Financing Flashcards
Nominal/Annual Interest Rate (APR)
the interest rate for the year
Effective Annual Interest Rate
the annual interest rate that reflects the compounding period within the year
M
compounding periods per year
When do you use ia?
- payments are calculated on a yearly basis
2. interest compounds more frequently
c
number of interest periods per payment period
k
number of payments per year
Continuous Compounding
compounding periods approach infinity
2 Types of Loans
amortized and interest only
Amortized Loans
loan is repaid with equal periodic installments
Interest Only Loans
only interest is paid; no principal
Fees
expenses the lender charges to lend money
Finance Charges
the cost of borrowing
Periodic Interest Rate
interest rate the lender charges
Term of the Loan
amount of time to pay off the loan
Tubular Method
creating a table of regular payments, interest, and principal to find the balance
Remaining Balance Method
using formulas to determine payment, interest, and principal to find the balance at the end of period n
Mortgage
long term amortized loan for houses and properties
Conventional Mortgage
borrowing less than or equal to 80% of the appraised value of the asset
High Rate Mortgage
borrowing more than 80% of the appraised value of the asset
Collateral Mortgage
requires other assets in addition to the house/property to secure the loan
Amortization Period
number of years to repay the loan
Term
number of years at which point the interest rate will be renegotiated; principal can be payed then without penalty
Fixed Rate Mortgage
interest rate remains constant for the term
Variable Rate Mortgage
interest rate fluctuates with prime during the term
Open Mortgage
any amount of the principal can be payed whenever without penalty
Closed Mortgage
borrower is penalized if they over pay during the term of the mortgage
Advantages of Interest Only Loans
smaller equal payments; cheaper
Disadvantages of Interest Only Loans
don’t build equity, higher payments later, typically higher interest rates
