CCP Personal Finance Test 3

example of speculative risk

a small business, gambling

second mortgage

allows homeowner to borrow on the paid-up value of the property; home is collateral and is usually tax deductible

implied warranties

are not written and less enforceable

full or limited warranties

are usually written

when selecting the location of a house,

assess the school system and be aware of zoning laws

impulse buying

avoid ______ _______, unplanned purchasing, which can result in financial problems

social

avoid impulse buying on credit due to ______ factors

year

be aware if prices of items vary with the time of the _____

accidental and unintentional risks

nature and financial cost of the loss can be predicted

purchase price

negotiating the _______ ______- offers and counteroffers, earnest money, contingency clauses, such as obtaining financing and selling current home

uninsurable risk

no protection

leasing

not the best option for people; essentially renting a car for several years, might work for people who want a new car every 3 years or who are running a business

apartments

renting ________ are most common, but houses are available too. Consider multiple factors such as location, building exterior before renting

peril

the cause of a possible loss

fees

there are always ______ with a refinance

pros of renting

-moving is easier -rarely deal with maintenance and repairs -no property taxes

appraisal

An estimate of the current value of the property. (agent will want a low price to budget their time), desirable improvements such as a remodeled bathroom may be desired

Reverse mortgages

Another name for interest only or adjustable payment or negative amortization or other loans where the homeowner pays less early in the life of the mortgage. These are all bad!

how to calculate unit pricing

to calculate the price of an item, divide the cost by the number of units ex: a 64 ounce product costing $8.32 would be calculated like this: Unit price = $8.32/64 = $0.13 or 13 cents an ounce

what do people people buy when they buy insurance?

a policy; the firm assumes the risk for a fee called a premium, which the insured policyholder pays periodically

trade-off

daily buying decisions involve a trade-off between current spending and saving for the future

example of a hazard

defective house wiring

personal factors

gender, age, occupation, income, education, size of family, marital status

appreciation

home value goes up

risk

uncertainty or lack of predictability,

when paying off your mortgage...

-make sure mortgage does not have a prepayment penalty (most don't, but make sure at closing) -before paying additional amounts on your mortgage, be sure to pay off your credit card balances and other high-interest debt -be aware of organizations that promise to set up additional payments on your mortgage, which is something you can do on your own. And refinancing also charges fees. -**Paying early is always a good concept. Don't pay fees, just pay extra. Always good to pay debt early!!

Phase 2: Evaluating Alternatives

-ask yourself in general (not just for a car): can I delay the purchase or do without the item?, should I buy on cash or credit?, which brands?, how do price, quality and service differ among stores?, is it possible to rent item instead of buying? -comparison shop -selecting vehicle options -comparing used vehicles (CarMax superstore) -what bells and whistles do I really need? (ex: heated seats, fast, sporty, good sound system)

benefits of home ownership

-deduct property taxes and mortgage interest -probable increase in value of your home -building equity in your income -lifestyle flexibility -pride of ownership -stability of location

drawbacks of home ownweship

-down payment -limited mobility -home improvements, maintenance, repairs -real estate taxes

advantages of leasing

-lower payments than buying, security deposit smaller than down payment for buying -lease agreement provides business records -usually obtain a more expensive vehicle

cons of renting

-no equity or tax deduction -limits regarding remodeling, pets, sound -pay a security deposit, utilities, and renters insurance -read the lease and all the details!

drawbacks of leasing

-no ownership interest; possible charge for extra miles -requirements similar to qualifying for credit

refinancing

-obtain a new mortgage if interest rate drops at least 1% -when interest rates drop, sometimes we can get a lower mortgage rate

pure risk

most common risks are personal risks, property risks and liability risks

Phase 4: Post-purchase Activities

-Lemon Laws (Lemon Law America) -automobile operation costs -Fixed Ownership Costs (deprecation is largest) -variable operating costs -motor vehicle maintenance -regular care minimizes major repairs. this is CRITICAL -automobile servicing sources (car dealers, auto repair shops, mass merchandise retailers, specialty shops)

interest only mortgages

-allow a homebuyer to have lower payments for the first few years of a loan -none of the mortgage payment goes to the loan amount -higher payments will occur later in the loan -can be especially dangerous if the value of the property declines

arbitration

3rd party for decision (binding)

Adjustable rate mortgages (ARM)

During the life of the loan, the interest rate increases or decreases due to market interest rates. Rate and payment caps limit changes in those things. The most common ARM at this point is the 5/1. This loan is fixed for the first 'five' years and then adjusts every 'one' year. There is sometimes a rate cap.

Interest-Only Mortgage

TERRIBLE IDEA, RISK IS WAY TOO HIGH. BUY WHAT YOU CAN AFFORD. For just about everyone, get a regular 30 year fixed mortgage. (or 15 year fixed)

open dating

______ ______ describes the freshness or shelf life of perishable products

"sale"

_______ prices might not always mean saving money (every price in store is inflated)

comparison

_______ shopping is considering alternative stores, brands and prices (you should do this)

leasing

a contract to use an automobile for a monthly payment

lemon law

a law that requires a seller or manufacturer of a defective vehicle either to replace or repair it or to refund the buyer's money

cooperatives

a non profit organization; members save money

economic, social and personal factors

factors that influence your spending, saving and investing choices

examples of peril

fire, windstorms, explosions, robbery, accidents, premature death

social factors

lifestyle, interests, hobbies, peer group, culture, advertising, media -this is the one where we can have some CONTROL

amortization

loan balance goes down (this builds equity)

examples of risk

loss that a person or property covered by insurance faces

risk management

organized strategy for protecting assets and people

amortization

process of making payments, reducing the amount owed and paying off the mortgage loan

insurance

protection against possible financial loss (gives peace of mind)

depreciation

the largest fixed expense for a new car is usually ________

common trade-offs that are overlooked when buying

-paying a higher price over time by using credit to buy items you need now -buying unknown, possibly poor-quality brands that are less expensive -ordering online, which saves time and money, may make it difficult to return, replace or repair purchases -taking time and effort to comparison- shop to save money and obtain better after sale service

Phase 3: Purchase Price

-price negotiation for new and used cars -know necessary info about the product -deal with a person of authority to give you a lower price or additional features -used cars: current price info in newspaper ads, KBB, Edmunds -new cars: set price dealers or car-buying services -IN GENERAL- negotiating is less of a major part of the process since consumers have more information (internet has completely changed car buying -compare financing alternatives -avoid buying upside-down or having negative equity in your car -look for rebates or low-interest financing -consider the APR (true cost of credit) -check auto financing info at Bankrate -start with your own bank or credit union and know the rate they offer. Car dealer sometimes can have the better.

Phase 1: Preshopping Activities

-problem identification (why do you need the car?) -information gathering: personal contacts, business organizations, media sources (tv, websites like Kelly's Blue Book and Edmunds), independent testing organizations like Consumer Reports, government agencies, online sources like Autotrader, Cars.com, CarMax

renting vs. buying a house

-renters lose tax advantages and equity growth (multiple thousands of dollars over time). Renters can't customize as much -buyers have to make down payment and spend on repairs. Also takes longer to move

what to do when preparing your home for selling

-repair, repaint (in neutral bright colors), clean -clear the garage- keep kitchen and bathroom clean -keep the lawn cut (maintain the lawn the whole time you own the house) -when showing the home, turn on lights and open drapes. Clear off kitchen appliances. -a good real estate agent can tell you how to give the house appeal. Curb and appeal in-house appeal. Buying is emotional; buyers can't really 'visualize'.

types of housing

-single family dwelling -multiunit dwelling- duplex, townhouse - condominium- you own your individual unit in a building with several units -cooperative housing- non-profit org and members own shares and rent a unit in a building with multiple units -manufactured homes- fully or partially assembled in a factory and then moved to a housing site (aka Prefab) -mobile homes -new builds

Evaluate legal alteratives

-small claims court -class action suits -using a lawyer -other legal alternatives-legal aid society, prepaid legal services -personal consumer protection (do business with reputable companies; sign contracts you UNDERSTAND; be cautious of exaggerated offers; compare buying on credit versus paying cash; avoid rushing to get a deal

closing costs include...

-title insurance and title fees -attorney's and appraisal fee -property survey; termite inspection -recording fees -transfer taxes -lender's origination fee -escrow account for tax and insurance reserve -pre-paid interest; real estate commission

steps of closing a purchase transaction

1. meeting of buyer, seller lender 2. signing of documents 3. insurance and title search

mediation

3rd party negotiates (nonbinding)

conventional mortgage

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

lowest

Get ________ fixed rate for shortest term you can afford.

hazard

Increases the chance of loss

buy-downs

Interest rate subsidy from a home builder or a real estate developer that reduces the mortgage payments for the first few years. Home price is often increased to cover the buy-down

Resolve consumer problems

Step 1: return to a place of purchase Step 2: contact company Step 3: obtain assistance from a consumer agency -Better Business Bureau -Mediation 3rd party negotiates (nonbinding) -Arbitration 3rd party for decision (binding) -Federal and State government agencies Step 4: legal action

government financing programs

VA- Loans insured by Veterans Administration (for veterans) FHA- Loans insured by Federal Housing Authority (for lower income)

example: Upside Down

a $26,000 vehicle is purchased with an initial loan of $18,000. After a period of time, the vehicle may only may be worth $12,000 while you still owe $14,000. To avoid this situation, make a large down payment, have a short-term loan (les than 5 years) and pay off the loan faster than the decline in the value of the vehicle. -try to NEVER be in this situation on a car OR home, which is rare, but CAN happen

rebates

a partial refund of price of products

accidental and unintentional risks

are insurable risks

listing with a real estate agent

best idea for most people; negotiate fee and find someone reputable who knows the immediate area

less

buy _____ that you can afford

speculative risk

chance of either loss or gain

insurable risk

chance of loss, not gain

appraisal

conduct an at home inspection and get an ________

higher

convenience and ready-to-use products may mean _________ prices; large packages are usually (not always) the best buy

what type of mortgage is usually best for most people?

conventional mortgage

price

determine a home's ________ based on current supply and demand for housing

used car warranties

disclosures must describe warranty if any (otherwise car sold "as is")

what are the price and down payment of a home affected by?

down payment, income, current living expenses CONSIDER: mortgage rates, your ability to make monthly mortgage (principle interest), tax and insurance payments (PITI)

coupons

help save money on groceries

what are second mortgages known as?

home equity loans, or home equity line of credit, or HELOC

when can refinancing a loan be helpful?

if you can get a lower interest rate (generally happens when interest rates fall)

new-car warranties

include basic parts, power train, and corrosion coverage

economic factors

inflation, interest rates, tax rates, government regulations, product safety -cannot control

advertising

information on a food label can be helpful or just ___________

insurance company or insurer

is a risk-sharing firm that assumes financial responsibility for losses from an insured risk

before leasing:

know the capitalized cost of the lease, the money factor, the monthly payment, number of payments and the residual value

service contracts

known as extended warranties but are not warranties; for a fee they provide coverage for expensive repairs but have exclusions

measurement

unit pricing uses a standard unit of ___________ to compare prices of packages of different sizes

real estate agent

use a ______ ______ ______- they present your offer, negotiate the price, assist you in obtaining financing, and represent you at the closing. charge a fee 4%-7% but its negotiable.

when selling by owner,

use a lawyer or title company to assist with contract and closing

correct

warranties on consumer products are usually not mathematically _______

debt

when people buy more then they need, what does this lead to?

purchase location

when purchasing something, the choice of retailer depends on location, price, product selection, and services available

interest

why does buying on credit cost more?

early

you should pay off your mortgage ______ if possible