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Intro to FP > Financing Strategies > Flashcards

Financing Strategies Flashcards

1
Q

Maximum indebtedness on a primary residence used for computing deductible Interest

A

$750,000

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2
Q

Reverse Mortgage can be taken how

A

Lump sum, fixed monthly payment for life, credit line account or combination of the three

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3
Q

Reverse mortgage is secured how

A

Secured by the home, not by income or assets the borrower owns

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4
Q

Are there decreasing loan payments on a reverse mortgage?

A

No

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5
Q

A home equity LOAN has what type of interest rate?

A

Fixed

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6
Q

Interest on a home equity loan is tax deductible when used for what?

A

Used for capital improvements on a primary residence

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7
Q

When is home equity interest NOT tax deductible

A

If its used for personal expenses like paying off CC, or tuition, or a vacation

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8
Q

Home Equity Disadvantages

A

-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

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9
Q

When should you consider an ARM?

A

When rates are low or expected to drop and you plan to relocate in a few years, consider an ARM

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10
Q

Personal Loan

A

short term unsecured loan provided by a bank or credit union

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11
Q

What do banks look at to qualify you for a personal loan?

A

income verification or proof of ownership of other assets that equal the amount borrowed

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12
Q

What is a disadvantage of personal loans?

A

-higher interest rates
-some require payment in as short as 2 years

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13
Q

When must principal be immediately repaid on a HELOC?

A

if you sell the home

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14
Q

When is interest on a home equity loan/heloc tax deductible? (this is important)

A

when its used to buy, build or improve a primary or secondary home

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15
Q

Is interest on a home equity loan/heloc tax deductible if used for personal expenses?

A

No

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16
Q

Major disadvantage of HELOC

A

puts the home at risk

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17
Q

Total qualified residence loan balance (max) for married or single filers

A

$750k for married, $375k for married filing separately IN ORDER TO DEDUCT THE INTEREST

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18
Q

HELOC

A

REVOLVING 🎠 credit line with set borrowing limit

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19
Q

When do you take a withdrawal from a HELOC?

A

as needed

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20
Q

HELOC rate based on what?

A

Fed Funds rate

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21
Q

Payments on a HELOC fluctuate how?

A

based on the interest rate and the balance owed

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22
Q

Is interest on a HELOC tax deductible?

A

When used to build or improve a primary or secondary home up to 750k

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23
Q

Can you convert a HELOC?

A

yes sometimes you can convert to a fixed rate loan when the withdrawal period ends

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24
Q

What is used as collateral for a margin account?

A

the equity in the account

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25
Q

Can you deduct interest in a margin account?

A

Yes, up to a certain amount as an itemized deduction

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26
Q

How do you borrow funds to purchase securities?

A

in a margin account

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27
Q

Permanent Life Insurance

A

WL or UL combine insurance coverage with a savings element in the form of cash value

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28
Q

How does the cash value build up in LI?

A

tax deferred

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29
Q

Is cash value LI tax deferred?

A

yes

30
Q

What happens if you don’t repay a loan on cash vaue LI?

A

the death benefit is reduced by the amount of the loan

31
Q

Advantage of credit union

A

may be non-profit so their rates and fees are lower

32
Q

Drawback of credit union

A

may not have as wide variety of loan products as traditional banks

33
Q

Finance companies

A

provide consumers with funds to buy cars and appliances at competitive rates and possibly lower fees

34
Q

Payday loan companies amount/length of time

A

typically lower than $1000, 1-4 weeks, apr can be as high as 48%

35
Q

A home equity loan is open end or closed end?

A

closed end

36
Q

A home equity line of credit is open end or closed end?

A

open end - its a revolving

37
Q

Typical max borrowing percentage of equity in the home?

A

75-80% of the equity in the home

38
Q

Is heloc/loan interest tax deductible if used for a vacation home?

A

yes

39
Q

Is a HELOC secured or unsecured?

A

It is secured by the home which puts the home at risk if you default

40
Q

What type of bankruptcy does Home Equity debt fall under?

A

Chapter 7

41
Q

What happens if you claim chapter 7 for a heloc?

A

The personal liability is waived but the bank still has a lein on the home and can foreclose if regular payments aren’t made

42
Q

If you take out a mortgage for 500k, how much room do you have to take out home equity to use for qualified purposes?

A

$250k

43
Q

Is a HELOC taken for to pay off debt or student loan interest tax deductible?

A

no

44
Q

Main advantages of HELOC over other type of loans?

A

lower costs and potential tax benefits

45
Q

Where do you take the tax deduction on home equity interest?

A

itemized deduction on Schedule A of 1040 provided the loan does not exceed the home’s market value

46
Q

When did the 750k/375k interest limit go into effect?

A

2017

47
Q

What was the max for a home equity prior to 2017 that could be deducted?

A

100k

48
Q

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?

A

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

49
Q

Why do home equity loans/credit have lower interest rates?

A

because they are secured by the home

50
Q

Credit cards can be discharged fully under chapter 7 - so can HELOCS but what happens

A

The bank still has a lein on the home so if you don’t make payments you can lose the home

51
Q

2nd disadvantage of HELOC

A

home value drops after the loan so you owe more than the home is worth (this can happen with a mortgage as well)

52
Q

Is a lower interest rate always better on a refinance?

A

Not always - you have to consider costs and fees might outweigh the savings on the rate

53
Q

Reverse Mortgage

A

loan advance that make cash payments to seniors while permitting them to live in their homes the rest of their lives

54
Q

How is a reverse mortgage paid back?

A

The principal and interest is deferred and repaid once the home is sold - typically at the owner’s death

55
Q

Are reverse mortgages cheap?

A

No. There are high costs associated

56
Q

Refinancing looks to improve what 2 things

A

lower interest rate and/or shorter term of the loan

57
Q

Purpose of refinancing

A

lower the monthly payments and overall costs of the loan

58
Q

Since folks typically move every 7 years you should typically not refinance if the term is

A

over 7 years

59
Q

If your original mortgage was taken out before 2017 can you grandfather it in?

A

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

60
Q

How do you determine the time it takes to pay off closing costs?

A

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

61
Q

When would it make sense to pay closing costs and/or points?

A

If the homeowner is going to stay in the home a longer amount of time it makes sense to “buy” a lower interest rate

62
Q

What do you need on hand in order to consider paying closing costs and/or points?

A

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

63
Q

Not extending the term on a refinance makes sense when?

A

When the owner plans to stay in the house longer than the time of the term

64
Q

2 times you should not consider paying points/closing costs

A

-If you’re not going to live in the home long
- if interest rates are expected to fall again

65
Q

250k 30 year mortgage 6% rate what is the monthly payment

A

n = 360
i = .5
PV = 250k
FV= 0
solving for payment
PMT = 1,498.88

66
Q

250k, 30 year mortgage, 6% - How to amortize for 7 years payment?

A

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

67
Q

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

A

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

68
Q

Say you are 7 years into a mortgage and need to compare a 30 year refinance vs a 15 year

A

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

69
Q

Say you want to determine how much time it takes to recoup closing costs on a new mortgage?

A

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

70
Q

$50 Liability on a CC falls under what act

A

Truth in Lending

Intro to FP (14 decks)

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