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)
Adjustable Rate Mortgages (ARMs)
The interest rate may change on a monthly or annual basis according to a specified benchmark. Tend to have cap.
Federal Housing Administration (FHA) Mortgage Loans
Appeals to buyers who may not meet the underwriting requirements for a conventional loan. FHA loan attribute is a very low initial down payment and sometimes, a lower interest rate, given the federal government’s guarantee of repayment.
Veterans Administration (VA) Mortgage
Sames federal guarantee of repayment as that for FHA mortgages, but VA mortgages are for veterans of the US armed services only. An even more favorable attribute of the VA mortgage is that, in certain cases, no initial down payment is required.
Interest-Only Mortgages
The homeowner tries to keep the mortgage payment at a minimum, while hoping that the fair market value of the home will increase so that the principal amount may be paid off by the sale proceeds. If the home declines from it’s original purchase price, homeowners may find themselves in a cash deficit position at the time of subsequent resale. Only for risk aggressive homeowners.
Reverse Mortgages
The lender pays the homeowner a stream of income secured by the considerable amount of equity in the home. The lender makes parents to the homeowner on the basis of the fair market value of the home and the age of the borrower at the time that the loan is made. Made available to owners 62 or older. IF the home is sold to satisfy the obligation to the lender, the remaining cash proceeds are not protected and may cause Medicaid eligibility to be lost.
