Borrowing: loans, mortgages, LOC, credit cards

Question 1

Simple Interest vs. Compound interest

Answer 1

Simple- calculated on the principal or on the outstanding balance of the loan

Compound- calculated on the principal amount plus all the accumulated interest

Question 2

Secured Loan

Answer 2

you can back your debt with some sort of collateral that has value
Ex. HELOC

Question 3

Revolving loan

Answer 3

A line of credit- can borrow, pay it back, and borrow again

Question 4

Unsecured loan

Answer 4

interest rate is higher because the bank or CC assumes more risk

Question 5

Payment structure on smaller vs. larger loans

Answer 5

Smaller personal loans- payment goes towards the principal, less towards interest

Mortgages- initial payment goes towards the interest (about 50% of term), then you will start paying off the principal

Question 6

Loan vs. LOC payments

Answer 6

Loans are often paid same each month

LOC payments are usually changing each month based on prime rate

Question 7

APR

Answer 7

Annual percentage rate

• the effective rate; includes interest rate and all other fees
• must be shown by credit card companies and loan issuers by law

Question 8

LOC

Answer 8

Line of Credit

• tied to prime rate (prime rate varies for each bank)
• you are charged interest as soon as you begin spending money until it is paid back in full. Includes minimum payment fee on balance owing

Question 9

Mortgage

Answer 9

A type of loan secured with real estate or personal property.

Question 10

Down payments on mortgage

Answer 10

down payments depend on the total purchase price of the home

Need to pay 20% down, or will need mortgage loan insurance.

Question 11

Fixed or variable rate mortgage

Answer 11

Variable- can get low interest rate when rates are low (economy poor) but when these rates change with economy, then mortgage rate will increase.
Often cheaper because less risk for banks

Fixed- interest rate is set with what the rate is at the time.

Question 12

Second mortgages

Answer 12

another mortgage on the same property. Only possible once you have equity in the property (paid off some of the mortgage)

Question 13

HELOC

Answer 13

A type of second mortgage secured against your home. But there is no end date so you can make payments based on the monthly payments, while also taking money out as long as you don’t go over the maximum.

Question 14

Using HELOC to pay credit cards

Answer 14

Good way to pay off credit cards because credit cards have a higher interest than HELOCs do.

Question 15

Closed mortgage

Answer 15

Cannot be prepaid, renegotiated or refinanced before maturity, except according to its terms. Often the least expensive mortgages.

Question 16

Open mortgages

Answer 16

can be prepaid at any time, without requiring the payment of additional fees.

Banks will charge more for these because they are more risky for the bank, less stability

Question 17

Fixed-rate mortgage

Answer 17

Rate of interest is fixed for a specific period of time (the term)

Question 18

Variable rate mortgage

Answer 18

interest rate for mortgage is not fixed. the rate will change with prime rate.
However, payment will stay the same so you will build up more interest and it will take you longer to pay off

Question 19

adjustable rate mortgage

Answer 19

payment floats with interest (never fixed). So both the payment and the interest rate are changing

Question 20

Amortization period

Answer 20

the time over which all regular payments would pay off the mortgage

Usually the 25 year mark of a new mortgage

Question 21

Term

Answer 21

the length of the current mortgage agreement.

Ex. mortgage over 25 years, but can have 5 year term set, then set new term until total 25yrs

Question 22

Posted vs. Best Rates

Answer 22

Posted- the mortgage rates that the banks post for you to compare different rates

best- the lowest rate. the lower rate that the banks can offer through negotiations. Mortgage brokers are often able to find the best rates because they can compare with many banks and unions and negotiate for you.

Question 23

Stress test

Answer 23

Test used to qualify for a mortgage.

Banks calculate your ability to pay using whatever is greater (5.25% OR current rate +2%)

Question 24

How much mortgage you can afford?

Answer 24

1. Monthly housing cost (needs to be less than 32% monthly household income)
2. Total monthly debt load (total debt should be less than 40% gross monthly income)

Question 25

Canadian Mortgage and Housing Corporation (CMHC)

Answer 25

• down payment of less than 20%, need mortgage loan insurance
• allows you to get a mortgage for up to 95% of the purchase price of home
• ensures you get reasonable interest rate
• stabilizes economy by making sure there is a way to fund mortgages when economic slumps occur

Question 26

Debt vs. deficit

Answer 26

Debt- all the money that is owed
Deficit- how much money was overspent… leads to debt

Question 27

Paying off credit card

Answer 27

Buy something in one period. Have one month plus 21 day period to pay it all off. Once this period is over, will start gaining interest. Anything else bought after the very first thing will also be acruing interest.

Pay in full!