Exam 2 study guide PDF

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This Study Guide is beneficial for Chapters 5-8. It covers each chapter in depth with questions and answers provided. ...

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Study Guide

FIN 101

Exam II

Chapter 5  Factors a home buyer should consider when evaluating a house purchase o Evaluating how long you plan to live there o Location plus if you have children are the schools in the location suitable o What is the property tax situation o Think about the resale value  Single family homes, duplexes, condominiums or condos o Single family home- one family built on its own lot o Duplex- two family home each family has its own living quarters o Condominium- you own an individual living unit and other areas are held in common ownership by the residents. Owners get to deduct interest expense and property taxes o Timeshares- own time at a vacation property, generally not a sound investment o Co-ops- form of ownership where the residents own a corporation that owns the property  Down payment on a house when purchasing o  Disadvantages and advantages of renting o Advantages- no long term commitment, no bills such as lawn maintenance or exterior painting, cheaper and usually great for retired people so they don’t have the headaches of maintaining a home o Disadvantages- rent payments go nowhere, no interest mortgage deduction or taxes, no control over the building, no attachment, inability to remodel, no pride of ownership  Disadvantages and benefits of homeownership o Advantages of buying: Tax benefits, build equity, remodel freely, put down roots. o Disadvantages- money is tight, limited mobility, not feeling at home, the market is up (interest rates), selling can take time  PMI o Private mortgage insurance- when the homeowners equity reaches about twenty percent of the property value, the policy can be canceled  Foreclosure o The legal process of seizing your house for not paying your mortgage on your taxes. The property is sold and the proceeds go to paying off the note or taxes.  Balloon loan o Starts with an initially low interest rate for a defined period- then the balance of the note is due in one payment  ARM o Adjustable mortgage rate- it begins at one interest rate that is usually lower than the fixed rate loans and then adjusts the rate at a predetermined point in future.  Negative amortization o A loan situation where your payment does not cover all of the interest or any of the equity. You make payments but the balance of the loan keeps going up because you pay interest you did not cover in your payment  Factors that lenders consider while qualifying for a mortgage loan

Study Guide

FIN 101

Exam II

o When qualifying for a mortgage loan, lenders consider these factors: debt to income ratio, employment history, stable address, credit score and character   

Items that are income tax deductible from mortgage payments The numbers that conventional mortgage lenders use for debt-to-income ratios Mortgage length/term and total interest paid over the life of the loan o Shorter mortgage term= higher monthly payment and less interest paid over the life of the loan given the same interest rate and loan amount

Chapter 6  Buying new vs used o Two components: financial and emotional o Buying a new car (financing, warranties, and maintenance)  Depreciation o The loss in value an asset experiences over time o The best value for your auto dollar buy at the best price, finance at the best rate, drive for many years  The process of selling your car o Set a price and determine the value, clean it and fix it up, market it, transfer title  The dealer invoice price o One should research using nada.com, kbb.com (Kelly blue book), or Edmunds.com  Leasing vs buying o Advantages of buying: own for a number of years, when sold or traded in- the auto has some value, no mileage limit, personalization o Disadvantages of buying: financing and loans, debt and interest expense o Benefits of leasing: legitimate deduction most of the cost off your business taxes, new car every two or three years without a large amount of cash down, smaller monthly payments o Disadvantages of leasing: leasing is an expensive way to have a car, monthly payments build no equity, predetermined period, mileage is often limited, at the end buy a car without trade-in or lease again  The general terms found in most auto leases o Term of lease (2-3 years) o Upfront money, could be first and last months payment plus tax o Number of miles o Insurance coverage is required o Residual value or price and excessive wear  The sources of auto financing o Dealer financing- some offer low interest,0 percent down, cash back rebates with great credit rating o Bank/credit union financing- offer competitive rates, preapproval puts you in a strong bargaining position

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FIN 101

Exam II

o Third party financing- high interest rates for poor credit, loans are expensive, payments may be made weekly in some cases, if you fail to pay your car will be repossessed and you will still owe the difference which will be high due to the interest rate o Internet sources- bankrate, eloan, capitalone, bankofamerica Price components available on the sticker o Destination and delivery charges o Add ons/extra services o ADM- additional dealer mark-up Extended warranties that cover major items and components of a new car o New cars often come with extended warranties that cover major items and components and may cover 10 years or 100,000 miles Insurance coverage and auto leases o Insurance leasing company will require you to carry comprehensive insurance coverage on the vehicle, often with zero deductible. The residual value at the end of the lease o What the car will be worth at the end of the lease, aka the depreciated value. The capitalized cost o The price of the car Credit score & auto loan rate / APR & monthly payment (reviewed in class) Analysis of different monthly auto payments for the same vehicle provided by two different banks

Chapters 7 and 8  Whole life policy o Provides basic protection and adds a savings component that accumulates on a tax deferred basis. o Death proceeds with not typically be the subject to income taxation, but they may be subject to federal estate taxation o No inheritance tax in indiana  Term life policy o An insurance policy that offers death benefit for a define period, term is from 1-30 years, when it ends so does the coverage  Universal life policy o A variation of whole life insurance o Features: a death benefit and a savings component but offers consumers a great deal of flexibility in how their premium is applied o More options on interest rates for savings, loans and repayments o Options to invest in mutual funds  Liability and Collision auto insurance policies o Collision- required if you finance or lease a car, wreck protection, covers your car regardless of who is at fault or if you hit an object or tree, usually has a deductible o Liability- covers the person in the accident, required in most states, important to have since it can protect you in an accident by compensating the other party  Comprehensive auto insurance and damages

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FIN 101

Exam II

o Does not cover accidents o Protects from theft, fire, vandalism, hail, wind, and other types of damage o Required for lease vehicle The replacement value of the home/ the replacement insurance problem reviewed in class o Replacement value of a home- pick this option if you want the insurance company to pay for replacing your possessions with the same or comparable quality items up to the limits of your policy. Renter’s Insurance o Covers smoke, fire, theft, wind damage, water damage (but not flooding), and other general perils. Consolidated Omnibus Budget Reconciliation Act (COBRA) o Cobra allows you to maintain your group health insurance coverage for up to 18 months if you lose your job o Applies only to companies with 20 or more employees o You have a 60 day window to file for benefits after you leave the company o Applies if you are the child under the age of 23 of a worker who left the company o Applies if you leave your job and are self employed or unemployed Standard Deductions o Itemized Deductions o Examples- state and local tax deduction not exceeding 10k, mortgage and home equity loan interest, charitable contributions, medical expenses o Remember: interest is not tax deductible on personal auto loan Tax Credit o Are dollar for dollar reductions in your tax bill and are more desirable than tax deductions Marginal Tax Rate o Is the rate that you would pay on the last dollar of income o The highest rate you pay on part of your taxable income Tax Audit o An examination by agents of the IRS of your current and possibly past tax returns to ensure they are in compliance with the tax law Audit Triggers Tax deductible interest on a mortgage loan vs personal vehicle loan...