FIN2100 Mid-Term 2
Class-Action Suit
A legal action taken by a few individuals on behalf of all the people who have suffered the same alleged injustice.
Fixed Rate vs. ARMs
ARMS are riskier Fixed Rate risks higher interest rate
Personal Property Floater
Additional property insurance to cover the damage or loss of a specific item of high value. Needed for expensive items since normal coverage is limited. Jewelry, antiques, electronics
A Second Mortgage
Allows a homeowner to borrow on the paid-up value of the property. Borrow a lump sum against the equity and repay it in monthly installments. You need to be careful when using a home equity line of credit if borrowing additional funds. This revolving credit plan can keep you continually in debt as you request new cash advances. Risky, high interest rates!
Other Mortgages & Financing Methods
Balloon Mortgage Graduated Payment A Second Mortgage Reverse Mortgage Interest Only Mortgage Buy-Downs (?) Refinancing
Leasing a Car
Disadvantages: No ownership interests, Must meet requirements, Lease payment reflects initial 3 years of depreciation (highest during life of car) + interest, May have additional costs (e.g. mileage)
Review the economics of prepaying something in advance relative to alternative uses of money (i.e. keeping money in the bank and earning interest).
Do I prepay? Offers to prepay a vendor at a discount for payments otherwise due each month (or period) involves you loaning money to the vendor in exchange for an interest rate. The question is: What is the interest rate and is this a good deal relative to the current use of the money? and What are the risks?
To calculate the principal balance due after 12 payment
Don't clear the calculator, and insert: N = 12, Solve for FV = 98,984.19
Replacement Value
A claim settlement method in which the insured receives the full cost of repairing or replacing a damaged or lost item. 10-20% more than ACV coverage
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.
Unit Pricing Example
A food package with 32 ounces costing $1.76, would have a unit cost of what amount? $1.76 ÷ 32 = 5.5 cents an ounce
Adjustable Rate Mortgages (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. A rate cap restricts the amount by which the interest rate can increase or decrease. Payment changes on 1-, 3-, 5-, 7-, or 10-year schedules.
Balloon Mortgage
A home loan with fixed monthly payments and a large final payment, usually after three, five, or seven years. Extremely risky!
Peril
The causes of a possible loss, such as fire, windstorms, robbery, disease or death
30 Year vs. 15 Year Mortgages
*30 year mortgage*: Higher interest rate, Lower payments, Higher total interest costs, Slower growth of equity. You can always pay more principal each month without penalty! *15 year mortgage*: Lower interest rate, Higher payments, Lower total interest costs, Faster growth of equity
Pros and cons of owning a home
*Advantages of Owning:* Pride of ownership, Reduced income taxes, Build an equity by paying down the loan or by price appreciation, Builds your credit rating, Hedge against inflation *Disadvantages of Owning:* Financial uncertainty, Limited mobility, Higher living costs (maintenance, insurance, taxes, etc.)
Pros and cons of renting a home
*Advantages of renting:* Mobility, Fewer maintenance responsibilities, Lower initial costs *Disadvantages of renting:* Few financial benefits, Restricted lifestyle, Legal concerns of a lease, Costs including a security deposit, utilities and renter's insurance
Understand the steps involved in resolving consumer complaints and agencies involved
1. Return to place of purchase 2. Contact the company's main office via telephone or their web site or letter 3. Obtain assistance from a consumer agency: Better Business Bureau website to file a complaint online: http://www.bbb.org. State consumer protection office or agency. Federal agencies (Bureau of Consumer Financial Protection)
Actual Cash Value (ACV)
A claim settlement method in which the insured receives payment based on the current replacement cost of a damaged or lost item, less depreciation.
Rate Cap
A limit on the increases and decreases in the interest rate charged on an adjustable-rate mortgage
Payment Cap
A limit on the payment increases for an adjustable-rate mortgage.
Household Inventory (?)
A list or other documentation of personal belongings, with purchase dates and cost information.
Risk Management
A long range, organized, planned strategy to protect your assets and family. Risk avoidance, risk reduction, risk assumption, risk shifting
Cooperative
A nonprofit firm, business, or organization whose member-owners may save money on certain products or services.
Points
A point equals 1% of a mortgage and represents "prepaid" interest at closing (in exchange for a lower interest rate). $125,000 mortgage with 1 point costs $1,250. Points ARE tax deductible! Buyers have various options: 0 points = somewhat higher mortgage rate 1 or more points = somewhat lower mortgage rate (lowers risk to lender)
Coinsurance Clause
A policy provision that requires a homeowner to pay for part of the losses if the property is not insured for the specified percentage of the replacement value.
Speculative Risk
A risk in which there is a chance of either loss or gain. Chance of loss or gain, Uninsurable, Such as starting a small business or gambling
Pure Risk
A risk in which there is only a chance of loss; also called insurable risk. Insurable, Accidental/unintentional, Nature and financial loss of the risk can be predicted, Can be personal, property or liability risk
Vicarious Liability
A situation in which a person is held legally responsible for the actions of another person (vicarious = indirect or second-hand)
Strict Liability
A situation in which a person is held responsible for intentional or unintentional actions.
Operating a car: Review excel file to see the savings of buying used vs. new over a life-time
A spender UCF graduate likes the prestige of a Lexus IS 250. Saver UCF graduate drives a Corolla. The internet shows that the five year cost of owning a 2010 Lexus IS 250 is $42,814 while the five year cost of owning a 2010 Corolla is $24,607, an $18,207 difference over five years. On an annual basis, this would equate to the Lexus costing $3,641.40 more per year. Assume our UCF saver invests the savings of $3,641.40 per year (end of the year) for 40 years and earns 11% per year (interest compounded annually). How much will the saver have in his/her retirement account as a result of driving lower cost cars throughout his/her lifetime? $2,118,661.44
Warranty
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.
Endorsement
An additional backing of coverage to a standard insurance policy. Flood (separate policy required), Earthquake (separate policy required), Hurricanes - 2% deductible, Sinkholes
Service Contracts or Extended Warranties
An agreement between a business and a consumer to cover the repair costs of a product. Aggressively sold by merchants. High profit margins to merchants and manufacturers. Low probability of claims
No-Fault Insurance System
An automobile insurance program in which drivers involved in accidents collect medical expenses, lost wages, and related injury costs from their own insurance companies.
Express Warranty
An express warranty, usually in written form, is created by the seller or manufacturer and has two forms: the full warranty and the limited warranty. (Full vs. Limited)
Buy-Downs (?)
An interest rate subsidy from a home builder, a real estate developer or by the buyer that reduces a home buyer's mortgage payments during the first few years of the loan.
Down-payment Example
An item bought on credit with a $60 down payment, and monthly payments of $70 for 36 months, would have a total cost of what amount? 36 × $70 = $2,520 plus the $60 down payment for a total of $2,580
Various types of home to own:
Apartment, New House, Previously owned house, Condominium, Cooperative, Mobile Home
Reverse Mortgage
Assist people who have a high equity in their homes and need cash. A loan that provides elderly homeowners with tax-free income and is paid back with interest when the home is sold or the homeowner dies. Must be 62+. Also called home equity conversion mortgages.
Points - Effective Rate
Assume a $100,000 mortgage at quoted 5% rate with one point vs. 5.2% quote with no points. Calculate payment on mortgage using quoted rate = $536.82 End mode, Pmt/yr = 12, PV = 99,000 (100,000 minus one point or 1,000), Pmt = -536.82, N = 360, FV = 0 Solve Int = 5.08 < the no point option of 5.2% (You would need another $1,000 to pay the point at closing )
Calculate a Claim
Assume a 5 year old sofa costing $8,000 is lost in a fire. It has a 10 year life and cost $10,000 to replace. Replacement Cost: $10,000 both ACV and RV. Less Depreciation: ACV ($5,000), RV $0. Insurance Value: ACV $5,000, RV $10,000. Deductible: ACV ($500), RV ($500). Settlement: ACV $4,500, RC *$9,500*
Calculate Refinancing Breakeven
Assume you pay $4,000 at closing to save $109.89 per month with a new 5.5% mortgage. How long must you stay in the house to breakeven? Simple payback: $4,000/109.89 = 36.4 months Using TVM payback (more appropriate): End Mode, Pmt/yr = 12, PV = (4,000), FV = 0, Pmt = 109.89, Int = 5.5 Solve for N = 39.9 months (*Part 1: Solve for PV, Part 2: How much to get your money back: TVM Payback > Solve for N)
Uninsured Motorist's Protection
Automobile insurance coverage for the cost of injuries to a person and members of his or her family caused by a driver with inadequate insurance or by a hit-and-run driver. Does not cover property damage
Medical Payments Coverage
Automobile insurance that covers medical expenses for people injured in one's car or as a pedestrian.
Bodily Injury Coverages
Bodily Injury Liability Medical Payments Coverage
Money Principle 6:
Buying a house is essential to wealth accumulation (and just because a bank will give you a mortgage does NOT mean you can afford to repay it!)
Lease vs. Buying Issues
Buying is usually better than leasing Leasing Disadvantages: No ownership interests. Must meet requirements. Lease payment reflects initial 3 years of depreciation (highest during life of car) + interest. May have additional costs (e.g. mileage)
Risk
Chance or uncertainty of loss; also used to mean "the insured." Pure risk vs. Speculative risk
Types of Mortgages
Conventional Government guaranteed financing programs Adjustable rate mortgages (ARM) Interest-only mortgage
Homeowner's Insurance
Coverage for a place of residence and its associated financial risks. Buildings and other structures, Loss of use/additional living expenses while home is uninhabitable, Personal liability and related coverages
Bodily Injury Liability
Coverage for the risk of financial loss due to legal expenses, medical costs, lost wages, and other expenses associated with injuries caused by an automobile accident for which the insured was responsible.
Payment on a $100,000 mortgage, 30 year, 7%
END mode, P/YR = 12, N = 360, I%YR = 7, PV = $100,000, PMT = -$665.30
Negligence
Failure to take ordinary or reasonable care in a situation.
Conventional Mortgage
Fixed rate, fixed payment, amortized - 5%, 10% or 20% down - 15, 20 or 30 years of fixed payments - Lower rate than 30-year fixed; faster equity buildup and quicker payoff of loan.
Medical Payments Coverage
Home insurance that pays the cost of minor accidental injuries on one's property.
Open Dating
Information about freshness or shelf life found on the package of a perishable product.
Liability
Legal responsibility for the financial cost of another person's losses or injuries.
Government Guaranteed Financing Programs (mortgage)
Loans from the Veterans Administration (VA) & Federal Housing Authority (FHA). Fixed-rate mortgage (30-year and 15-year). Low down payment requirements and fully assumable with no prepayment penalties.
Understand what impacts the value of a home
Location, location, location Down payment/earnest money Mortgage application Appraisal (for bank/lenders) Assessment (for property taxes)
How Much Coverage Do You Need?
Look for a policy with full coverage rather than a coinsurance clause, with replacement cost not actual cash value
Escrow Accounts
Money, usually deposited with the lending financial institution (third party), held for the payment of property taxes and homeowner's insurance.
"PITI"
Mortgage payments consist of "PITI" *Principal* (remitted to lender monthly) *Interest* (remitted to lender monthly) *Taxes* (escrowed based on assessed values) *Insurance* (escrowed based on estimate) *Private mortgage insurance (PMI) is usually required if the down payment is less than 22 percent.
Types of liabilities
Negligence, Strict Liability, Vicarious Liability
Strategies in buying a car
Never pay the sticker price! Watch for traps and dealer financing! Trade-in at the end to eliminate taxes and fees. Watch for 0% interest traps. Avoid most service contracts/extended warranties
Legal Aid Society
One of a network of publicly supported community law offices that provide legal assistance to consumers who cannot afford their own attorney (public defender)
Calculate Refinancing
Original mortgage = $120,000, 7%, 30 yrs Current payment = $798.36 Refinance at 5.5% three years later Remaining mortgage due = $116,072.36 New payment for 27 year refinancing = $688.47 PV of $109.89/month savings for 324 months at 5.5% = $18,526.92 vs. cost of refinancing [Refinancing requires a view on future rates. Base analysis on expected life of new mortgage. Avoid pitfall of extending terms during refinancing]
Interest Only Mortgage
Pay a low interest rate only at first, usually 5 years, then converts to normal mortgage for 25 years (= higher payment). No decrease in amount owed; no building equity unless home value increases. Extremely risky!
Commonly overlooked trade-offs include:
Paying a higher price by using credit Buying low cost, possible poor-quality brands Brands that are difficult to repair Ordering by mail or online can save time and money, but may make return or repair difficult Comparison shopping takes time, saves money
Graduated Payment
Payments start lower and go up, rate fixed. For persons whose income will increase. Very risky!
Underinsured Motorist Protection
Pays costs if your car is hit by a person who doesn't have enough insurance to cover the damage they did to you and your car
Do I prepay? Calculate the interest rate implicit in deal, accept prepay if you are investing money at a lower rate and have enough cash...don't forget risk differences
Pest contract $360 annual; $30/month (end of month) or 10% discount if paid today End mode Pmt/yr =12 PV = negative 324 (being 360 times 90%) Pmt = 30 N = 12 FV = 0 Solve for I = 19.9%
Steps to selling a home
Preparing your home Determining the selling price using appraiser and realtor $250,000 (S)/$500,000 (M) of gain is excludable from tax return For sale by owner Listing with a real estate agent
How much home can you afford
Price & Down Payment Size & Quality
Calculate price per square foot
Price / Square ft. of living space = Price per square foot
Pros and Cons of using an agent
Pros: They present your offer, negotiate the price, assist you in obtaining financing, and represent you at the closing Cons: A buyer's real estate agent really represent the seller Real estate agents may not accept commissions for referrals to title companies, closing agents, etc. but you should separately shop for these services to ensure prices are competitive
Types of Risk
Risk, Peril, Hazard, Risk Management
Hazard
Something that increases the likelihood of a loss, such as driving drunk, smoking in bed, or defective house wiring
Financial Responsibility Law
State legislation that requires drivers to prove their ability to cover the cost of damage or injury caused by an automobile accident. 40 states have compulsory automobile insurance laws - Florida uses 10/20/10 liability limit
Steps in Buying a House
Step 1: Determine Homeownership Needs (Determine how much you can afford, Price and down payment, Size & Quality, Location) Step 2: Finding and Evaluating a Property to Purchase (Zillow.com or Realtor.com, Realator) Step 3: Pricing the Property (Determine & Negotiate price , Contingency Clauses, *Step 4: Obtaining Financing & Mortgage Paymnents (PITI) Step 5: Closing
Steps to planning an insurance program
Step 1: Set Insurance Goals Step 2: Develop a Plan to Reach Your Goals Step 3: Put Your Plan into Action Step 4: Check your Results
Umbrella Policy
Supplementary personal liability coverage (home/auto/bodily); also called a personal catastrophe policy. $1,000,000 or more in liability coverage
Various legal options available to consumers
Take legal action: Small claims court. Class action suits. Use a lawyer. Other legal alternatives
Understand escrow accounts and credit life requirements for down payments less than 20%
Target 20% down, or drop credit life ASAP 5% or 10% more likely for young buyers IRA and 401-K loans NOT recommended for down payment
Mediation
The attempt by an impartial third party to resolve a difference between two parties through discussion and negotiation (voluntary)
Self-Insurance
The process of establishing a monetary fund to cover the cost of a loss. Self-insurance does not eliminate risks; it only provides means for covering losses.
Refinancing (a mortgage)
The process of obtaining a new mortgage on a home (after paying off old mortgage) to get a new/lower interest rate. Consider refinancing when interest rates are falling
Amortization
The reduction of a loan balance through payments made over a period of time.
Arbitration
The settlement of a difference by a third party whose decision is legally binding. Avoid! (Car dealers and stock brokers require this)
Unit Pricing
The use of a standard unit of measurement to compare the prices of packages of different size. Larger quantities should = lower price/unit
100/300/50 Auto Coverage
These amounts represent thousands of dollars of coverage. 50/100 = death. Bodily Injury Liability: Indicates $100,000 limit that will be paid to *one* person in an accident. Indicates $300,000 limit that will be paid to *all* persons in an accident Property Damage Liability: Indicates $50,000 limit for payment for damage of property of others
Review various steps involved in researching purchases, including sources of data and which sources are the best to rely on
Timing Purchases, Store Selection (Cooperative), Brand Comparison, Label Information (Open Dating), Price Comparison (Unit Pricing)
To calculate interest and principal paid in first 12 months
Total Paid: 12 x 665.30 = 7,983.60 Principal: 100,000 - 98,984.19 = 1,015.81 Interest: 7,983.60 - 1,015.81 = 6,967.79
Calculate the cost per mile of a vehicle
Total costs (A+B) $ / Divided by miles per year = Equals cost per mile $
Auto Insurance Coverages
Uninsured Motorist's Protection Underinsured Motorist Protection
To calculate interest and principal paid in first 12 months
Using AMORT keys, solve for PMT then: 1 INPUT 12 (start/end period) Shift AMORT (1-12) (Hit "=" 3 times) Hit = displays 1,015.79 prin Hit = displays 6,967.81 int Hit = displays 98,984.21 bal [Small differences due to rounding]
Review financial implications of purchasing decisions
Various economic, social, and personal factors affect daily buying habits. These factors are the basis for spending, saving, investing, and achieving personal financial goals. In very simple terms, the only way you can have long-term financial security is to not spend all of your current income.
100/300/50 Auto Claim Example
With 100/300 bodily injury coverage, for example, a driver would have a limit of $100,000 for claims that could be paid to one person in an accident. In addition, there would be a $300,000 limit for all bodily injury claims from a single accident.
Calculate implicit interest in a 0% financing problem (similar to example in class and in the homework)
You have been given a choice of paying $19,000 for a new GM car with a $3,000 cash rebate (net cost of $16,000 which you finance separately), or 0% financing for 48 months with no cash rebate. What is the implicit rate of interest in this deal? 8.69%
Calculate for a variable in a car note given all other factors (e.g. calculate PMT given interest, cost, and term).
monthly Pmt, trade-in value, down payment, loan interest rate, loan term, sales tax