Personal Finance Exam 2

Condominiums usually require a monthly fee for various services. At $235 a month, how much would a homeowner pay over a 10-year period for living in this housing facility?

$235 x 12 x 10 = $28,200

Drew's monthly net income is $4,000. What is the maximum he should use on debt payments?

.20 x monthly income .20 x 4,000 = $800

Many locations require that renters be paid interest on their security deposits. If you have a security deposit of $1,800, how much would you expect to receive in interest per year at 3 percent?

1,800 x 0.03 = $54

What would be the maximum limit for an individual's debt-to-equity ratio, excluding the home mortgage?

1.00

If you have declared personal bankruptcy, then this fact may be reported by credit bureaus for ____________ years.

10

Experts suggest that you spend no more than ____________ percent of your net income (after-tax) on consumer credit payments.

20%

Private Mortgage Insurance is usually required if the down payment is less than _____ percent of the purchase price of the home.

20%

Louise's monthly gross income is $2,000. Her employer withholds $400 in federal, state, and local income taxes and $160 in Social Security taxes per month. Louise contributes $80 per month for her IRA. Her monthly credit payments for Visa, MasterCard, and Discover cards are $35, $30, and $20, respectively. Her monthly payment on an automobile loan is $285. (a) What is Louise's debt payments-to-income ratio? (Enter your answer as a percent rounded to 1 decimal place.)

27.2%

Which of the following methods calculates interest on the full amount of the original principal?

Add-on interest method

Which one of these is the fairest method of calculating finance charges on a credit card?

Average daily balance method

Which of the following is most likely not a valid reason for using credit?

Borrowing to pay for your expensive dinner and movie every week

Which form of bankruptcy allows a debtor with a regular income to extinguish his or her debts from future earnings or other property over a period of time?

Chapter 13

Paul Carter is applying for a loan from a bank. The bank is concerned because Paul is an airline pilot for United Airlines. The bank thinks that Paul may be laid off in the near future. Which one of the 5 Cs of credit is the bank concerned with?

Conditions

Which one of the following is a local, nonprofit organization that provides debt counseling services for families and individuals with serious financial problems?

Consumer Credit Counseling Service

Suppose that your monthly net income is $2,400. Your monthly debt payments include your student loan payment and a gas credit card. They total $360. What is your debt payments-to-income ratio?

Debt payments / Net income =$360 / $2,400 =0.15, or 15

During which phase of the home-buying process would you assess types of housing available?

Determine home ownership needs

Kate plans to rent instead of buying her housing. Which advantage of renting will she realize?

Ease of mobility

Which type of debt would not be forgiven in a straight bankruptcy?

Educational loans

Which federal credit law sets the procedure for promptly correcting billing mistakes?

Fair Credit Billing Act

Dave borrowed $600 for one year and paid $45 in interest. The bank charged him a $6 service charge. What is the finance charge on this loan?

Finance charge=Interest + Other costs =$45 + 6 =$51

Anthony Newton wants to buy a new sail boat. He is planning on making a $9,000 cash down payment, which is a large portion of the cost of what he is financing. In which way is Anthony reducing his lender's risk?

He is taking a higher stake in the asset he is purchasing.

(b) If Bobby just pays the minimum payment and carries a balance from one month to the next, which card should he choose?

He should most likely select the card with the lower interest rate.

If Bobby pays his credit card balance in full each month, which card should he choose?

He should select the card without the annual fee.

Damon convinced his aunt to lend him $10,300 to purchase a plasma digital TV. She has agreed to charge only 8 percent simple interest, and he has agreed to repay the loan at the end of one year. How much interest will he pay for the year?

I = P x R x T $10,300 X .08 X 1

Gary Simpson notices that his neighbor has a brand new Ford F150 truck parked in the driveway. Even though his current car is fine, Gary decides that he needs a new car and goes out and purchases a Tundra with a six-year loan. Which one of the following best explains Gary's spending, which can lead to overindebtedness?

Keeping up with the Joneses

A few years ago, Michael purchased a home for $200,000. Today, the home is worth $300,000. His remaining mortgage balance is $100,000. Assuming Michael can borrow up to 80 percent of the market value of his home, what is the maximum amount he can borrow?

Maximum loan amount: 0.80 × Market value =0.80 × $300,000 =$240,000 Maximum loan available: Maximum loan amount − Current loan balance =$240,000 − 100,000 =$140,000

Which mortgage would result in higher total payments? Mortgage A: $970 a month for 30 years Mortgage B: $760 a month for 5 years and $1,005 for 25 years

Mortgage A

Which of the following would increase the equity in a home at a faster rate?

Obtaining a 15-year mortgage instead of a 30-year mortgage

Paula has completed a mortgage application and provided evidence of employment, income, assets owned, and existing debt to the potential lending institution. Although Paula has not even begun the process of looking at possible homes to buy, she is eagerly awaiting news from the lender as to whether she has been approved for a mortgage. In what stage of the application process is she?

Prequalification

Which of the following serves as collateral for the mortgage?

The home you buy

The amount of mortgage a person is eligible for will be larger when:

The interest rates are lower

Which federal law, passed in 1969, requires creditors to state the cost of borrowing as a dollar amount?

Truth in Lending Law

James Monroe is a member of a nonprofit organization that owns a building. He can occupy one of its units as long as he owns stock in the organization. What type of housing is James most likely living in?

a cooperative

If your credit application is denied, you:

are entitled to know the specific reason you were denied credit.

One of the drawbacks of borrowing from parents or family members is that such loans:

can complicate family relationships.

The borrower's financial ability to meet credit obligations is called:

capacity

Mortgage loans, automobile loans, and installment loans for purchasing furniture or appliances are examples of:

closed-end credit.

Which one of the following agencies maintains data about the amount and terms of your credit and your paying habits?

credit bureau

The most commonly purchased type of credit insurance is:

credit life insurance.

The appraised value of your home is the:

estimated current value of the property.

If you receive a phone call from a debt collector:

expect follow-up written communication within five days.

The total dollar amount you pay to use credit is called the:

finance charge

The most expensive loans are available from:

finance companies

If you have a problem with your credit account, the best solution is to:

first call your creditor.

Brett has hired a professional to assess the soundness of the roof, foundation, and building materials of a potential home he is considering. The professional will also be checking other aspects of the home including the plumbing, heating, and cooling systems. Brett is paying for a:

home inspection.

The legal document involved in renting an apartment is called a:

lease

Prepaid interest charged by a mortgage lender is called:

points

If creditors give you no credit for payments made during the billing period, then this is called the:

previous balance method.

A major expense associated with home ownership would be:

real estate taxes

The best way to maintain your credit standing is to:

repay your debts on time

The purpose of a rate cap with an adjustable rate mortgage is to:

restrict the amount by which the interest rate can increase or decrease during the ARM term.

A loan based on the high equity in a home that provides the homeowner with tax-free income and which is paid back when the home is sold or the homeowner dies is called a:

reverse mortgage.

A home equity loan may also be referred to as a ____________ mortgage.

second

A cost associated with renting would be:

security deposit

Chuck Spencer wants to borrow money for six years to purchase a new car. He has been offered a seven percent fixed rate loan and also a variable rate loan that has an initial rate of five percent. By choosing the variable rate loan, Chuck is reducing the lender's risk by:

sharing the interest rate risk.

Which one of the following is a disadvantage of using credit?

temptation to overspend

If you dispute the accuracy of information in your credit file

the credit bureau must reinvestigate and modify or remove inaccurate data

An example of open-end credit is:

the use of a bank credit card to make a purchase.

If you cosign a loan:

you will be required to pay the loan in full if the borrower does not pay.