Title | Personal Finance Final Exam Study Guide |
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Course | Personal Finance |
Institution | Sacred Heart University |
Pages | 27 |
File Size | 210.7 KB |
File Type | |
Total Downloads | 101 |
Total Views | 146 |
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Personal Finance Final Exam Study guide Chapter 10, Purchasing and Financing a Home How much can you afford? - Usually need 10-20% down payment - Typical mortgages are fixed-rate and 30 years - Home price should be no more than 2.5 times your total gross annual household income - Monthly mortgage payment should not exceed 28% of gross monthly income - Monthly debt payments (including mortgage) should not exceed 40% of gross monthly income Affordable Down payment - What is the market value of the asset you will convert to cash and use for your down payment? - You also need to allow for closing costs and some liquidity for unanticipated bills Affordable monthly mortgage payments - Refer your cash flow statement - Your mortgage payment may replace a rent payment but there are other expenses to consider - Allow for continued saving Lessons learned from others’ mistakes - Don’t go for the maximum you can afford - Don’t buy above what you can afford - Home values don’t always rise over time, values can also drop - Consider current economic conditions and job stability Selecting a Home - Purchasing a home may be the single biggest investment you will ever make and requires serious consideration - Decide on a price range and then identify a home you want - Compare the cost of buying to the cost of renting - Consider a condominium - Relying on a real estate agent o Listen to their input, but make your own decisions - Using online realtor services o Not available in all areas but may save commissions o Zip reality is an example - Criteria used to select a home o Price o Convenient location o Maintenance o School system o Insurance
o Taxes-usually between 1% and 2% of market value of home o Homeowner’s association o Resale value-consider real estate commission Financial Planning Online - Calculator web - This website allows you to estimate how much you could borrow to finance a home. Based on your income and other financial information - Go to the real estate section of Yahoo - This website provides sales prices of homes on a street in a city that you specify over a recent period. It can also provide a list of homes in the city you specify that sold within a certain price range. Valuation of a Home - Market analysis: an estimate of the price of a home based on the prices of similar homes in the area o Usually based on price per square foot o Information can be obtained from a real estate broker or appraiser - Economic impact on home values o Economic conditions affect the valuation of homes o As demand for homes increase, prices rise o When economic conditions weaken, and demand declines resulting in lower home prices - Impact of the financial crisis on home values o Mortgage defaults o Impact on home prices o Resolving the crisis Housing and economic recovery act of 2008 o Lessons from the crisis o Correcting the mortgage application process - Effects on business activity and zoning laws o Business activity nearby increases demand for housing in an area o Zoning laws may affect desirability - Obtaining a second opinion on your valuation o Remember that brokers represent sellers - Negotiating a price o Most sellers will accept less than their asking price o Seller may accept your offer, reject it, or suggest a revision o A contract will stipulate the agreed upon price and any other conditions Transaction Costs of Purchasing a Home - Down payment o Usually 10 to 20 percent
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o Serves as collateral o Lower down payment may be required for government backed loans Federal Housing Administration (FHA) Veterans’ Administration (VA) Maintenance of an escrow account required o Private mortgage insurance (PMI) may be required if your down payment is less than 20% of the home’s value Closing costs o Loan application fee-from $100 to $500 o Points: a fee charged by the lender when a mortgage loan is provided; states as a percentage of the mortgage loan amount o Loan origination fee-about 1% of the mortgage amount o Appraisal fee-from $200 to $500 o Title search and insurance
Financing with a Fixed-Rate - Fixed-rate mortgage: a mortgage in which a fixed interest rate is specified until maturity - Preferred when interest rates are expected to rise - May be assumable under some conditions - Amortization Table: o Basis for monthly mortgage payment amount for a fixed rate mortgage o Allocation of the mortgage payment: each payment represents a partial payment of principal and a partial payment of interest - Impact of the mortgage amount on the monthly payment o The larger the mortgage amount, the larger the mortgage payment - Impact of the interest rate on the monthly payment o The larger the interest rate, the larger on the mortgage payment - Impact of the mortgage maturity on the monthly payment o The longer the maturity, the lower the monthly payment o The longer the maturity, the more interest you pay over the life of the loan - Adjustable rate mortgage (ARM): a mortgage where the interest owed changes on response to movements in a specific market-determined interest rate - Advantage is that rate could go down; disadvantage is that rates could increase - Initial rate- usually relatively low - Interest rate index- determines whether mortgage rate goes up - Frequency of rate adjustments- varies Characteristics of a Fixed-Rate Mortgage - Estimating the monthly mortgage payment o Many mortgage loan websites offer mortgage calculators to estimate monthly payments based on a specific mortgage amount, interest rate, and maturity Characteristics of an Adjustable-Rate Mortgages
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Initial rate is relatively low for a year or so Interest rate index tied to mortgage contract Frequency of rate adjustment o Specified in mortgage contract o Many alternatives available from once a year to every five years Caps on adjustable-rate mortgages o Caps: maximum and minimum fluctuations in the interest rate on an ARM Limits the fluctuations in interest rate o Financing with a fixed-versus an adjustable-rate mortgage Depends on your expectation of future interest rates
Decision to Own A Home Versus Rent - Consider financial assessment before considering personal preferences - Estimating the total cost of renting and owning o Renting-rent payment, security deposit o Owning-down payment, mortgage payment, closing costs, maintenance, taxes and insurance Owning also has tax advantages Special Types of Mortgages - Graduated payment mortgage: a mortgage where the payments are low in the early years and then rise to higher level over time - Balloon payment mortgage: a mortgage where the monthly payments are relatively low, but one large payment is required after a specified period to pay off the mortgage loan - Interest-only mortgages o Adjustable-rate mortgages that allow home buyers to pay only interest on the mortgage during the first few years Mortgage Refinancing - Mortgage refinancing: paying off an existing mortgage with a new mortgage that has a lower interest rate - Rate modification: may be available to some fixed-rate mortgage holders - Refinancing analysis: compare the monthly savings to the cost of refinancing o Must pay additional closing costs How a Mortgage Fits Within Your Financial Plan - Key mortgage loan decisions for your financial plan are: o What mortgage amount can you afford? o What maturity should you select? o Should you consider a fixed-rate or an adjustable-rate mortgage?
Chapter 11, Auto and Homeowner’s Insurance Background on Insurance - Property insurance ensures that damages to your auto and home are covered - Also protects your personal assets from liability - Liability: the amount that you may be required to pay someone for damages that you caused - Its primary function is to maintain your existing level of wealth Managing Risk - Risk: exposure to events or perils that can cause financial loss - Risk management: decisions about whether and how to protect against risk - Avoid risk o Do not own any assets - Reduce risk o Limit the dollar value of assets - Accept risk o Feasible when likelihood of financial loss is low o Buying insurance differs from other purchases in that there is no immediate benefit o Remember that you do not have control over adverse events - Insure against risk o Premium: the cost of obtaining insurance - Economic impact on the decision to insure against risk o When economic conditions are favorable, people are willing to purchase or increase insurance coverage o When economic conditions are weak, they tend to reduce insurance o Consider the possible danger in reducing insurance coverage Role of Insurance Companies - Types of Insurance o Many types of insurance available Most popular forms are property and casualty insurance, life insurance and health insurance - Insurance company operations o Relationship between insurance companies and premiums - Underwriters: from an insurance perspective, underwriters are hired to calculate the risk of specific insurance policies, decide what policies to offer, and what premiums to charge
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Group insurance company’s employees to obtain discounts Role of insurance agents and brokers o Insurance agent: recommends insurance policies for customers o Captive (or exclusive) insurance agent: works for one particular insurance company o Independent insurance agent: represent many different insurance companies Auto Insurance - Auto insurance protects you from financial loss from damage or liability resulting from automobile accidents - Cost has increased in recent years o Personal injury attorneys No-fault insurance programs: do not hold a specific driver liable for causing the accident Idea is to reduce cost - Insurance policy: contract between an insurance company and policy holder - Auto insurance policy: specifies the coverage provided by the insurance company for a particular individual and vehicle - Coverage A: Liability coverage o Bodily injury liability coverage: protects against liability associated with injuries caused by the policyholder o Property damage liability coverage: protects against losses that result when the policyholder - Policy limits o Often described as 100/300/50 $100,000 per person injured in an accident $300,000 for all people combined $50,000 for property damage o Financial responsibility laws: laws that require individuals who drive cars to purchase a minimum amount of liability insurance - Coverage B: Medical Payments Coverage: insures against the cost of medical care for you and other passengers in your car when you are at fault an accident o Applies only to insured car - Coverage C: Uninsured or Underinsured Motorist coverage o Uninsured motorist coverage: insures against the cost of bodily injury when an accident is caused by another driver who is not insured o Underinsured motorist coverage: insures against bodily injury and drivers who have insufficient coverage - Coverage D: Collision and Comprehensive Coverage o Collision insurance: insures against costs of damage to your car resulting from an accident in which the policy holder is at fault o Comprehensive coverage: insures you against damage to your car that results from floods, theft, hail, explosions, riots, and various other events
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Deductible: a set dollar amount that you are responsible for paying before any coverage is provided by your insurer Other provisions are available for an additional premium Summary of auto insurance provisions o Contained in standard insurance policy o Expenses incurred by auto insurance companies cover claims and lawyers’ fees
Characteristics of your car o Value of car o Repair record of your car - Your personal characteristics o Your age o Your mileage o Your driving record o Your location o Your driving training o Your school performance - Your insurance company o Always obtain several different quotes o Several websites offer quotations o Compare prices at renewal time If you are in an Auto Accident - Contact police immediately - Request information from other driver(s), including insurance information - Obtain contact information from witnesses - Take pictures of any evidence - Write down details of an accident - Ask for a copy of the police report - File a claim with your insurance company immediately - Save receipts for any expenses and submit to insurance company Homeowners’ Insurance - Homeowners’ Insurance: provides insurance in the event of property damage, theft, or personal liability relating to your home - Covers events from fire to burglary - Homeowners’ insurance structured in six packages, each covering different perils in different amounts - Property damage: o Cash value policy: pays you for the value of the damaged property after considering depreciation o Replacement-cost policy: pays you for the actual cost of replacing the damaged property Minimum limit-many insurers require at least 80% of replacement cost
Financial institutions may require enough insurance to cover your mortgage - Other structures on property may also be covered - Personal property is covered up to a specified amount o Home inventory: contains detailed information about your personal property that can be used when filing a claim - Personal property replacement cost coverage is available - Personal property floater: an extension of the homeowner’s insurance policy that allows you to itemize your valuables - Home office provision may be requested or you could purchase a separate policy - Liability: included to cover any lawsuits resulting from an event occurring in your home or on your property - Other types of provisions: o Additional living expenses o Loss of use provisions Homeowners’ Insurance Premiums - Factors that affect homeowner’s insurance premiums o Value of insured home o Deductible o Location o Degree of protection o Discounts - Strategies to reduce your homeowner’s insurance premium o Increase your deductible o Improve protection o Use one insurer for all types of insurance o Stay with the same insurance company o Shop around Filing a Claim - Contact insurance company immediately if damage occurs - Claims adjuster estimates damage - Present your home inventory - Get an independent estimate - Appeal low estimates by insurance company Renter’s Insurance - Renter’s insurance: an insurance policy that covers your possessions within a house, condo, or apartment that you are renting - Renter’s insurance policy provisions o Specifies maximum coverage for personal for personal assets o Also covers liability from damages to a person on your property Umbrella Personal Liability Policy: - Umbrella Personal Liability Policy: a supplement to auto and homeowner’s insurance that provides additional personal liability coverage
o Especially important for wealthy people o Must show proof of existing coverage How Home and Auto Insurance Fits Within Your Financial Plan - Key decisions about car and homeowner’s insurance for your financial plan are: o Do you have adequate insurance to protect your wealth? o How much insurance should you plan to have in the future?
Chapter 12, Health and Disability Insurance Health Insurance: Insurance offered by private insurance companies or the government that covers health care expenses incurred by policyholders for necessary medical care - Critical component of financial planning - Cost of health insurance - About 1 in 5 workers in uninsured - Your health insurance decision is not whether to obtain it, nut which health plan to purchase and how much coverage to purchase - Many options available Private Health Insurance: insurance that can be purchased from private insurance companies to provide coverage for health care expenses Types of private health insurance coverage - Most common are fee for service (indemnity) plans or managed care plans - Fee for service plan: health insurance that reimburses individuals for part or all of the expenses they incur from health care providers; individuals are free to seek care from a primary care physician or a specialist - Managed health care plan: a health insurance policy under which individuals receive services from specific doctors or hospitals that are part of the plan - Health maintenance organization (HMO): a health insurance plan that covers health care services approved by doctors; a primary care physician provides general health services and refers patients to a specialist as necessary - Preferred provider organization (PPO): a health insurance plan that allows individuals to select a health care provider and covers most of the fees for services: a referral from a doctor is not required to visit a specialist - Discount on charge arrangement: an arrangement in which the preferred provider organization (PPO) pays a specific percentage of the health care providers’ charges -
Per diem rate arrangement: an arrangement in which the preferred provider organization (PPO) pays the provider a specific sum for each day a patient is hospitalized
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Premiums for private health care insurance o Higher for family coverage
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o Self-employed, unemployed or those whose employer doesn’t offer health care may purchase private coverage o Quotes and applications available online Comparison of private health insurance plans o Trade-offs between flexibility in selecting physician and premium o HMOs and PPOs offer brochures with comparative information
Contents of Health Care Insurance Policies -
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Identification of insured persons Location Preexisting conditions Cancellation and renewability options Other coverage o Rehabilitation o Mental Health Pregnancy Dental insurance: insurance that covers part or all of the fees imposed for dental services, including annual checkups, orthodontics, and oral surgery Vision insurance: insurance that covers part or all of the fees imposed for optician and optometrist services, including annual checkups, glasses, contact lenses, and surgery Determinants of unreimbursed medical expenses o Deductible o Coinsurance o Stop-loss provision o Coverage limits o Coordination of benefits Expenses not covered by private insurance plans o These should be included in your budget o Flexible spending account: an account established by the employer for the employee to use pretax income to pay for medical expenses Funds cannot be carried over to the next year
Government Health Care Plans -
Medicare o Provides health insurance to people over age 65
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o Part A: covers impatient care in hospitals or nursing facilities and some home health o Part B is optional coverage o Part C is a combination of Part A and Part B provided through private insurance companies o Part D provides coverage for prescription Medigap insurance: insurance provided by private insurance companies to cover medical expenses that are not covered by Medicare Medicare Prescription Act o Passed in 2003 o Allows coverage for senior citizens and persons with disabilities o Covers some prescription drugs o Allows seniors to purchase various forms of coverage for prescription drugs o Health savings account: an account that shelters income from taxes and that can be used to pay health care expenses Medicaid: a federal program that provides health care to the aged, blind, disabled, and needy families with dependent children o Recipients must meet federal guidelines o Administered on a state-by-state basis
Legislation Affecting Health Care Insurance -
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Consolidated omnibus Budget Reconciliation Act (COBRA) o COBRA allows continuation of coverage provided through an employer’s plan for 18 months Health Insurance Portability and Accounting Act (HIPAA) o HIPAA prohibits insurance companies from denying health insurance coverage based on applicant’s health status, medical history, previous claims, or disability Affordable Care Act o Patient Protection and Affordable Care Act (PPACA) passed in 2010 o Allows young adults to continue on their parent’s plan until age 26 o Health insurers cannot deny applicants based on preexisting conditions o Remains a contentious political issue
Long-Term Care Insura...