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CFP Course 101 (Unit 4)
Terms in this set (24)
Adjustable rate mortgages (ARMs)
Mortgage loan where the interest rate may change on a monthly or annual basis according to a specified benchmark (e.g., the 10-year Treasury note).
Many of these loans have a cap that limits the amount by which the interest rate and, accordingly, the monthly payment can change.
These loans that do not have a cap can allow for negative amortization to occur. When this happens, the mortgage balance may become greater than the value of the home.
A tool that monitors income, expenses, and spending patterns. This report is a realistic estimate of income and expenditures, as well as a control document for future cash flows.
Conventional fixed-rate mortgage
Mortgage loan that has a level interest rate for the term of the loan (the shorter the loan term, the higher the monthly payment) and a fixed payment amortization schedule.
Consumer debt ratio
Ratio that compares monthly consumer debt payments to monthly net income (gross income less all income taxes and FICA). This type of debt refers to debt other than mortgage indebtedness and most often includes debt incurred to service automobile purchases and credit card purchases.
A generally accepted rule in personal financial planning is that this ratio should not exceed 20%
This ratio compares current assets to current liabilities. There is no accepted standard for this ratio. However, the higher the ratio the better, and a ratio greater than 1.0 indicates that the client can pay off existing, short-term liabilities with readily available, liquid assets such as cash.
A recurring or nonrecurring expense for an item or service that is either nonessential or more expensive than necessary. Examples include vacations, club dues, entertainment, and gifts.
General rule of thumb, an amount equal to three to six months of fixed and variable monthly expenses is considered adequate for this type of savings goal.
Federal Housing Administration (FHA) mortgage loans
These types of mortgage loans appeal to buyers who may not meet the underwriting requirements for a conventional home loan (15- or 30-year fixed mortgage of ARM). A primary attribute of this type of loan is a very low initial down payment and, sometimes, a lower interest rate, given the federal government's guarantee of repayment.
A loan with an interest rate that remains constant until paid in full. Although initial interest rates are higher than those of variable (adjustable) rate loans, these types of loans offer more security because the underlying interest rates will not increase considerably during the term of the loan.
Home equity loans and lines of credit
These types of loans give homeowners access to the equity in their homes for home improvements or other expenditures.
This type of debt may be used for any purpose without affecting the interest deductibility for income tax purposes. However, for interest deduction purposes, qualifying debt for which interest may be deducted is the lesser of (1) $100,000 married filing jointly or single filer, ($50,000 if the taxpayer files married filing separately), or (2) the fair market value of the primary residence reduced by the amount of current acquisition indebtedness.
Housing cost ratio
This ratio, calculated as a percentage of a client's gross income, takes into account the following costs: rent or an individual's monthly mortgage payment, including principal and interest payments on the mortgage, property taxes, and homeowners insurance premium (PITI). This ratio should not exceed 28%
A loan for which the client borrows a single amount of money and repays it with interest at a stated interval. Most loans are these types of loans.
A mortgage loan where the homeowner tries to keep the mortgage payment at a minimum while hoping that the fair market value of the home will increase so that the principal amount will be paid off by the sale proceeds. However, if the value of the home declines from its original purchase price, homeowners may find themselves in a cash deficit position at the time of subsequent resale. Therefore, by their very nature, these types of mortgages should only be executed by relatively risk-aggressive homeowners.
A loan due one year or more from a specified date
A policy that protects lenders against losses that result from defaults on home mortgages. FHA requirements include this primarily for borrowers making a down payment of less than 20 percent.
A recurring or nonrecurring expense that is essential for an individual to maintain his lifestyle. Examples include rent or mortgage payments, loan repayments, food, utilities, and taxes.
This is a special type of mortgage loan where the payment stream is reversed (that is, the lender pays the homeowner a stream of income secured by the considerable amount of equity in the home). The lender makes payments to the homeowner on the basis of the fair market value of the home and the age of the borrower at the time that the loan is made. This mortgage loan is available to borrowers who are 62 years or older with a residence free from indebtedness.
A loan for which the creditor maintains a security interest in property, such as personal property, which serves as collateral for the debt. If the debtor falls behind on secured debt payments, the lender can repossess the property that secures the debt.
A loan that is due in less than one year
Single payment (bridge) loan
A loan which provides short-term, temporary financing which is repaid with interest in one lump sum at the end of the term. These types of loans are often used to provide funds for a period of time between two transactions, for example, the purchase of one house and the sale of another.
Total debt ratio
This ratio, calculated as a percentage of a client's gross income, includes both housing costs and consumer debt payments. It should not exceed 36%
Unsecured (signature) loan
A loan for which the client merely promises to repay the debt in exchange for the borrowed funds. In the event of default, lenders can take legal action but most often will attempt to settle the debt for less than the amount owed. However, this will negatively affect an individual's credit rating.
Variable (adjustable) rate loan
The interest rate on this type of loan adjusts at various intervals throughout loan term; thus, they are riskier. The initial interest rate on these types of loans is typically lower than those of fixed rate loans.
Veterans Administration (VA) mortgages
This mortgage loan features the same federal guarantee of repayment as that for FHA mortgages, but it is for service members and veterans of the U.S. armed services, their spouses, and other eligible beneficiaries. An even more favorable attribute of this loan is that, in certain cases, no initial down payment is required; in other words, the entire purchase price can be borrowed. In addition, no mortgage insurance is required.
THIS SET IS OFTEN IN FOLDERS WITH...
CFP Course 101 (Unit 1)
CFP Course 101 (Unit 2)
CFP Course 101 (Unit 3)
CFP Course 101 (Unit 5)
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