Sec. 1 - Ch.8: Financial Strategies Flashcards
What is considered short-term debt?
Consumer and auto debt (also personal line of credit), everything else is considered long-term debt
What is a Secured Loan? What is this type of loan also called?
- A loan where the borrower pledges assets to repay the loan in the event of default
- Ex: the home or car is the collateral for a mortgage or car loan
- Also called collateralized loans
What is a Unsecured Loan? What is this type of loan also called?
A loan where people borrow on their credit worthiness, and no collateral is pledged
- Also called a signature-only loan
Who has the greater advantage with a home purchase
The person with the higher tax bracket and longer time frame
What is a fixed rate mortgage
Payments and interest are fixed over the period of repayment (typically 15-30 years)
What is a Adjustable-Rate Mortgage (ARM)?
A home loan with an interest rate that adjusts over time based on the market
- They typically carry a lower initial interest rate than fixed-rate mortgages because the greater degree of uncertainty
- These types of loans work best for people that know they’ll sell their home after a few years or can afford payment jumps
What are Balloon payments?
Payments based on a long-term mortgage at a given interest rate
- This type of loan is best if property values continue to appreciate, if the borrower’s income and credit capacity do not decrease, and if interest rates remain low.
What does paying down the principal on your mortgage do to your net worth?
Increase your net worth (decrease in liabilities)
- Just paying the interest off doesn’t affect your net worth
What is the indebtedness limit for qualified personal resident interest to be deductible, filing single & JTWROS? What about existing primary mortgages?
$750,000
- Existing mortgages are grandfathered in up to $1 million
- Interest attributable to debt over these limits is nondeductible personal interest
What is required of a home equity loan in order to be deductible?
It must be used to improve the home
What are the 2 key factors when evaluating whether a client should refinance their mortgage?
Length of time expected to stay in the home and cash flow capacity
What are reasons to refinance a mortgage?
- To obtain a lower interest rate
- To consolidate debt
- To change the term of the loan (shorter or longer)
- To raise extra cash
What is a reverse mortgage?
A way to access equity in a home
- Funds may be received in a lump sum, ongoing payments, or as a line of credit
When is repayment triggered on a reverse mortgage?
Upon the death on the individual owner (or longest living spouse), the conclusion of a term of years, or by certain events like the absence of an elder in the home for a minimum of 1 year
