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Finance 3300 > Chapter 9 > Flashcards

Chapter 9 Flashcards

1
Q

Young/single people should purchase what kind of house?

A

home or condominium, for tax benefits

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2
Q

Young couples with no children should purchase a house with what in mind?

A

house for financial benefits and to build long-term financial security

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3
Q

Couples with young children should purchase a house with what in mind?

A

purchase a home to meet financial and other family needs

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4
Q

Retired persons should purchase what kind of housing?

A

housing that requires minimal maintenance

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5
Q

Couples with children no longer at home should purchase what kind of housing?

A

housing that requires minimal maintenance but meets lifestyle needs

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6
Q

Single parents should purchase what kind of housing?

A

housing that requires minimal maintenance

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7
Q

Traditional financial guidelines dictate what cap on spending for housing in relation to income?

A

spend no more than 25-33% of take-home pay on housing -OR- no more than 2.5 times your annual income

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8
Q

What is an opportunity cost when you rent a home?

A

renters lose tax advantages and equity growth

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9
Q

What is an opportunity cost when you build a home?

A

time and effort when it’s built to your personal specifications

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10
Q

What are the four steps to renting?

A

search; investigate before you sign your lease; live in rental property; end your lease

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11
Q

What are three fiscal advantages to home ownership?

A

investment from appreciation & equity build-up; tax benefits; hedge against inflation

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12
Q

What are the tax benefits of home ownership? (2)

A

deduct some closing costs; ignore up to $500,000 in CG if married jointly and living in house for 2 of past 5 years ($250,000 otherwise)

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13
Q

What are fiscal advantages to renting? (2)

A

no money for down payment; no property taxes

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14
Q

When might you be forced to rent? (2)

A

house is too expensive to buy; can’t qualify for loan

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15
Q

What are four reasons you might not qualify for a loan?

A

bad credit (<720 FICO); low income; new job (<2 years); cash shortage

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16
Q

What are five disadvantages of renting?

A

no tax benefits; limitations for remodeling; restrictions on pets or other activities; legal concerns of lease; costs

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17
Q

What are three costs associated with renting?

A

SUR - security deposit, utilities, renter’s insurance

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18
Q

Who is the lessor and the lessee?

A

lessor = owner/landlord; lessee = tenant

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19
Q

What are the five steps to buying a home?

A

determine home ownership needs; find + evaluate a property to purchase; price the property; obtain financing; close transaction

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20
Q

What are three fiscal barriers to buying a home?

A

obtaining money for down payment; obtaining mortgage financing; home values could drop

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21
Q

Give two examples of multi-unit dwellings.

A

duplexes; townnhomes

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22
Q

What is a condominium?

A

a unit in a building of units

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23
Q

(T/F) A condominium refers to a type of building structure.

A

False, rather, it is a form of home ownership

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24
Q

Complete the sentence: Own air space between

A

walls, floor and ceiling as fee simple estate

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25
Q

What are manufactured homes?

A

fully or partially assembled in a factory, then moved to the housing site

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26
Q

What are mobile homes?

A

a type of manufactured home that is energy inefficient and is often less than 1,000 sq. ft.

27
Q

When selecting a location, what should you be aware of?

A

zoning laws

28
Q

Define zoning laws.

A

public restrictions on how property can be used

29
Q

What is another name for private restrictions?

A

deed restrictions

30
Q

What is an appraisal?

A

independent estimate of value, given current market conditions

31
Q

The home price is affected by

A

whether it’s a seller’s market (high demand) or a buyer’s market (low demand)

32
Q

What is earnest money?

A

buyer deposit to show good faith

33
Q

Give two examples of contingency clauses.

A

buyer must be able to obtain financing; purchase contingent on sale of buyer’s current home

34
Q

What does PMI stand for?

A

private mortgage insurance

35
Q

When is PMI required?

A

required on conventional loan if <20% down

36
Q

What does a PMI typically cost?

A

0.50% at closing + 1/12 of 0.50% per month until loan is <= 78% of original purchase price

37
Q

What are the guidelines for affordability of housing in relation to gross income?

A

33 to 38% of gross income

38
Q

What are the three steps to the mortgage application process?

A

prequalification; finding a property (including appraisal); fee payment + interest rate to lock commitment

39
Q

What are points?

A

points are prepaid interest as a percentage of the loan amount (i.e. 1 point = 1% of loan amount)

40
Q

If a borrower satisfies FNMA’s guidelines, what happens?

A

FNMA will purchase loan from originator

41
Q

What is the conforming loan maximum?

A

$417,000

42
Q

What must a borrower do to prequalify for a loan?

A

satisfy both the front-end and back-end ratios

43
Q

What is the front end ratio?

A

PITI <= 28% of gross income

44
Q

What is the back end ratio?

A

PITI + min. debt payments <= 36% of gross income

45
Q

What is PITI?

A

sum of monthly principal, interest, taxes, and insurance

46
Q

How do we calculate PITI?

A

PITI = debt service + escrows

47
Q

In conventional fixed-rate, fixed-payment mortgages, what are the common down payments?

A

5%, 10% or 20%

48
Q

In conventional fixed-rate, fixed-payment mortgages, what are the common term lengths for fixed payments?

A

15, 20, or 30 years

49
Q

What are two government financing programs for mortgages, and how do their offerings compare to conventional mortgages?

A

Veterans Administration (VA); Federal Housing Administration (FHA); often offer lower down payment than conventional mortgages

50
Q

What are balloon mortgages?

A

fixed payments + one large payment prior to maturity

51
Q

What is the advantage of balloon mortgages?

A

passes interest rate risk to borrower, so you get a lower interest rate

52
Q

Describe the three features of adjustable rate mortgages (ARMs).

A

during the life of the loan, the interest rate varies with an index; likely has two rate caps to restrict rate changes; convertible ARMs allow owner to convert to FRM

53
Q

What are the two ARM caps?

A

periodic cap; life-of-the-loan cap

54
Q

What are buy-downs?

A

interest subsidy for home builder or real estate developer that reduces debt service for the first few years

55
Q

What is a second mortgage? (3)

A

home is collateral; equity is borrowed; interest may be tax deductible

56
Q

What are reverse mortgages? (2)

A

provides elderly (>62 years) with tax-free income based on home equity; loan repaid when owner dies or sells

57
Q

What is refinancing?

A

obtain new loan to pay off old loan

58
Q

Who usually establishes the escrow account?

A

mortgage company

59
Q

What is an escrow account?

A

cash savings account used to pay insurance premiums and property taxes

60
Q

(T/F) Escrow accounts must maintain a certain balance.

A

True

61
Q

The interest earned by an escrow account is kept by

A

the mortgage company

62
Q

(T/F) You don’t need to set up an escrow account.

A

True, but you may have to pay a waiver fee

63
Q

Deed vs. title.

A

deed transfers ownership; title is evidence of ownership

64
Q

If you’re in “for sale by owner,”

A

use a lawyer or title company

Finance 3300 (15 decks)

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