Personal Finance Chapter 5

independent used car lots

Usually offer older (4-6 years) cars and have lower overhead than franchise dealers. No industry standards, so check with the Better Business Bureau before buying.

Negative Amortization

When the principal balance on a mortgage loan increases because the monthly loan payment is lower than the amount of monthly interest being charged; some ARMs are subject to this undesirable condition.

Anchoring

a behavioral bias in which an individual tends to allow an initial estimate (of value or price) to dominate the subsequent assessment (of value or price) regardless of new information to the contrary

Foreclosure

a borrower typically cannot make scheduled mortgage payments and the lender repossesses the property in an effort to recover the loan balance owed

Contingency Clause

a clause in a real estate sales contract that makes the agreement conditional on such factors as the availability of financing, property inspections, or obtaining expert advice

Multiple Listing Service (MLS)

a comprehensive listing, updated daily, of properties for sale in a given community or metropolitan area; includes a brief description of each property with a photo and its asking price but can be accessed only by realtors who work for an MLS member

closing costs

all expenses (including mortgage points) that borrowers ordinarily pay when a mortgage loan is closed and they receive title to the purchased property

earnest money deposit

money pledged by a buyer to show good faith when making an offer to buy a home

franchise dealerships

offer the latest-model used cars, provide financing, and will negotiate on price

index rate

on an adjustable-rate mortgage, the baseline index rate that captures interest rate movements

interest rate cap

on an adjustable-rate mortgage, the limit on the amount that the interest rate can increase each adjustment period and over the life of the loan

margin

on an adjustable-rate mortgage, the percentage points a lender adds to the index rate to determine the rate of interest

adjustment period

on an adjustable-rate mortgage, the period of time between rate or payment changes

real estate short sale

sale of real estate property in which the proceeds are less than the balance owed on a loan secured by the property sold

property taxes

taxes levied by local governments on the assessed value of real estate for the purpose of funding schools, law enforcement, and other local services

fuel economy

the environmental protection agency EPA mileage rating are especially useful on new vehicles, which carry a sticker indicating the number of miles per gallon each vehicle is suspected

money factor

the financing rate on a lease; similar to the interest rate on a loan

Depreciation

the loss in the value of an asset such as an automobile that occurs over its period of ownership calculated as the difference between the price initially paid and the subsequent

Loan-to-Value Ratio

the maximum percentage of the value of a property that the lender is willing to loan

closed-end lease

the most popular form of automobile lease; often called a walk-away lease, because at the end of its term the lessee simply turns in the car (assuming the preset mileage limit has not been exceeded and the car hasn't been abused)

capitalization costs

the price of a car that is being leased

Prequalification

the process of arranging with a mortgage lender, in advance of buying a home, to obtain the amount of mortgage financing the lender deems affordable for the home buyer

Foreclosure

the process whereby lenders attempt to recover loan balances from borrowers who have quit making payments by forcing the sale of the home pledged as collateral

residual value

the remaining value of a leased car at the end of the lease term

Fixed Rate Mortgage

the traditional type of mortgage in which both the rate of interest and the monthly mortgage payment are fixed over the full term of the loan

Inflation Hedge

Common stock is an inflation hedge - we expect it to provide protection over time against inflation.

Real Estate Settlement Procedures Act (RESPA)

A federal law requiring mortgage lenders to give potential borrowers a government publication describing the closing process and providing clear, advance disclosure of all closing costs to home buyers.

VA loan guarantee

A guarantee offered by the U.S. Veterans Administration to lenders who make qualified mortgage loans to eligible veterans of the U.S. armed forces and their unmarried surviving spouses.

rental contract lease agreement

A legal instrument that protects both the lessor and the lessee from an adverse action by the other party; it specifies the amount of the monthly payment, the payment due date, penalties for late payment, the length of the lease agreement, deposit requirements, fair wear and tear definitions and provisions, the distribution of expenses, renewal options and early termination penalties, and any restrictions on children, pets, subleasing or using the facilities.

biweekly mortgage

A loan on which payments equal to half the regular monthly payment are made every two weeks.

mortgage loan

A loan secured by the property: If the borrower defaults, the lender has the legal right to liquidate the property to recover the funds it is owed.

Shared Appreciation Mortgage

A loan that allows a lender or other party to share in the appreciated value when the home is sold.

piti

Acronym that refers to a mortgage payment including stipulated portions of principal, interest, property taxes, and homeowner's insurance.

two-step ARM

An adjustable-rate mortgage with just two interest rates: one for the first five to seven years of the loan, and a higher one for the remaining term of the loan.

open-end (finance) lease

An automobile lease under which the estimated residual value of the car is used to determine lease payments; if the car is actually worth less than this value at the end of the lease, the lessee must pay the difference.

Private Mortgage Insurance (PMI)

An insurance policy that protects the mortgage lender from loss in the event the borrower defaults on the loan; typically required by lenders when the down payment is less than 20 percent.

superstores

AutoNation, CarMax, and similar dealers offer no-haggle pricing and a large selection. They certify their cars and may offer a short term warranty

mortgage points

Fees (one point equals 1 percent of the amount borrowed) charged by lenders at the time they grant a mortgage loan; they are related to the lender's supply of loanable funds and the demand for mortgages.

Safety features

Government regulations ensure that these features are likely to be similar in new cars, but older used cars may not have some features such as side impact airbags

payment cap

On an adjustable-rate mortgage, the limit on the monthly payment increase that may result from a rate adjustment.

rent ratio

The ratio of the average house price to the average annual rent, which provides insight into the relative attractiveness of buying a house versus renting in a given area of potential interest.

title check

The research of legal documents and courthouse records to verify that the seller conveying title actually has the legal interest he or she claims and that the title is free of all liens and encumbrances.

Mortgage Broker

a firm that solicits borrowers, originates primarily conventional loans, and places them with mortgage lenders; the broker merely takes loan applications and then finds lenders willing to grant the mortgage loans under the desired terms

mortgage banker

a firm that solicits borrowers, originates primarily government-insured and government-guaranteed loans, and places them with mortgage lenders; often uses its own money to initially fund mortgages it later resells

condominium (condo)

a form of direct ownership of an individual unit in a multiunit project in which lobbies, swimming pools, and other common areas and facilities are jointly owned by all property owners in the project

conventional mortgage

a mortgage offered by a lender who assumes all the risk of loss; typically requires a down payment of at least 20 percent of the value of the mortgaged property

adjustable-rate mortgage

a mortgage on which the rate of interest and therefore the size of the monthly payments is adjusted based on market interest rate

interest-only mortgage

a mortgage that requires the borrower to pay only interest; typically used to finance the purchase of more expensive properties

Graduated Payment Mortgage

a mortgage that starts with unusually low payments that rise over several years to a fixed payment

Ballon Payment Mortgage

a mortgage where the monthly payments are relatively low, but one large payment is required after a specified period to pay off the mortgage loan

down payment

a portion of the full purchase price provided by the purchaser when a house or other majors asset is purchased often called equity

purchase options

a price specified in a lease at which the lessee can buy the car at the end of the lease term

FHA mortgage insurance

a program under which the Federal Housing Administration (FHA) offers lenders mortgage insurance on loans having a high loan-to-value ratio; its intent is to encourage loans to home buyers who have very little money available for a down payment and closing costs

convertible ARM

an adjustable-rate mortgage loan that allows borrowers to convert from an adjustable-rate to a fixed-rate loan, usually at any time between the 13th and the 60th month

sales contract

an agreement to purchase an automobile that states the offering price and all conditions of the offer; when signed by the buyer and seller, the contract legally binds them to its terms

cooperative apartment (co-op)

an apartment in a building in which each tenant owns a share of the nonprofit corporation that owns the building

lease

an arrangement in which the lessee receives the use of a car (or other asset) in exchange for making monthly lease payments over a specified period

tax shelter

an investment that provides immediate tax benefits and a reasonable expectation of a future financial return

Buydown

financing made available by a builder or seller to a potential new-home buyer at well below market interest rates, often only for a short period

Growing Equity Mortgage

fixed-rate mortgage with payments that increase over a specific period. Extra funds are applied to the principal so that the loan is paid off more quickly

private individuals

generally cost less because there's no dealer overhead; may have maintenance records; be sure seller has title to car

Homeowners Insurance

insurance that is required by mortgage lenders and covers the replacement value of a home and its contents