Module 3 (1)

Question 1

How does debt affect a client’s financial situation?

Answer 1

Debt enables a client to obtain items that she otherwise may not be able to obtain.

However, it creates an obligation to repay (which may be difficulty during a period of financial stress), limits cash outflows that otherwise may be available for other consumption or savings, and increases expenses (d/t financial charges).

Question 2

What are some tax implications of home mortgages?

Answer 2

points paid are tax deductible for the buyer of a home, as is home interest (generally).

Capital gains may be income-tax-free (exceptions and restrictions apply to both of those benefits)

Question 3

What are the potential costs and benefits of refinancing a mortgage?

Answer 3

Costs: typically the same as those involved when obtaining the original mortgage. If interest rates are higher when the home is refinanced, interest costs will increase, but the monthly payment may be lower due to a longer financing period.

Benefits: they are greatest if interest rates are lower, because not only will monthly payments be reduced, interest costs will decrease

Question 4

What are some ways for your client to improve their credit score?

Answer 4

1. make monthly payments ON TIME **–by doing so consistently and developing a long history of responsible credit use her credit score will improve.
2. a low credit utilization amount (e.g., if they have 30k available credit, but only use 3k, that will be far better than using 27k)

Question 5

Monroe and Rosalee are considering purchasing a home for 350k, they will be able to put 20% down and want to know the monthly payment as well as the amount of interest they will pay for both a 15-year mortgage and a 30-year mortgage. The 15-year mortgage offers 3.75% interest rate while the 30-year mortgage offers a 4.15 % interest rate. Calculate the payment for each mortgage and identify the difference in interest between the two mortgage options

Answer 5

First to calculate the payment and total interest paid for the 15 year mortgage–set the calculator to 12 compounding periods (12, SHIFT, P/YR) and END mode. Then:
15, SHIFT, N
3.75, I/YR
280,000, +/-, PV
0, FV (to reflect that the loan will be paid off)
Solve for PMT= $2,036.22

Then, to determine the interest they will pay over the life of the loan

1, INPUT
180, SHIFT, AMORT
Press = twice to reveal $86, 520.11 in interest paid

To calculate the payment and total interest paid for the 30-year mortgage:

30, SHIFT, N
4.15, I/YR
280,000, +/-, PV
0, FV
Solve for PMT=$1,361.09
Then, to determine the interest they will pay over the life of the loan: 
1, INPUT
360, SHIFT, AMORT
Press = twice to reveal $209, 992.15 in interest paid