Midterm 4 Part 3 Flashcards
Should you shop for houses or for neighborhoods first?
Neighborhoods. The perfect home in a bad neighborhood will not make you happy.
What factors should you consider when purchasing a home?
How busy the road is
Closeness to school, work, shopping
Quality of schools
Train tracks
Scary dogs
etc. Anything that’s important to YOU
True or False: When you find a good neighborhood you should drive around it several times at different times of the day
True
FSBO
For sale by owner
Why are FSBO homes usually bought/sold on a discount?
Because you don’t have to pay realtor fees.
True or False: If you do your research and read a lot of books, you can sell your own house
TRUE
You’ll have as much knowledge as the realtors
Examples of websites that will bring you up to speed on the location’s market
Realtor.com and forsalebyowner.com
Buyer’s remorse
Regretting a purchase that was made hastily
Why would a seller be more likely to negotiate if you’re patient?
Because they know you might not be that interested, and might cancel the deal.
The seller WANTS to sell the house, so they’ll be willing to go lower
True or False: You should almost always offer a price that is lower than the asking price first
True
What is Brau’s advice on how long of a mortgage you should expect?
15 years
If it would take more than 15 years to pay the house back, then it’s too much
What are three reasons why it’s a bad idea to take a 30 year mortgage for more “flexibility?”
- With a 15 year mortgage, you’re more likely to buy a house you can actually afford
- You’re paying WAYYY more interest when you go for 30 years
- You get a lower rate when buying for 15 years (because longer loans are more risky)
Once you sign a contract with the negotiated price, what are you supposed to do?
Call a couple mortgage brokers and get quotes on mortgages. Compare apples to apples, and look for other listings that are very similar to yours
Good faith estimate
An estimate of the closing costs that will be required
What is the most important thing you should ask when negotiating?
Is that the best you can do?
What is a prequal?
It is a letter from the bank indicating that you are credit worthy of a loan up to some $$ limit
True or False: A prequal means that you have been vetted and verified as a buyer
False
They have not vetted your credit score yet
Is it easier to get a prequal or a preapproval letter from the bank?
Prequal
Why is a preapproval letter better?
Because it indicates that the bank has done their research on you and is ready to write you a check immediately up to some $$ amount
What technique helps you save in closing costs?
No cost streamline mortgage
What are the two assumptions you’re making when using the no cost streamline technique?
- You will move within a few years
OR - Interest rates will drop enough that you can refinance
What happens if neither of your assumptions happens when using the no cost streamline mortgage technique?
You end up losing a lot of money
True or False: Refinancing a mortgage can lengthen your mortgage as a whole
True
What does it mean to use a no-cost streamline mortgage?
You (the buyer) are willing to pay a higher interest rate, but you are NOT willing to pay any closing costs whatsoever and you are not allowing the principal to be any higher
True or False: When you approach your bank or mortgage dealer about using the no-cost streamline mortgage technique, they will understand what you mean
False
Not all of them. If you have to explain it, it’s a bad sign
True or False: If the lender says they will accept the NCSM technique by adding all the closing costs into the loan, you should accept
FALSE
This puts you more in debt. You want them to increase your mortgage RATE to pay for the costs of closing
How much more does your mortgage rate usually have to be to pay for closing costs using the NCSM?
0.75 - 1% more
What are the HUD documents?
They are the settlement statements when buying a house that list all charges and payments between the buyer and seller. It’s like the bill of sale
True or False: when using the NCSM technique you should double check your HUD documents
TRUE
When using the NCSM technique, what should you do after closing if the interest rates fall?
Go back to step one and refinance again.
What are origination points?
Fees paid to the lender to write the mortgage (or to refinance)
What is an escrow?
A third party that holds the money until an agreement has been met.
What are discount points?
Fees paid to decrease the mortgage rate
True or False: You can request the bank use your own title firm / specific contact for managing the title and paperwork
True
What is title insurance and why should you get it?
Title insurances protects you from other people that may make a claim to your property in the future.
If you don’t have it, somebody could make a case that the land you’re on is actually theirs, and kick you off. You get NOTHING.
True or False: For most investors, it’s best to have a risky part of the portfolio and a non-risky part
True
True or False: Paying off debt is considered the non-risky part of your investment portfolio
TRUE
Which debts do you want to pay off first and why?
The ones that are most expensive with the highest interest rates. You want to pay these off first to spend less money in the long run. The sooner you pay these off, the less you’ll pay in interest
What formula do you use if your debt is tax deductible?
After tax cost of debt
True or False: If you pay off your credit card debt, you are guaranteed zero risk
TRUE
Because by paying off the debt, you don’t owe any interest to the credit company. You can turn an 11% rate into a 0% rate just by getting rid of your debt.
Why is paying off debt on the non-risky part of your portfolio?
Because when you pay off debt, you don’t have to pay the interest rates. If your interest rate is 0%, then your risk is 0%
What is the best thing to set up to pay off your debts?
A budget
True or False: It is very hard, if not impossible, to find a risk free return rate higher than an after tax mortgage
TRUE
Why would some people want to find a risk free return rate higher than their after tax mortgage?
So that they can choose a longer loan (30 year vs. 15 year) and use the money they save to make other investments to pay off the additional interest.
This is a BAD idea because it’s very difficult/risky to find a rate this high. And if you CAN’T, you end up paying hundreds of thousands of dollars more in interest on that 30 year mortgage.
What is the number one reason people want to own their home as quickly as possible?
Peace of mind. In tough financial times, if pensions fail, if markets crash, you at least have a roof over your head
True or False: As you get older, it’s best to invest in more risky assets to prepare for retirement
FALSE
The opposite is true. As you get older, invest in less risky assets
Examples of less risky assets for individuals to invest in
CDs, low mortgage real estate, etc.
True or False: Stocks are high risk
TRUE
True or False: Stocks are best for long-term investing
TRUE
True or False: Stocks are not only risky, they are also stressful (as you watch the markets go up and down)
TRUE
True or False: Even with all market crashes in U.S. history, stocks have consistently come back up and risen over time. This makes them the best long-term investment
TRUE
What is considered long-term investing?
20-30 years
What is dollar cost averaging?
The investor puts a set amount of money into a specific asset on a schedule. This is usually on a schedule.
Think of a 401 k plan that automatically takes funds out of your paycheck and invests them for you.
With a dollar cost averaging system in place: when the market is down, your system buys more shares, when the market is up, your money is increasing in value. It rides out the storms
What is an example of a passive investment strategy?
Dollar cost averaging system
True or False: As people get older, they should have less and less of their investment money in stocks and more of it in savings.
True.
That way if the market crashes, they won’t lose as much.
True or False: Men are better investors than women
FALSE
Women are more stable, men are impulsive
True or False: You will make more money over time if you invest in stock index funds instead of normal stocks
True
True or False: You will make more money over time if you invest in stock index funds instead of actively managed funds
True
Why are index funds better than actively managed fund?
Because you don’t have to pay somebody to manage your money
What is the expense ratio?
How much you pay to invest
True or False: You want to choose the broadest index whenever your funds allow it
True
But broader indexes are also more expensive, you may not be able to afford it
What is “the match”
It is the amount that the employer will match when investing. For example, if they say they’ll match up to 5%, then invest 5% to get as much free money from your employer as possible
If you ARE forced to buy actively managed funds (because your employer doesn’t provide index funds), what two things should you look for in the funds you invest in?
- No loads
- Low expense ratios
What is a no-load fund?
A fund that doesn’t charge additional operation costs or sales charges
What is a Ponzi scheme? (fraudulent)
Somebody offers to “double” your money in a short period of time (or some such number). You pay them money, and when it comes time to pay rates, the company just gives them half of their money back to make it look like the returns are real. Word gets around that it’s legit, then everybody starts pouring money into this company. All of their returns are just portions of their own money being given back to them.
Eventually, the company makes enough money and moves to Costa Rica to escape with everything they stole.
Why might you desire small-cap and emerging market funds in your portfolio?
Because they are high risk. High risk = high return
By what factor have small cap stocks historically outperformed large cap stocks?
5
Why is it acceptable to some reasonable investors to have some of their portfolio in extremely risky markets?
Because they also have a non-risky section of their portfolio, they have a large portion in less risky assets, and they only have a small part of their portfolio in this risky business.
Why are stocks sometimes called inflation hedges?
They are making more in returns than inflation, so you’re getting more back.
For example: Treasury bills barely make more than the inflation rate. So most of their appreciation is eaten by inflation, rather than going to you. Stocks have a much larger gap and can stay ahead of inflation in a more profitable way.
What rule helps older people decide how much of their portfolio to put in risky assets/stocks?
Subtract your age from 100. The number that’s left is the amount that you should have AT MOST in risky assets
What is a positive saver?
Somebody who invests ( in risky or non risky assets) as a means to pay for retirement.
True or False: When you choose a financial planner (which is recommended due to tax laws) you should choose someone with a CFP
TRUE
It’s a must
Should your financial planner hold a CFP or a CFA?
Both if possible, they’re both benefits
What question should you ask when deciding how much to save for retirement?
What do you want to DO in retirement?
What should you consider when choosing a financial planner?
How they make their paycheck
How often are they available
How are they certified and how many attempts it took them
Are they restricted in which funds they can invest in
What products can they deal in (stocks, funds, real estate)
What is churning?
The financial planner has an incentive to trade on your account (because of commissions) even if it is unwise.
Why is it a bad sign if a financial planner has restricted investment opportunities?
Because it usually means there are loads to worry about
True or False: It never hurts to ask for a different price. It never hurts to negotiate
True
I slightly disagree, but for the most part, that’s true
True or False: People that ask for better offers, GET better offers
Historically True
What are some examples of additional compensation packages?
- Paying for graduate school
- Paying for moving expenses
- Increasing the signing bonus
- Increasing salary
- Taking on burden of selling the house
- Paying for training/certifications
- Granting stock options
What are the two types of life insurance?
Term and cash value
What are the two main types of cash value life insurance?
Whole and universal
True or False: Life insurance sales people are trying to sell you cash value insurance because they get a larger commission
True
How does cash-value insurance work?
Each month when you pay your premium, a portion of it is invested for you. You also receive some tax benefits
How does term life insurance work?
Each month you pay a lower monthly premium and that’s it. There’s no investment aspect. Your loved ones just collect when you die.
True or False: Term insurance is cheaper than cash value insurance
TRUE
Usually much cheaper
Why is term insurance cheaper?
Because you’re not paying the sales person as large of a commission and you’re not paying the company a load to invest the money for you.
Why is it better to get term insurance rather than cash value insurance?
Because it’s way cheaper and you can cut out the middle man by investing the difference yourself.
Surrender penalty
A large fee for withdrawing from the fund / investment too soon.
True or False: Cash value plans have larger surrender penalties
TRUE
When is a good time to buy cash value insurance?
When you’re very rich and trying to max out as many tax benefits as possible.
What’s a good website to compare term life policies?
matrixdirect.com
True or False: Group life plans are cheaper than single life insurance plans
True, but not all companies offer them
If you sell/buy via FSBO, how much do you typically save in realtor fees?
4.5 - 6%
True or False: A 15 year mortgage offers you greater flexibility than a 30 year mortgage
FALSE
True or False: Actively managed funds earn higher returns than index funds
FALSE
Where do you find EBIT?
On the income statement
Where do you find depreciation?
On the income statement, or two balance sheets
Where do you find cash tax payments (tax payments)?
Income statement
Where do you find CAPEX?
Changes in capital expenditure (gross property, plant, and equipment) from two balance sheets
