Borrowing: loans, mortgages, LOC, credit cards Flashcards
Simple Interest vs. Compound interest
Simple- calculated on the principal or on the outstanding balance of the loan
Compound- calculated on the principal amount plus all the accumulated interest
Secured Loan
you can back your debt with some sort of collateral that has value
Ex. HELOC
Revolving loan
A line of credit- can borrow, pay it back, and borrow again
Unsecured loan
interest rate is higher because the bank or CC assumes more risk
Payment structure on smaller vs. larger loans
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
Loan vs. LOC payments
Loans are often paid same each month
LOC payments are usually changing each month based on prime rate
APR
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
LOC
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
Mortgage
A type of loan secured with real estate or personal property.
Down payments on mortgage
down payments depend on the total purchase price of the home
Need to pay 20% down, or will need mortgage loan insurance.
Fixed or variable rate mortgage
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.
Second mortgages
another mortgage on the same property. Only possible once you have equity in the property (paid off some of the mortgage)
HELOC
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.
Using HELOC to pay credit cards
Good way to pay off credit cards because credit cards have a higher interest than HELOCs do.
Closed mortgage
Cannot be prepaid, renegotiated or refinanced before maturity, except according to its terms. Often the least expensive mortgages.
Open mortgages
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
Fixed-rate mortgage
Rate of interest is fixed for a specific period of time (the term)
Variable rate mortgage
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
adjustable rate mortgage
payment floats with interest (never fixed). So both the payment and the interest rate are changing
Amortization period
the time over which all regular payments would pay off the mortgage
Usually the 25 year mark of a new mortgage
Term
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
Posted vs. Best Rates
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.
Stress test
Test used to qualify for a mortgage.
Banks calculate your ability to pay using whatever is greater (5.25% OR current rate +2%)
How much mortgage you can afford?
- Monthly housing cost (needs to be less than 32% monthly household income)
- Total monthly debt load (total debt should be less than 40% gross monthly income)
Canadian Mortgage and Housing Corporation (CMHC)
- 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
Debt vs. deficit
Debt- all the money that is owed
Deficit- how much money was overspent… leads to debt
Paying off credit card
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!
