CFP Exam Course 511 Module 3

Mortgage insurance

A policy that protects lenders against losses that result from defaults on home mortgages

Cash and cash equivalents

Low-risk assets that may be readily converted to cash

Statement of financial position

Also known as the net worth statement, is a profile of what is owned (assets), what is owed (liabilities), and your client's net worth on a specific date

Variable expenses

Amount varies from month to month such as electricity or household maintenance

Conventional mortgage loans

Are those made by commercial lenders in the private sector. These may also be called conforming loans, because they conform to Fannie Mae and Freddie Mac dollar limit requirements

Consumer debt ratio

Monthly consumer debt payments / monthly net income

Housing cost ratio

Monthly housing costs / Monthly gross income

Liquid assets

Assets that may be quickly accessed by the client without the risk of a significant loss to principal

Net-investment-assets-to net-worth-ratio

Net investment assets / Net worth

Invested assets

Included in this category are stocks, bonds, mutual funds, gems, gold, collectibles, investment real estate, fine art, ownership interests, in closely held businesses, vested pension benefits, and similar assets.

Personal use assets

Includes the client's residence, automobiles, boats, recreational real estate, and personal effects such as furnishings, clothes, jewelry, and similar assets.

Total debt ratio

Total monthly debt / Monthly gross income

Installment loan

Loan for which the client borrows a single amount of money and repays the balance with interest at stated intervals

Finance lease or equity lease or an open-end lease

Generally has a lower monthly payment than a closed-end lease but, at the end of the lease, the lessee may owe the lessor additional money if the asset rents or sells for an amount that is less than the value projected at the time the lease was initiated

Reverse mortgage

Home loan that allows senior citizens with limited income to stay in their homes. The payment stream is reversed, where the lender pays the homeowner a stream of income secured by a considerable amount of equity in the home.

Three major categories of assets

1. Cash and cash equivalents 2. Invested assets 3. Personal use assets

Expenses are categorized in four ways

1. Fixed 2. Variable 3. Nondiscretionary 4. Discretionary

Outflows should be divided into three things

1. Savings and investments 2. Fixed outflows 3. Variable outflows

Home equity loan

A client receives a lump sum in the amount of the loan. With this type of loan, borrowers repay the loan with equal monthly payments over a fixed term

Unsecured (signature) loan

A loan for which the client merely promises to repay the debt in exchange for the borrowed funds

Secured loan

A loan for which the creditor maintains a security interest in property, which serves as collateral for the debt

Single payment (bridge) loan

A loan that provides short-term, temporary financing that is repaid with interest in one lump sum at the end of the term

Fixed-rate loan

A loan with an interest rate that remains constant until paid in full

Balloon mortgage

A mortgage in which the borrower makes fixed payments, which are based upon the established interest rate for a long-term mortgage

Current ratio

Current assets / current (short-term) liabilities

Veterans Administration loans

Feature the same federal guarantee of repayment as that for FHA mortgages, but ____ are for service members. In certain cases, no initial down payment is required; in other words, the entire purchase price can be borrowed

Fixed expenses

Definite monthly amount such as medical insurance premiums

Current (short term) liabilities

Due within one year from the statement date, such as a promissory note.

Fixed cost lease or closed-end lease

One in which the lessee agrees to pay a stated monthly fee for the use of the asset for a specified time period

Graduated payment mortgage

Payable over a long time period, such as 30 years, and has a fixed interest rate. The payments are lower for the first few years of mortgage repayment (although they sometimes increase annually), then they adjust to a higher fixed payment that continues for the remainder of the loan.

The statement of financial position could be called the _________ on the CFP exam

Personal balance sheet

Home equity line of credit (HELOC)

Provides a set amount of credit from which funds may be drawn as needed.

Discretionary expense

Recurring or nonrecurring expense for a nonessential item or one more expensive than necessary

Nondiscretionary expense

Recurring or nonrecurring expense that is needed to maintain lifestyle such as mortgage payments, utilities, and taxes

Fixed outflows

Relatively predictable and recurring expenses over which the client does not have much control.

Cash flow statement

Reveals the client's cash receipts and disbursements over a specific period of time - monthly, quarterly, and often over one year. It summarizes the inflows and outflows of cash and reveals a client's pattern of spending, saving, and investing.

Interest-only mortgage

The homeowner tries to keep the mortgage payment at a minimum while hoping that the fair market value of the home will increase so that the principal amount will be paid off by the sale proceeds

Variable (adjustable) rate loan

The interest rate adjusts at various intervals throughout loan term, which makes them riskier

Adjustable-rate mortgages (ARMs)

The interest rate and payment may change every month, quarter, year, three years, or five years. ____ can allow for negative amortization to occur. This is the case when the agreed-upon monthly payment is less than the accruing interest charges and unpaid interest is added to the mortgage balance, increasing the debt

Net worth

The residual value after the value of liabilities has been subtracted from asset values. Assets-liabilities = net worth

Federal Housing Administration (FHA) mortgage loans

These mortgages appeal to buyers who may not meet the financial underwriting requirements for a conventional home loan. ____ has a very low initial down payment and a lower interest rate because of the federal government's guarantee of repayment

Long-term liabilities

Those due more than one year from the statement date.

Variable outflows

Those over which the client can exercise some degree of control, such as expenditures for food, transportation, clothes and entertainment.