimum balance each month. 2. Missing payments or paying late 3. Using savings to pay normal bills 4. Depending on overtime to meet normal expenses

What is (are) the signal(s) of potential debt problems?

points

What is prepaid interest charged by a mortgage company called?

$111 ((22 checks 12 months $0.25) + ($3.75 12 months) = $111 cost)

What would be the net annual cost of the following checking accounts? a. Monthly fee, $3.75; processing fee, $0.25 cents per check; checks written, an average of 22 a month.

$172

What would be the net present value of a microwave oven that costs $170 and will save you $79 a year in time and food away from home? Assume an average return on your savings of 5 percent for 5 years. (Hint: Calculate the present value of the annual savings, then subtract the cost of the microwave.)

Mortgage balance

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

short-term savings instruments

When interest rates are rising, a person would be best served by:

True

When you cosign a loan, you are being asked to guarantee this debt.

825

Which FICO credit score would represent the least risky borrower

Fair Credit Billing Act

Which federal credit law sets the procedure for promptly correcting billing mistakes?

Chapter 13

Which form of bankruptcy allows a debtor with a regular income to extinguish his or her debts from future earnings or other property over a period of time?

Property taxes

Which of the following expenses is NOT usually incurred by a tenant?

Cooperative housing

Which of the following is a form of housing in which the units are owned by a nonprofit organization?

A department store credit card

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

money market fund with an investment company

Which one of the following savings plans is not covered by federal deposit insurance?

False

With an open-end credit, you pay back one-time loans in a specified period of time in equal amounts.

$359.38

You got a car loan. The loan amount is $20,000, 3% APR, 5 years term. What is your monthly payment? (Use your financial calculate, make N and Interest rate monthly)

$898 (PV -200,000; N= 12*30; I/Y= 3.5/12; FV=0, CPT PV)

You need a $200,000 30-year loan for a house. If the rate is 3.5%, what is your monthly mortgage payment? (Hint, use your financial calculator. Make N and I/Y MONTHly not yearly)

$418 (PV=-23000; I/Y=3.5/12; N=60, FV=0, CPT PMT)

You plan to buy a car which will cost you $25,000. You can make a $2000 down payment. What is your monthly loan payment if the interest rate is 3.5% and the term is 60 month?

Restrictive endorsement

Zoe signed the back of her check with the words "for deposit only." She used a(n)

small claims court

a court that settles legal differences involving amounts below a set limit and employs a process in which the litigants usually do not use a lawyer

chapter 13 bankruptcy

a debtor with a regular income proposes a plan for using future earnings or assets to eliminate his or her debts over a period of time

deed

a document that transfers ownership of property from one party to another

class-actions suit

a legal action taken by a few individuals on behalf of all the people who have suffered the same alleged injustice

open end credit

a line of credit in which loans are made on a continuous basis and the borrow is billed periodically for a least partial payment

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

money market account

a savings account offered by banks, savings and loan associations, and credit unions that requires a minimum balance and has earnings based on market interest rates

Certificate of deposit (CD)

a savings plan requiring that certain amount be left on deposit for a stated time period to earn a specified interest rate TYPES -rising rate or bump up -liquid -zero coupon -indexed (pg 116-117)

warranties

a written guarantee from the manufacturer or distributor of a product that specifies the conditions under which the product can be returned, replaced, or repaired