Personal Finance Chapter 7

Joe Smith earns $72,000 per year. His bank uses a rule that PITI must be equal to or less than one third of gross monthly income. If his home owner's insurance is $100 per month, roughly how much maximum monthly payment can Joe afford including taxes over and above the $100 for insurance?

$1,900

The annual rental payments for an apartment are $16,000 plus renter's insurance of $300 and the lost interest on the security deposit of $100. A comparable home mortgage would cost about $22,000 per year. How much will the rental option cost?

$16,400

The benefits of a conventional 15-year or 20-year mortgage usually include:

-a quicker pay-off of the loan than a 30-year amortization -a lower rate than a 30-year mortgage -a faster equity build-up than a 30-year mortgage

Which of the following are the most important three considerations when evaluating a local school system?

-achievement level of students -program variety -school funding

Common sources of down payment funds to purchase a home include:

-assistance from relatives -personal savings -the sale of investments

Exterior construction factors include

-conditions of roof and gutters -material quality

The financial variables to consider when determining an appropriate amount for your housing expenses include which of the following?

-home cost -income -take-home pay

The benefits of a FHA/VA fixed-rate mortgage include

-low down payment -may be assumable with no prepayment penalties

Generally speaking the ________ the credit score the _________ the mortgage rate

-lower, higher -higher, lower

Which of the following are advantages of buying housing?

-many remodeling or customization possibilities -significant tax benefits

Which of the following can affect mortgage affordability?

-mortgage rates -your down payment -the length of the loan -the amount of income you earn

Which of the following are disadvantages associated with renting?

-no federal tax benefits -restrictions on pets (no pets) and certain activities -limitations on remodeling

When thinking of buying your first home it is important to

-realize you may not get everything you want in the first house -consider a handy-man's special at a lower price

Which of the following home improvements are the three most desirable (i.e., they will have the greatest positive impact on the asking price)?

-remodeled bathroom -remodeled kitchen -new energy-efficient features

What are some of the living expenses (other than the rent payment) that you would incur if you were to rent a unit?

-telephone -heat -electricity

When seeking a real estate agent, it is important to consider the agent's

-willingness to market your property -knowledge of the community

Which of the following are the common terms (years) of home mortgages?

10,15,20,30

An important security measure to take when selling your own home is to show the home when _______ or more adults are at home

2

Private mortgage insurance (PMI) is required when the down payment is less than

20%

The Homeowner Protection Act requires that a PMI policy be terminated when the equity reaches ___________ of the property value at the time the mortgage was executed

22%

Which of the following is NOT included among closing or settlement costs? One of these is incurred at the beginning of the process and not at the closing

Credit report

Who is most likely to benefit from a reverse mortgage?

Elderly home owners who can take the funds in the form of a tax-free loan to live on and pay back the loan when the home is sold

Each year about 30% of home owners sell their own homes without the help of agents

False

Home equity loan interest is only tax deductible as long as the proceeds are spent on education with the risk being that a default on the equity loan could mean foreclosure

False

When renting, it is not recommended that one should get insurance coverage on personal property

False

After you vacate a rental unit, your security deposit should be refunded within a reasonable time

True

Buying a house is the most expensive decision that most people will ever make

True

Factors that impact the asking price for a home include recent selling prices of comparable homes in your area

True

Negotiating the purchase price for a home may involve an offer and several counteroffers

True

One drawback of an adjustable-rate mortgage (ARM) is that the monthly payment may increase in future years if interest rates increase

True

One of the reasons why renting offers fewer financial benefits than home ownership is that rent is not tax deductible while the interest on mortgage payments is

True

The drawback of an ARM is that monthly payments may be higher in the future

True

The importance of preparing your home for sale is that it can make for a fast and financially favorable sale

True

The services that a real estate agent can provide include suggesting a selling price, making potential buyers and other agents aware of your home, and conducting showings of your home

True

Which of the following statements is NOT true?

a point equals 5% on the loan amount

The common areas of condominiums are not owned by the condo owner but by the condominium _________

association

Factors such as the material quality and condition of the building, the condition of the foundation, roof and gutters, and the type of chimney are part of the:

exterior construction

Factors such as the appearance of the neighborhood, the quality of landscaping, the condition of the driveway, and the outdoor lighting are part of the:

exterior facilities

The main benefit of a conventional 30-year mortgage is

fixed payments

The benefits of an adjustable rate mortgage include all of the following EXCEPT

fixed rates on loans

Potential home owners without children should evaluate school systems of the municipalities where they might live because

good schools translate to rising property values

The one drawback of a conventional 15-year or 20-year mortgage when compared to a 30-year mortgage is

higher monthly payments

You can sell your own home but you must be prepared to

invest your time and effort

One of the most important factors when selecting a home (after determining what you can afford to pay) is the

location of the house

The only way that interest only mortgage benefits the borrower is by

lower payments

One of the most important services that real estate agents provide is

marketing your house on various websites

An adjustable rate mortgage usually has a rate cap and a __________ cap

payment

Tenants are often subjected to restrictions regarding __________, and remodeling

pets

It is a good idea for home buyers to go first to a mortgage company and __________

pre-qualify

A _________ deposit is usually one month's rent that is held by the landlord to cover the cost of any damages to the rented property

security

Previously owned houses, new houses and custom-built houses are often referred to as

single-family dwellings

The one drawback of a FHA/VA fixed-rate mortgage is

slow processing time

Which of the following is NOT true?

the government provides mortgage money on VA and FHA loans

Which of the following best describes the rights of residents of cooperative housing?

the right to occupy the unit for as long as stock is owned

Which of the following best describes the role of a home inspector?

to review the interior and exterior construction, facilities, and design of a potential home purchase

When it comes to the size of manufactured homes, which one of the following is true?

typically these homes are smaller than 1,000 square feet

A drawback of 30 year conventional mortgage is

you will pay a relatively large amount in interest expense over 30 years

Which of the following is NOT true about adjustable-rate mortgages?

your payments are fixed over the life of the loan

According to the text, interior construction factors include the following

-condition of stairways -condition of the water heater -condition of the heating unit

Every buying decision is a statement about your lifestyle

True

The annual rental for an apartment is $16,000 with renter's insurance of $300 and an opportunity cost on the security deposit of $100. A home would carry annual mortgage payments of $16,100, property taxes of $3,000, and home owner's insurance of $1,000. The estimated annual cost of repairs and maintenance for the home is $1,500 with an opportunity cost for the down payment and closing costs of $750. You estimate that the growth in equity will be $1,500 a year and the home will appreciate in value by about $2,000 per year. Because the interest and the property insurance are tax deductible, $5,400 of tax savings should be realized each year. How much will it cost to own the house?

$13,450

Interior construction can include all of the following

-ease and operation of windows -condition of plumbing fixtures

Homeowners when selling their own homes should still obtain information regarding availability of financing because

homeowners can help potential buyers know if sale is possible

Although the interest only mortgage has lower interest payments, it does not allow the borrower to

-decrease the amount that is owed -build equity unless the home increases in value

The amount of money offered for a home depends on (select all that apply)

-features of the home -recent selling prices of homes in the area -the time the home has been on the market

Which of the following are main services offered by a real estate agent?

-helping you negotiate a price for a home -recommending other advisers to help you with the process of buying or selling a home

What are some of the disadvantages of home ownership?

-higher living expenses than renting -limited mobility when compared to renting -significant financial commitment

Which of the following factors have an impact on the amount you can spend to acquire a home of your own?

-your current living expenses -your income (salary, wages, investment income, etc.) -the amount of the down payment you can make

Place the steps of the mortgage process in the sequence in which they occur

1. Complete the mortgage application and present evidence of income, etc. 2. Lender gets credit report, confirms financial aspects 3. Mortgage is approved or denied

Which of the following captures the main factor to consider when refinancing a loan at a lower rate?

The cost of refinancing versus the benefits (savings) of lower monthly payments

The tenant is protected from rental increases during the lease term unless the lease contains a(n) ________ allowing for increases

provision