Section 101 Unit 3 Flashcards
Discretionary Expense
Is a recurring or nonrecurring expense for an item or service that is either nonessential or more expensive than necessary
Non-discretionary Expense
Is a recurring or nonrecurring expense that is essential for an individual to maintain his lifestyle.
Consumer-Debt-Ratio
Is the ratio of monthly consumer debt payments to monthly net income. Does not include mortgages.
Net Income
Is gross income less taxes
Consumer-Debt-ratio should not exceed…
20%
Housing Cost Ratio
Calculated as a percentage of the client’s monthly gross income. Housing cost (such as rent or an individuals monthly mortgage payment, including principal and interest payments on the mortgage, property taxes, and homeowners insurance premium [PITI]) 28% of gross monthly income
PITI
is an acronym for a mortgage payment that is the sum of monthly principal, interest, taxes, and insurance.
Total Debt Ratio
Calculated as a percentage of the client’s monthly gross income. Total debt (including monthly housing costs and consumer debt payments): 36% of gross monthly income.
Current Ratio
Is calculated by dividing the amount of a client’s current assets by his current liabilities. There is no percentage standard. However, a higher current ratio is preferable, and a ratio of greater than 1.0 indicates that the client can pay off existing, short-term liabilities with readily available, liquid assets.
Short-Term Debt
Debt that is due in less than a year
Long-Term Debt
Debt that is due in length longer than a year.
Secured Debt
Debt that is backed by property. If the debtor falls behind on payments the property is repossessed.
Unsecured Debt
An individual merely promises to repay the debt in exchange for the borrowed funds.
The economics of buying or renting a home depend primarily on the following factors
- The price of existing homes and the level of mortgage interest rates in a particular area.
- The extent to which home prices increase or decrease over the anticipated period that the client will own the home.
- The length of time the client expects to live in the home and the degree of uncertainty associated with this issue.
- The perceived income tax benefits of home ownership.
Conventional Fixed-Rate Mortgages
Have a level interest rate for the term of the loan (the shorter the loan term, the higher the monthly payment)