Financing Strategies Flashcards by Patrick H

Maximum indebtedness on a primary residence used for computing deductible Interest

$750,000

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Reverse Mortgage can be taken how

Lump sum, fixed monthly payment for life, credit line account or combination of the three

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Reverse mortgage is secured how

Secured by the home, not by income or assets the borrower owns

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Are there decreasing loan payments on a reverse mortgage?

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A home equity LOAN has what type of interest rate?

Fixed

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Interest on a home equity loan is tax deductible when used for what?

Used for capital improvements on a primary residence

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When is home equity interest NOT tax deductible

If its used for personal expenses like paying off CC, or tuition, or a vacation

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Home Equity Disadvantages

-Lender can repossess the home and sell it
-Must be paid in full, doesnt fall under bankruptcy
-Cant borrow addtl money until its repaid in full

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When should you consider an ARM?

When rates are low or expected to drop and you plan to relocate in a few years, consider an ARM

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Personal Loan

short term unsecured loan provided by a bank or credit union

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What do banks look at to qualify you for a personal loan?

income verification or proof of ownership of other assets that equal the amount borrowed

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What is a disadvantage of personal loans?

-higher interest rates
-some require payment in as short as 2 years

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When must principal be immediately repaid on a HELOC?

if you sell the home

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When is interest on a home equity loan/heloc tax deductible? (this is important)

when its used to buy, build or improve a primary or secondary home

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Is interest on a home equity loan/heloc tax deductible if used for personal expenses?

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Major disadvantage of HELOC

puts the home at risk

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Total qualified residence loan balance (max) for married or single filers

$750k for married, $375k for married filing separately IN ORDER TO DEDUCT THE INTEREST

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HELOC

REVOLVING 🎠 credit line with set borrowing limit

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When do you take a withdrawal from a HELOC?

as needed

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HELOC rate based on what?

Fed Funds rate

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Payments on a HELOC fluctuate how?

based on the interest rate and the balance owed

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Is interest on a HELOC tax deductible?

When used to build or improve a primary or secondary home up to 750k

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Can you convert a HELOC?

yes sometimes you can convert to a fixed rate loan when the withdrawal period ends

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What is used as collateral for a margin account?

the equity in the account

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Can you deduct interest in a margin account?

Yes, up to a certain amount as an itemized deduction

How do you borrow funds to purchase securities?

in a margin account

Permanent Life Insurance

WL or UL combine insurance coverage with a savings element in the form of cash value

How does the cash value build up in LI?

tax deferred

Is cash value LI tax deferred?

yes

What happens if you don't repay a loan on cash vaue LI?

the death benefit is reduced by the amount of the loan

Advantage of credit union

may be non-profit so their rates and fees are lower

Drawback of credit union

may not have as wide variety of loan products as traditional banks

Finance companies

provide consumers with funds to buy cars and appliances at competitive rates and possibly lower fees

Payday loan companies amount/length of time

typically lower than $1000, 1-4 weeks, apr can be as high as 48%

A home equity loan is open end or closed end?

closed end

A home equity line of credit is open end or closed end?

open end - its a revolving

Typical max borrowing percentage of equity in the home?

75-80% of the equity in the home

Is heloc/loan interest tax deductible if used for a vacation home?

yes

Is a HELOC secured or unsecured?

It is secured by the home which puts the home at risk if you default

What type of bankruptcy does Home Equity debt fall under?

Chapter 7

What happens if you claim chapter 7 for a heloc?

The personal liability is waived but the bank still has a lein on the home and can foreclose if regular payments aren't made

If you take out a mortgage for 500k, how much room do you have to take out home equity to use for qualified purposes?

$250k

Is a HELOC taken for to pay off debt or student loan interest tax deductible?

Main advantages of HELOC over other type of loans?

lower costs and potential tax benefits

Where do you take the tax deduction on home equity interest?

itemized deduction on Schedule A of 1040 provided the loan does not exceed the home's market value

When did the 750k/375k interest limit go into effect?

2017

What was the max for a home equity prior to 2017 that could be deducted?

100k

If Mary has a pre 2017 mortgage for 1,080,000, and a home equity for 100k. What is the max that can be deducted?

Interest on the 1,100,000 but the remaining 80k would be outside the max level. 1 million on a mortgage 100k on home equity pre 2017

Why do home equity loans/credit have lower interest rates?

because they are secured by the home

Credit cards can be discharged fully under chapter 7 - so can HELOCS but what happens

The bank still has a lein on the home so if you don't make payments you can lose the home

2nd disadvantage of HELOC

home value drops after the loan so you owe more than the home is worth (this can happen with a mortgage as well)

Is a lower interest rate always better on a refinance?

Not always - you have to consider costs and fees might outweigh the savings on the rate

Reverse Mortgage

loan advance that make cash payments to seniors while permitting them to live in their homes the rest of their lives

How is a reverse mortgage paid back?

The principal and interest is deferred and repaid once the home is sold - typically at the owner's death

Are reverse mortgages cheap?

No. There are high costs associated

Refinancing looks to improve what 2 things

lower interest rate and/or shorter term of the loan

Purpose of refinancing

lower the monthly payments and overall costs of the loan

Since folks typically move every 7 years you should typically not refinance if the term is

over 7 years

If your original mortgage was taken out before 2017 can you grandfather it in?

Yes, but only to the 750k limit to get the deduction. Even if the new debt is above the original loan amount but below the 750k limit

How do you determine the time it takes to pay off closing costs?

You take the closing costs and divide that by the monthly savings. ex. Costs are $2500 and savings are $235.70 a month - will take 10.6 months to pay off closing costs

When would it make sense to pay closing costs and/or points?

If the homeowner is going to stay in the home a longer amount of time it makes sense to "buy" a lower interest rate

What do you need on hand in order to consider paying closing costs and/or points?

You need cash/assets to pay those costs. If you don't have that, you could take out a higher loan amount to cover costs but that would reduce the monthly savings

Not extending the term on a refinance makes sense when?

When the owner plans to stay in the house longer than the time of the term

2 times you should not consider paying points/closing costs

-If you're not going to live in the home long - if interest rates are expected to fall again

250k 30 year mortgage 6% rate what is the monthly payment

n = 360 i = .5 PV = 250k FV= 0 solving for payment PMT = 1,498.88

250k, 30 year mortgage, 6% - How to amortize for 7 years payment?

n = 360 i = .5 PV = 250k PMT = 1,498.88 CHS (SUPER IMPORTANT) HIT 84 f AMORT = 100,004.08 which means that that amount of INTEREST was paid on 84 payments TO FIND PRINCIPAL PRESS CAT EYES KEY x>

If you are 7 years into a 30 year mortgage at 6% and want to refinance with a closing cost of $5,000 - how do you find that

First you find the payment on the mortgage then n = 360 i = .5 PV = 250k PMT = $1,498.88 CHS (SUPER IMPORTANT) HIT 84 f AMORT - give you interest to 7 years HIT CAT EYES to give you Principal then hit RCL PV THEN ADD THE CLOSING COSTS this gives you the total amount you are refinancing including closing costs

Say you are 7 years into a mortgage and need to compare a 30 year refinance vs a 15 year

You first amortize the mortgage to 7 years. (F AMORT AND CAT EYES THEN RECALL PV AND ADD CLOSING COSTS) You can then determine the payments on the 30 year vs the 15 year and compare each

Say you want to determine how much time it takes to recoup closing costs on a new mortgage?

You take the ORIGINAL payment minus the new Payment (the savings) and divide that into the closing costs to give you how many months it will take to recoup

$50 Liability on a CC falls under what act

Truth in Lending

Financing Strategies Flashcards

(70 cards)