CH 6 Loans and Housing Decisions

real estate agent

Real estate agents can represent the buyer, the seller, or both. Their experience can be quite helpful, especially when making an offer on a house.

grace period

Repayment of federal student loans typically must begin within 6 months of completing school or when students are at half-time status or less

When searching for a rental property, what is the most important factor to consider?

Safety

back-end mortgage qualification ratio

The formula is the same, but the maximum in debt payments is lower, at 36%.

Peer-to-peer (P2P) lending

The marketplace has stepped in to help people make loans to each other rather than through a company. Peer-to-peer (P2P) lending allows a borrower and lender to come together via the Internet. Popular P2P lending platforms include LendingClub, Peerform, and Prosper

Which of the following factors helps determine whether a car is affordable?

The monthly loan payment. The monthly insurance cost. The monthly gas and maintenance cost.

Which of the following are indicators that a landlord is taking adequate care of property?

The property's parking lot has been repaved recently. The property is well lit. The property has high ratings posted online from tenants.

All the following help determine the amount of the loan that you can qualify for when auto shopping except:

The safety features in the car

total fixed payments-to-income ratio

This ratio, which should be less than 0.43 (or 43%), is the sum of the monthly housing payments plus all other monthly debt payments divided by total monthly income:

All the following are mainstream financial service providers except:

Title Loan Lender

Which of the following protects a lender in case another person, at a later date, makes a claim on a piece of real estate?

Title insurance.

Direct Consolidation Loans

allow students to consolidate all of their federal student loans into one easy-to-manage loan

short sale

allows the homeowner to sell the house for less than what is owed on the mortgage. This approach relieves the homeowner from paying the difference to the lender. Even though there may be tax complications with this strategy, it is often a more favorable solution than foreclosure.

primary mortgage insurance (PMI)

an insurance policy that protects the lender

Direct PLUS Loans

are available to graduate and professional students. Direct PLUS loans are also available to parents of undergraduate students to help pay for education expenses more than the capped amounts available through the other federal student loan programs. Interest on the loan is added to the loan balance, or students can pay the interest only until they're no longer attending school and repayment begins. Students don't need to show financial need to receive these loans.

lease

is a financial agreement between you and the dealership where you agree to pay a certain price for the right to drive the car for a set period of time.

lease

is a legal document that outlines the terms of the rental agreement. A lease is intended to protect both the landlord and renter (you) by clarifying what is required of both parties

Mortgage Insurance

which is an insurance policy that protects lenders from nonpayment of the loan, is required if more than 80% of the value of the home is borrowed.

Hazard Insurance

which is an insurance policy that will reimburse you if your home and belongings are destroyed or stolen

security deposit

which is money paid in advance to cover the cost of excess damage you might cause while living in the house or apartment

Requesting an advance on a paycheck from an employer

provides a low-cost loan alternative.

Housing Payment to Income Ratio

recommends that homeowners spend less than 31% of their monthly income on housing expenses. To calculate this ratio, add together all of the monthly housing payments and then divide this amount by total gross monthly income (before taxes are taken out). This ratio should be less than 0.31 or 31% (although some mortgage lenders require the mortgage payment plus homeowner's insurance and property taxes to be less than 28% of household income).

subletting

refers to allowing someone else, not originally on the lease, to live in the home and pay rent

All the following are features of renting, except that:

requires a down payment.

colatteral

something you give the lender that they can later sell if you don't repay the loan in a timely manner

Mortgage loan officer

specializes in mortgages and can help you get preapproved for a loan so that when you find the house you want, you know you can afford it.

Mainstream financial system

which include banks and credit unions. These institutions offer lower interest rates, are more heavily regulated by state and federal government agencies, offer what are considered traditional loan products, and rely heavily on each borrower's credit report and credit score when deciding whether to approve a loan

Payday Loan

which is a short-term loan designed to be repaid within a few weeks when the borrower receives a paycheck

Paul makes $4500 per month as a building maintenance engineer. He is shopping for a new apartment. Using HUD guidelines, what is the maximum amount Paul should spend on rent per month?

$1350 (30% of monthly income)

In order to make the monthly mortgage payment on a new house affordable, Kolton will need to obtain a lower mortgage interest rate. Kolton's bank has offered to reduce the rate of his mortgage from 5.10% to 4.20% if he pays one point at closing. If the amount of the mortgage is $480000, how much must Kolton pay to reduce his interest rate?

$4800 one point is equal to 1% of the total loan

Depreciation

(n.) a lessening in value; a belittling

Steps in purchasing an automobile

1. Determine your transportation needs 2.Calculate how much you can afford 3.Shop for a loan if you plan to borrow money 4. Research specific vehicle models and identify those that best meet your needs and budget 5.Obtain an estimate for auto insurance based on the specific vehicle you want to purchase 6. Locate the specific vehicle you will purchase and negotiate a purchase price

What percent of Americans own their personal residence free-and-clear, without a mortgage?

32%

The number of unbanked or underbanked households in the United States is approximately:

34 million Households

What percentage of adults living in the United States have a credit card?

75%

use assets

Assets that tend to go down in value (depreciate) ex: Cars

All of the following factors combine to help determine whether a vehicle is a value except:

Both low price and high quality.

Why do consumer advocates advise against using alternative financial services?

Because of the high-cost associated with the loans and other services.

settlement costs

Closing costs are often referred to as settlement costs because they are due when the sale takes place. Closing costs are typically several thousand dollars and usually average about 3% of the home's purchase price.

Annual Percentage Rate (APR)

Cost of borrowing money on an annual basis; takes into account the interest rate and other related fees on a loan.

When shopping for a new car, which of the following should be the first step in the buying process?

Determine your transportation needs

Friends and family can be good sources of low-cost loans, except that

Friends may not have the money to lend and family members may also be struggling financially.

Rank the following types of loans from least expensive to most expensive. I. Payday loan. II. Cash advance on a credit card. III. Pawnshop loan. IV. Subsidized student loan.

IV, II, III, I

homeowners association

In some situations, such as condominiums and houses that are part of a planned development, landscaping and exterior maintenance is handled by a homeowners' association. However, in exchange for the homeowners' association taking on these responsibilities, members of the association must pay a monthly payment for these services. Fees can range from a few dollars per month to well over $1,000 per month.

adjustable rate mortgage

Just as the name implies, the interest rate changes periodically (usually every year, but the initial years of the ARM may have a fixed interest rate). Each time the interest rate changes, the loan payment will increase or decrease accordingly.

Which of the following personal loan options would be the most appropriate for use as an emergency source of funds?

Line of Credit

Compared with repayment plans based on a borrower's income, the standard repayment plan will generally:

Minimize the amount of interest paid. Payoff the loan more quickly. Have a higher monthly payment.

application deposit

Money that covers the cost of processing the application for the rental.

Use the FHA housing payments-to-income ratio to determine whether Nadine can qualify to purchase a home. Assume that the mortgage payment is $1,200, taxes are $300, and insurance is $150 monthly. Also assume that Nadine earns $4,000 per month. Can she afford the home?

No, because the ratio is greater than the benchmark.

PITI stands for:

Principal, Interest, Tax, and Insurance.

Cash Advance

Service provided by credit card companies that allows cardholders to withdraw cash

A personal loan is a:

Small dollar loan used to pay bills or make purchases.

The first step in seeking federal student aid from a college or university is to

Submit the Free Application for Federal Student Aid form online.

All of the following are alternative financial service providers except:

Target Store card

personal line of credit

Usually, lines of credit are unsecured, which means that if Justin fails to pay back the loan, the lender can't repossess any of Justin's property. Here's how a line of credit works: 1. The bank tells the customer (borrower) how much may be borrowed in total. 2. The borrower is then given a debit card or a checkbook. 3. The borrower can then access the line of credit as needed. 4. Interest is only paid on the money borrowed.

overdraft fee

a fee for insufficient funds in the account

Renter's Insurance

a type of insurance that covers the loss of a tenant's personal property as a result of damage or theft

Direct Subsidized Loans

are federal student loans made to undergraduate students who demonstrate a financial need. If the student is enrolled in school for more than half-time, interest on these loans is paid by the federal government, making these loans the best value if you have to borrow.

FHA Loans

are insured (for the lender) by the government so that lenders are more willing to make loans to borrowers that (1) have less money available for closing costs and down payments, and (2) may also have slightly lower credit scores than are necessary to qualify for conventional mortgages. However, in exchange for the greater flexibility in qualifying for a mortgage, FHA loans have a maximum amount that can be borrowed based on the local housing market.

Direct Unsubsidized Loans

are made to undergraduate, graduate, and professional students. Interest on these loans is added to the loan balance until payments begin—which is usually 6 months after graduation—and interest continues to be charged as payments are made (standard loan). The annual amount a student can borrow under both the direct subsidized and direct unsubsidized loans is capped. Students don't need to show a financial need to receive these loans.

Loan Origination Fee

are paid to the lender for providing a loan

unsecured loan/signature loans

are sometimes called signature loans because there is no collateral involved in the lending process. As a result, an unsecured loan is considered to be riskier than a secured loan and therefore carries a higher interest rate.

Federal Direct Loans

are the primary form of student financial aid. There are four types of federal direct loans:

reletting fee

covers the cost of renting the apartment again if you leave before your lease is up

The reason automobiles should not be considered an investment is because they

depreciate in value over time.

Good Faith Estimate (GFE)

details the following information: Loan type. Loan amount. Interest rate. Expected monthly principal and interest payment. Closing costs, which include all of the associated loan and purchase fees associated with buying a house, such as appraisal fees (to pay for a written document describing the value of the property), title insurance (insurance that protects either the lender or the borrower in case someone says they have a claim on the property after you've purchased it), loan origination fees and points (discussed below), governmental taxes, and some prepaid taxes and insurance

Preapproved

for a loan simply means that the lender has verified your credit, income, and other important facts and has indicated how much you are able to borrow for the purchase of a house

Financial aid award notifications are sent

from each school indicated on the student's FAFSA form.

foreclosure

if the homeowner fails to make the monthly mortgage payments, the lender can take possession of the house and sell it to another buyer in a process known as this

Title Insurance

insurance that protects either the lender or the borrower in case someone says they have a claim on the property after you've purchased it

deposit advance

is a short-term loan that is automatically repaid when the next qualifying electronic deposit is made (such as the next paycheck). These loans compete directly with payday loan services but at a much lower cost. Here's how a deposit advance works: To qualify for a deposit-advance loan, a borrower must have a checking account and a history of having paychecks, federal benefits, or other deposits made electronically. When a loan is needed, the borrower pays the bank approximately $10 for every $100 borrowed. The borrower then has 35 days to pay back the loan. If the loan is unpaid at that time, the lending institution will remove any money from the account and likely charge an overdraft fee—a fee for insufficient funds in the account

mortgage

is a special type of loan that is secured by real property—land and all improvements on a piece of land, including a personal residence.

secured loan

is one that is backed by collateral. Think of collateral as property (such as a car or valuable item) that can be seized by the lending institution if the borrower fails to repay the loan.

guarantor

is someone, like a parent or relative, who agrees to pay your rent in case you fail to make rental payments. If your credit score is low, you don't have a credit report, or you've never rented before, it's likely that your landlord will require a guarantor. (This is just one more reason to establish an outstanding credit score at an early age.)

Housing Equity

is the difference between what a house could sell for and the amount still owed on the mortgage. Housing equity is built in three ways: 1. Making a large down payment. This minimizes the initial loan. 2. Paying down the mortgage loan. Every time you make a monthly payment, a small portion of the payment goes toward paying down the principal on the mortgage loan. 3. When housing prices in the area increase. Although housing prices generally rise over long periods of time, housing prices can increase or decrease across time based on where the home is located and general market conditions.

Equity

is the value of the asset less any debt associated with that asset. When you buy a new or used car, after making payments for 3 years you will have built up considerable equity in the vehicle and own a valuable (albeit depreciating) asset.

Personal Loan

is typically a small-dollar debt that can be used to pay bills or make purchases

All of the following are true of the FAFSA form except that:

it is rather expensive to complete and file, and should only be done as a last resort.

unbanked/underbanked

meaning that they have no or only a limited relationship with a bank or credit union.

eviction

occurs when a landlord removes a tenant (renter) from the property for breaking a clause in the lease, such as not paying rent on time. The timing of an eviction is determined by state law.

All of the following are types of federal financial aid awards, except:

on campus employment.

Alternative financial system

such as check cashers, money order providers, pawn shops, payday lenders, auto title loan lenders, and rent-to-own retailers. These types of lenders typically don't rely on an individual's credit report when making a loan decision. Instead, these firms focus on making loans that are collateralized either with an asset or access to a borrower's bank account. In this way, if a borrower makes a late payment or fails to pay, the lender can seize the borrower's assets and enforce payment through other legal means.

installment loan

the borrower receives the full amount of the loan upfront in a single lump sum.

value

the combination of the price paid and the quality of the item purchased

landlord

the person or company that owns the property you hope to rent

Loan points

they sometimes have the option of paying a large upfront fee in exchange for a lower interest rate; this fee is referred to as loan points

pet deposit

to help offset damages caused by animals living with you in the property

Appraisal Fees

to pay for a written document describing the value of the property

All the following are outlined in a lease except that:

when you can turn on your water heater.

Public Service Loan Forgiveness (PSLF) Program,

which allows any remaining student loan balance to be forgiven after the borrower makes 120 (10 years) of on-time payments while working for local, state, or federal government entities or for 501(c)3 not-for-profit organizations.

Closing Costs

which include all of the associated loan and purchase fees associated with buying a house