Financing Strategies Flashcards
Maximum indebtedness on a primary residence used for computing deductible Interest
$750,000
Reverse Mortgage can be taken how
Lump sum, fixed monthly payment for life, credit line account or combination of the three
Reverse mortgage is secured how
Secured by the home, not by income or assets the borrower owns
Are there decreasing loan payments on a reverse mortgage?
No
A home equity LOAN has what type of interest rate?
Fixed
Interest on a home equity loan is tax deductible when used for what?
Used for capital improvements on a primary residence
When is home equity interest NOT tax deductible
If its used for personal expenses like paying off CC, or tuition, or a vacation
Home Equity Disadvantages
-Lender can repossess the home and sell it
-Must be paid in full, doesnt fall under bankruptcy
-Cant borrow addtl money until its repaid in full
When should you consider an ARM?
When rates are low or expected to drop and you plan to relocate in a few years, consider an ARM
Personal Loan
short term unsecured loan provided by a bank or credit union
What do banks look at to qualify you for a personal loan?
income verification or proof of ownership of other assets that equal the amount borrowed
What is a disadvantage of personal loans?
-higher interest rates
-some require payment in as short as 2 years
When must principal be immediately repaid on a HELOC?
if you sell the home
When is interest on a home equity loan/heloc tax deductible? (this is important)
when its used to buy, build or improve a primary or secondary home
Is interest on a home equity loan/heloc tax deductible if used for personal expenses?
No
Major disadvantage of HELOC
puts the home at risk
Total qualified residence loan balance (max) for married or single filers
$750k for married, $375k for married filing separately IN ORDER TO DEDUCT THE INTEREST
HELOC
REVOLVING 🎠 credit line with set borrowing limit
When do you take a withdrawal from a HELOC?
as needed
HELOC rate based on what?
Fed Funds rate
Payments on a HELOC fluctuate how?
based on the interest rate and the balance owed
Is interest on a HELOC tax deductible?
When used to build or improve a primary or secondary home up to 750k
Can you convert a HELOC?
yes sometimes you can convert to a fixed rate loan when the withdrawal period ends
What is used as collateral for a margin account?
the equity in the account
Can you deduct interest in a margin account?
Yes, up to a certain amount as an itemized deduction
How do you borrow funds to purchase securities?
in a margin account
Permanent Life Insurance
WL or UL combine insurance coverage with a savings element in the form of cash value
How does the cash value build up in LI?
tax deferred
Is cash value LI tax deferred?
yes
What happens if you don’t repay a loan on cash vaue LI?
the death benefit is reduced by the amount of the loan
Advantage of credit union
may be non-profit so their rates and fees are lower
Drawback of credit union
may not have as wide variety of loan products as traditional banks
Finance companies
provide consumers with funds to buy cars and appliances at competitive rates and possibly lower fees
Payday loan companies amount/length of time
typically lower than $1000, 1-4 weeks, apr can be as high as 48%
A home equity loan is open end or closed end?
closed end
A home equity line of credit is open end or closed end?
open end - its a revolving
Typical max borrowing percentage of equity in the home?
75-80% of the equity in the home
Is heloc/loan interest tax deductible if used for a vacation home?
yes
Is a HELOC secured or unsecured?
It is secured by the home which puts the home at risk if you default
What type of bankruptcy does Home Equity debt fall under?
Chapter 7
What happens if you claim chapter 7 for a heloc?
The personal liability is waived but the bank still has a lein on the home and can foreclose if regular payments aren’t made
If you take out a mortgage for 500k, how much room do you have to take out home equity to use for qualified purposes?
$250k
Is a HELOC taken for to pay off debt or student loan interest tax deductible?
no
Main advantages of HELOC over other type of loans?
lower costs and potential tax benefits
Where do you take the tax deduction on home equity interest?
itemized deduction on Schedule A of 1040 provided the loan does not exceed the home’s market value
When did the 750k/375k interest limit go into effect?
2017
What was the max for a home equity prior to 2017 that could be deducted?
100k
If Mary has a pre 2017 mortgage for 1,080,000, and a home equity for 100k. What is the max that can be deducted?
Interest on the 1,100,000 but the remaining 80k would be outside the max level.
1 million on a mortgage
100k on home equity pre 2017
Why do home equity loans/credit have lower interest rates?
because they are secured by the home
Credit cards can be discharged fully under chapter 7 - so can HELOCS but what happens
The bank still has a lein on the home so if you don’t make payments you can lose the home
2nd disadvantage of HELOC
home value drops after the loan so you owe more than the home is worth (this can happen with a mortgage as well)
Is a lower interest rate always better on a refinance?
Not always - you have to consider costs and fees might outweigh the savings on the rate
Reverse Mortgage
loan advance that make cash payments to seniors while permitting them to live in their homes the rest of their lives
How is a reverse mortgage paid back?
The principal and interest is deferred and repaid once the home is sold - typically at the owner’s death
Are reverse mortgages cheap?
No. There are high costs associated
Refinancing looks to improve what 2 things
lower interest rate and/or shorter term of the loan
Purpose of refinancing
lower the monthly payments and overall costs of the loan
Since folks typically move every 7 years you should typically not refinance if the term is
over 7 years
If your original mortgage was taken out before 2017 can you grandfather it in?
Yes, but only to the 750k limit to get the deduction. Even if the new debt is above the original loan amount but below the 750k limit
How do you determine the time it takes to pay off closing costs?
You take the closing costs and divide that by the monthly savings.
ex. Costs are $2500 and savings are $235.70 a month - will take 10.6 months to pay off closing costs
When would it make sense to pay closing costs and/or points?
If the homeowner is going to stay in the home a longer amount of time it makes sense to “buy” a lower interest rate
What do you need on hand in order to consider paying closing costs and/or points?
You need cash/assets to pay those costs. If you don’t have that, you could take out a higher loan amount to cover costs but that would reduce the monthly savings
Not extending the term on a refinance makes sense when?
When the owner plans to stay in the house longer than the time of the term
2 times you should not consider paying points/closing costs
-If you’re not going to live in the home long
- if interest rates are expected to fall again
250k 30 year mortgage 6% rate what is the monthly payment
n = 360
i = .5
PV = 250k
FV= 0
solving for payment
PMT = 1,498.88
250k, 30 year mortgage, 6% - How to amortize for 7 years payment?
n = 360
i = .5
PV = 250k
PMT = 1,498.88 CHS (SUPER IMPORTANT)
HIT 84 f AMORT = 100,004.08 which means that that amount of INTEREST was paid on 84 payments
TO FIND PRINCIPAL PRESS CAT EYES KEY
x><y = 25,901 in PRINCIPAL was paid during 84 payments
THEN HIT
RCL PV to get the original amount minus the principal
If you are 7 years into a 30 year mortgage at 6% and want to refinance with a closing cost of $5,000 - how do you find that
First you find the payment on the mortgage then
n = 360
i = .5
PV = 250k
PMT = $1,498.88 CHS (SUPER IMPORTANT)
HIT 84 f AMORT - give you interest to 7 years
HIT CAT EYES to give you Principal
then hit RCL PV THEN ADD THE CLOSING COSTS
this gives you the total amount you are refinancing including closing costs
Say you are 7 years into a mortgage and need to compare a 30 year refinance vs a 15 year
You first amortize the mortgage to 7 years. (F AMORT AND CAT EYES THEN RECALL PV AND ADD CLOSING COSTS)
You can then determine the payments on the 30 year vs the 15 year and compare each
Say you want to determine how much time it takes to recoup closing costs on a new mortgage?
You take the ORIGINAL payment minus the new Payment (the savings) and divide that into the closing costs to give you how many months it will take to recoup
$50 Liability on a CC falls under what act
Truth in Lending
