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CFP - Tracie > 511 - Module 3 > Flashcards

511 - Module 3 Flashcards

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1
Q

Adjustable-Rate Mortgages (ARMs)

A

Interest rate and payment may change periodically, usu. tied to a specific index such as LIBOR. May have an interest cap. May also result in reverse amortization.

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2
Q

Back-end ratio

A

aka Total debt ratio

total monthly debt
_____________________
monthly gross income

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3
Q

Balloon mortgage

A

Payments are made for a short period of time, then the loan is paid off in a lump sum.

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4
Q

Brokerage company

A

An intermediary that facilitates transactions involving sales of investments or real estate.

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5
Q

Cash flow statement

A

Summarizes the inflow and outflow of money over a specific period of time, and reveals patterns of spending, saving and investing.

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6
Q

Closed-end lease

A

The lessee agrees to pay a stated monthly fee for the use of the asset for a specified time period.

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7
Q

Consumer debt ratio

A

Monthly consumer debt payments
____________________________________
Monthly net income

Should not exceed 20%

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8
Q

Conventional mortgage loans

A

Made by commercial lenders in the private sector. aka Conforming Loans because they conform to Fannie Mae and Freddie Mac dollar limit requirements.

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9
Q

Credit Union

A

Similar to a bank, but not owned by a corporation. Clients are members, and receive dividends instead of shareholders. Regulated by the National Credit Union Share Insurance Fund (NCUSIF), and insured up to $250,000 per qualifying account.

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10
Q

Fair market value

A

The price at which a willing and knowledgeable buyer would purchase an asset from a willing and knowledgeable seller.

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11
Q

Federal Deposit Insurance Corporation (FDIC)

A

Insures accounts up to $250,000 at a single institution in different categories:
* Single ownership
* Joint ownership
* Retirement (IRA) ownership
* Revocable trust ownership (per beneficiary)

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12
Q

Federal Housing Administration (FHA) loans

A

Federal government guarantees repayment to the lender. Very low initial down payment, and sometimes lower interest rates.

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13
Q

Fixed outflows

A

Predictable recurring expenses, with little client control.

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14
Q

Fixed-rate loan

A

Interest rate remains constant until loan is paid in full.

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15
Q

Fixed-rate mortgage

A

Level interest rate for the term of the loan, and a fixed payment amortization schedule.

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16
Q

Front-end ratio

A

aka. Housing cost ratio
Monthly housing costs
________________________
Monthly gross income

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17
Q

Graduated payment mortgage

A

Long-term, fixed interest rate loan, with smaller payments to start, then adjust to higher amount later.

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18
Q

Home Equity Line of Credit (HELOC)

A

Set amount of credit based on equity in a property. Borrowers make payments only on the amount they borrow, not the full line of credit.

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19
Q

Home equity loan

A

Second mortgage that uses equity in the property to secure a lump sum of money for home improvements, etc.

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20
Q

Housing cost ratio

A

Monthly housing costs (PITI)
_______________________
Monthly gross income

aka. Front-end ratio
Should not exceed 28%

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21
Q

Inflows

A

Gross salary and wages, interest and dividends income, rental income, tax refunds and other amounts received.

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22
Q

Installment loan

A

Lump sum is borrowed and repaid in small periodic amounts until the debt is satisfied.

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23
Q

Negative amortization

A

When interest rates exceed payment amounts, making the overall debt higher.

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24
Q

Interest-only mortgage

A

Homeowner keeps payment at a minimum, in hopes that fair market value will increase and principal will be paid off by the eventual sale.

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25
Q

Jumbo loans

A

Loans above the Fannie Mae and Freddie Mac dollar limit requirements.

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26
Q

Long-term liabilities

A

Those due more than one year from the statement date.

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27
Q

Long-term loan

A

Repayment of one year or more.

28
Q

Net worth statement

A

aka Statement of Financial Position
A profile of what is owned (assets), what is owed (liabilities), and the client’s net worth on a specific date.

29
Q

Nonconforming loans

A

Loans above Fannie Mae and Freddie Mac dollar limit requirements (Jumbo loans), or loans to those with damaged credit.
aka Subprime loans

30
Q

Non-mortgage debt-to-income ratio

A

aka. Consumer debt ratio
Monthly consumer debt payments
___________________________________
Monthly net income

31
Q

Open-end lease

A

aka Finance or Equity lease
Lower monthly payment. At the end of the lease, lessee may owe additional money if asset is a lower value than was projected in the lease agreement.

32
Q

Outflows

A

Savings and investments
Fixed outflows - predictable and recurring, client has little control, such as note payments, mortgage payments and insurance premiums.
Variable outflows - client has some degree of control. Expenditures for food, transportation, clothes and entertainment.

33
Q

Personal balance sheet

A

aka. Statement of Financial Position

34
Q

Personal use assets

A

Includes the client’s residence, autos, boats, recreational real estate and personal effects such as furnishings, clothes, jewelry and similar assets.

35
Q

Prime loans

A

Conforming loans, typically with 20% or more down payment

36
Q

Private Mortgage Insurance (PMI)

A

An FHA policy that protects lenders against losses that result from defaults on home mortgages

37
Q

Pro forma cash flow statement

A

Projects anticipated inflows and outflows for a future period after implementing recommendations.

38
Q

Reverse amortization

A

When payments aren’t sufficient to pay the interest due, resulting in the amount of the loan increasing.

39
Q

Reverse mortgage

A

Lender pays income to senior citizen (age 62+), who incurs increasing debt until they no longer occupy the home. Then the debt is repaid, usually by selling the home. Non-recourse loan, which means homeowner’s heirs will never have to pay back more than the value of the home.

40
Q

Savings and loan association

A

aka Thrift Institution
Accept savings and provide home loans. Does not provide demand accounts (checking), but can offer interest-bearing Negotiable Order of Withdrawal (NOW) accounts. Regulated by the OCC (Office of the Comptroller of the Currency).

41
Q

Secured loan

A

Creditor retains a security interest in property as collateral.

42
Q

Short-term loan

A

Loans of less than 12 months.

43
Q

Single-payment (bridge) loan

A

Short-term loan that is repaid with interest in one lump sum at the end of the term.

44
Q

Statement of cash flow

A

Summarizes inflow and outflow of cash to reveal a client’s cash receipts and disbursements over a specific period of time (monthly, quarterly, annually).

45
Q

Statement of financial position

A

aka Net Worth Statement, or Personal Balance Sheet, is a profile of what is owned (assets), what is owed (liabilities), and the cliet’s net worth on a specific date.

46
Q

Subprime loans

A

Mortgages to borrowers of lower credit quality, or that have a lower priority claim to the collateral in event of default.

47
Q

Thrift institution

A

Savings and Loan Association

48
Q

Total debt ratio

A

Total monthly debt
_____________________
Monthly gross income

aka. Back-end ratio
Should not exceed 36%

49
Q

Trust company

A

Independent partnership, bank or law firm which specializes in managing estates and serving as the trustee for various types of trusts.

50
Q

Unsecured (signature) loan

A

Loan given on a promise of pay back, without the attachment of collateral.

51
Q

Variable (adjustable) rate loan

A

Interest rate adjusts at various intervals throughout the loan term. Riskier, but the interest rate is typically lower than those of fixed-rate loans.

52
Q

Variable outflows

A

Expenses that the client has some measure of control over, such as food, transportation, clothes and entertainment.

53
Q

Veterans Administration (VA) loans

A

Same federal guarantee of repayment as FHA loans. Mortgage only available to service members, veterans and eligible family members. Little to no down payment required, no PMI required, however there is a funding fee at the start of .5% to 3.6% (most pay 2.3%).

54
Q

Assets

A
  • Cash and cash equivalents
  • Invested assets
  • Personal use assets
  • Difficult to categorize (ie. life insurance, residence)
55
Q

Common abbreviations for ownership

A

S1 - Individual ownership of the first spouse
S2 - Individual ownership of the other spouse
JT - Property that is held jointly with rights of survivorship, usually a spouse
CP - Community property of the spouses.
TIC - Tenants in common
TE - Tenants by the entirety

56
Q

Assets to liabilities ratio

A

Current assets
________________________
Current (short-term) liabilities

aka. Current ratio
Higher is preferable. Greater than 1.0 means client can pay off existing short-term liabilities with liquid assets.

57
Q

Assets to net worth ratio

A

Net investment assets
________________________
Net worth

Should be 50%, or higher as retirement approaches. Younger clients may have 20%, since their portfolio is newer. 18% means client is not progressing in capital accumulation.

58
Q

Secured loan

A

The creditor maintains a security interest in property which serves as collateral for the debt.

59
Q

Unsecured (signature) loan

A

Client promises to repay the debt. Lenders can take legal action for default, but usually settle for less than the full amount, which negatively affects the client’s credit score.

60
Q

Fixed-rate loan

A

Interest rate remains constant until paid in full. Initial interest rates may be higher than variable-rate loans, but interest rates won’t increase considerably during the term of the loan.

61
Q

Variable (Adjustable) rate loan

A

Interest rate adjusts at various intervals. Riskier, but initial interest rate is typically lower than fixed-rate loans.

62
Q

Short-term loan

A

Due within one year of a specified date.

63
Q

Long-term loan

A

Due more than a year from a specified date.

64
Q

Installment loan

A

Client borrows a single amount of money and repays the balance with interest at stated intervals. Most loans are installment loans.

65
Q

Single payment (Bridge) loan

A

Short-term, temporary financing that is repaid with interest in one lump sum at the end of the term. Provides funds for a period between 2 transactions (like the purchase of one house and the sale of another).

CFP - Tracie (11 decks)

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