Chapter 9 Flashcards by Bhargav Arimilli

Young/single people should purchase what kind of house?

home or condominium, for tax benefits

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

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

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

purchase a home to meet financial and other family needs

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Retired persons should purchase what kind of housing?

housing that requires minimal maintenance

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

housing that requires minimal maintenance but meets lifestyle needs

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Single parents should purchase what kind of housing?

housing that requires minimal maintenance

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

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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What is an opportunity cost when you rent a home?

renters lose tax advantages and equity growth

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What is an opportunity cost when you build a home?

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

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What are the four steps to renting?

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

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What are three fiscal advantages to home ownership?

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

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

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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What are fiscal advantages to renting? (2)

no money for down payment; no property taxes

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When might you be forced to rent? (2)

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

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

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

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What are five disadvantages of renting?

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

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What are three costs associated with renting?

SUR - security deposit, utilities, renter’s insurance

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Who is the lessor and the lessee?

lessor = owner/landlord; lessee = tenant

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What are the five steps to buying a home?

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

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What are three fiscal barriers to buying a home?

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

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Give two examples of multi-unit dwellings.

duplexes; townnhomes

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What is a condominium?

a unit in a building of units

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

False, rather, it is a form of home ownership

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Complete the sentence: Own air space between

walls, floor and ceiling as fee simple estate

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What are manufactured homes?

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

What are mobile homes?

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

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

zoning laws

Define zoning laws.

public restrictions on how property can be used

What is another name for private restrictions?

deed restrictions

What is an appraisal?

independent estimate of value, given current market conditions

The home price is affected by

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

What is earnest money?

buyer deposit to show good faith

Give two examples of contingency clauses.

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

What does PMI stand for?

private mortgage insurance

When is PMI required?

required on conventional loan if <20% down

What does a PMI typically cost?

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

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

33 to 38% of gross income

What are the three steps to the mortgage application process?

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

What are points?

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

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

FNMA will purchase loan from originator

What is the conforming loan maximum?

$417,000

What must a borrower do to prequalify for a loan?

satisfy both the front-end and back-end ratios

What is the front end ratio?

PITI <= 28% of gross income

What is the back end ratio?

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

What is PITI?

sum of monthly principal, interest, taxes, and insurance

How do we calculate PITI?

PITI = debt service + escrows

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

5%, 10% or 20%

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

15, 20, or 30 years

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

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

What are balloon mortgages?

fixed payments + one large payment prior to maturity

What is the advantage of balloon mortgages?

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

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

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

What are the two ARM caps?

periodic cap; life-of-the-loan cap

What are buy-downs?

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

What is a second mortgage? (3)

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

What are reverse mortgages? (2)

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

What is refinancing?

obtain new loan to pay off old loan

Who usually establishes the escrow account?

mortgage company

What is an escrow account?

cash savings account used to pay insurance premiums and property taxes

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

True

The interest earned by an escrow account is kept by

the mortgage company

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

True, but you may have to pay a waiver fee

Deed vs. title.

deed transfers ownership; title is evidence of ownership

If you're in "for sale by owner,"

use a lawyer or title company