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4 steps in smart buying process
Differentiate Want From Need
Do your homework
Make your purchase
Maintain your purchase
Edmunds Car Buying Guide
Provides manufacturers suggested retail price, the dealer's invoice price, any rebates and financing incentives, projected resale values and insurance premium information, along with reviews and evaluations.
Holdback
In auto sales, an amount of money generally in the 2 to 3 percent range, that the manufacturer gives the dealer after the sale of an automobile
Leasing a vehicle
For people who prefer to get a new vehicle every few years, drive less than 15,000 miles annually and would rather not put up with the hassle of trade-in and maintenance
Closed-end lease or walk-away lease
A vehicle lease in which you return the vehicle at the end of the lease and literally walk away from any further responsibilities. You just need to bring the vehicle back in good condition with normal wear and tear, and the vehicle dealer assumes the responsibility for reselling the vehicle
Purchase option
A vehicle lease option that allows you to buy the vehicle at the end of the lease for either it’s residual value or a fixed price that is specified in the lease
Open end lease
A vehicle lease stating that when the lease expires, the current market value of the vehicle will be compared to its residual value, as specified in the lease
Monthly Lease Payment depends on
The agreed-on price of the vehicle
Any other up-front fees, such as taxes, insurance, or service contracts
Your down payment plus any trade-in allowance or rebate
The value of the vehicle at the end of the lease
The rent or finance charges
The length of the lease
lemon laws
– these are state laws that protect consumers when they purchase a vehicle (car, truck or motorcycle) that fails to function as it should.
Cooperative (co-op)
An apartment building or group of apartments owned by a corporation in which the residents of the building are stockholders
Homeowners Fee
A monthly fee paid by shareholders to the cooperative corporation for paying property taxes and maintaining the building and grounds
Condominium
A type of apartment building or apartment complex that allows for the individual ownership of the apartment units but joint ownership of the land, common areas and facilities
Down Payment
The amount of money outside or not covered by mortgage funds that the home buyer puts down on a home at the time of sale
Closing or settlement costs
Expenses associated with finalizing the transfer of ownership of the house
What are the components of closing costs?
points or discount points
loan origination fee
loan application fee
appraisal fee
title search
PITI (Principal, Interest, Taxes, and Insurances)
Escrow Account
What 3 things do Banks and Lenders look at when you apply for a loan?
Financial History
Ability to Pay
The appraised value of the home you are interested in buying
Mortgage Bankers
Someone who originates mortgage loans with funds from other investors, such as pension funds and insurance companies, and services the monthly payments
Mortgage Brokers
An intermediary who, for a fee, secures mortgage loans for borrowers but doesn't actually make those mortgage loans. A mortgage broker will find the best loan available for the borrower.
Conventional Mortgage Loans
A loan from a bank or an S&L that is secured by the property being purchased
Government Backed Mortgage Loan
A mortgage loan made by a traditional lender but insured by the government
Veterans Administration
Federal Housing Administration
Assumable Loan
A mortgage loan that can be transferred to a new buyer, who simply assumes or takes over the mortgage obligations. Such a mortgage saves the new buyer the costs of obtaining a new mortgage loan
Prepayment privilege
A clause in a mortgage allowing the borrower to make early cash payments that are applied toward the principal
Adjustable rate mortgage
A mortgage in which the interest rate charged fluctuates with the level of current interest rates. The loan fluctuates or is adjusted, at set intervals (say, every year) and only within set limits
Initial rate
The initial rate charges on an ARM, sometimes called the teaser rate. This rate holds only for a short period, usually between 3 and 24 months, before being adjusted at which point it generally rises
periodic cap
limits the amount by which the interest rate can change during any adjustment
lifetime cap
limits the amount by which the interest rate can change during the life of the ARM
payment cap
sets a dollar limit on how much your monthly payment can increase during any adjustment period.
Negative Amortization
A situation in which the monthly payments are less than the interest that’s due on the loan. As a result, the unpaid interest is added to the principal, and you end up owing more at the end of the month than you did at the beginning of the month
Balloon Payment Mortgage
A mortgage with relatively small monthly payments for several years (5 or 7) after which the loan must be paid off in one large balloon payment.
Graduated Payment Mortgage
A mortgage in which payments are arranged so they steadily rise for a specified period of time, generally 5 to 10 years, and then level off
Growing equity mortgage
A conventional 30-year mortgage in which prepayment is automatic and planned for. Payments begin at the same level as those for a 30 year fixed rate mortgage and then rise annually, generally increasing at between 2 and 9 percent per year, allowing the mortgage to be paid off early
Shared appreciation mortgage
A mortgage in which the borrower receives a below-market interest rate in return for which the lender receives a portion of the future appreciation (generally between 30 and 50%) in the value of the home
Interest only mortgage
A mortgage with interest only payments for an initial set period ( for 5 years on a 30 year loan) after this period, the borrower pays interest and principal with payments adjusted upward to reflect full amortization over the remaining years of the loan.
Private Mortgage Insurance
Insurance that protects the lender in the event that the borrower is unable to make the mortgage payments
Independent or Exclusive Buyer-Broker
A real estate agent hired by the prospective home buyer who exclusively represents the home buyer. Such brokers are obligated to get the buyer the best possible deal and in general are paid by splitting the commission with the sellers agent
Real Estate Short Sale
A sale of property where the proceeds from the sale fall short of the balance owed on the property
Earnest Money
A deposit on the purchase to assure the seller that the buyer is serious about buying the house
Closing
The time at which the title is transferred and the seller is paid in full for the house, At this time, the buyer takes possession of the house
Settlement or Closing Statement
A statement listing the funds required at closing, which the real estate broker should furnish to the buyer for review at least 1 business day before closing
Patient Protection and Affordable Care Act
Aka obamacare, this major health care act was signed into law in 2010 and put in place comprehensive health insurance reforms
Risk pooling
Sharing the financial consequences associated with risk
Premium
A life insurance payment
Actuaries
Statisticians who specialize in estimating the probability of death based on personal characteristics
Face amount or face of policy
The amount of insurance provided by the policy at death
Insured
Is the person whose life is insured by the life insurance policy
Policyholder or policy owners
The individual or business that owns the life insurance policy
Beneficiary
The individual designated to receive the insurance policy’s proceeds upon the death of the insured
Earnings Multiple Approach
A method of determining exactly how much life insurance you need by using a multiple of your yearly earnings
Term insurance
A type of insurance that pays the beneficiary a specific amount of money if the policy holder dies while covered by the policy
Cash value insurance
A type of insurance that has two components; life insurance and a savings plan
Renewable term insurance
A type of term insurance that can be renewed for an agreed-on period or up to a specified age (65 or 70) regardless of the insured’s health
Decreasing term insurance
Term insurance in which the annual premium remains constant but the face amount of the policy declines every year
Group Term Insurance
Term insurance provided typically without a medical exam, to a specific group of individuals such as company employees, who are associated for some purpose other than to buy insurance
Credit or mortgage group life insurance
Group life insurance that's provided by a lender for its debtors
Convertible term life insurance
Term life insurance that can be converted into cash-value life insurance at the insured’s discretion, regardless of his or her medical condition and without a medical exam
Whole life insurance
Cash-value insurance that provides permanent coverage and a death benefit when the insured dies. If the insured turns 100, the policy pays off, even though the insured hasn’t died
Cash value
The money that the policyholder is entitled to if the policy is terminated
Nonforfeiture right
The right of the policyholder to choose to receive the policy’s cash value; in exchange, the policyholder gives up his or her right to a death benefit
Universal life insurance
Policy is a type of cash-value that’s much more flexible than whole life. It allows the policyholder to vary the premium payments and the level of protection
Variable life insurance
Provides permanent insurance coverage as whole life does; however, the policyholder, rather than the insurance company, takes on the investment risk.
Coverage grace period
The late payment period for premiums during which time the policy stays in effect and no interest is charged. If payments still aren’t made, the policy can be canceled after the grace period
Loan clause
A clause that provides the right to borrow against the cash value of the policy at a guaranteed interest rate
Policy Reinstatement clause
A clause that provides the right to restore a policy that has lapsed after the grace period has expired. Generally, reinstatement is provided for within a specified period( usually 3 to 5 years after the policy has expired)
Change of policy clause
A clause that gives the policyholder the right to change the form of the policy, for example, from a continuous-premium whole life policy to a limited premium whole life policy
Riders
A special provision that may be added to a policy that either provides extra benefits to the beneficiary or limits the company’s liability under certain conditions
Settlement or payout options
The alternative ways that a beneficiary can choose to receive the policy benefits upon the death of the insured
Traditional net cost method (TNC)
A method of comparing insurance costs that sums the premiums over a stated period (10 or 20 years) and subtracts from this the sum of all dividends over that same period
Interest adjusted net cost method (IANC) or Surrender Cost Index
A method of comparing insurance costs that incorporates the time value of money into its calculations
Basic Health Insurance
Includes a combination of hospital, surgical, and physician expense insurance
Hospital Insurance
Covers costs related with a hospital stay, room charges, nursing costs, operating room fees, drugs supplied by the hospital
Surgical insurance
Covers the cost of surgery
Physician Expense Insurance
Covers physician fees outside of surgery, office or home visits, x-rays not performed in a hospital
Major Medical Expense Insurance
Covers medical costs beyond those covered by basic health insurance
Fee for service or traditional indemnity plan
An insurance plan that provides reimbursement for all or part of your medical expenditures. In general, it gives you a good deal of freedom to choose your doctor and hospital
Manages health-care or prepaid care plan
An insurance plan that entitles you to the health care provided by a specific group of participating doctors, hospitals, and clinics. These plans are generally offered by health maintenance organizations or variations of them
Coinsurance or percentage participation
An insurance provision that defines the percentage of each claim that the insurance company will pay
Co-payment or deductible
The amount of expenses that the insured must pay before the insurance company will pay any insurance benefits
HMO
Is a prepaid insurance plan that entitles members to the services of participating doctors, hospitals, and clinics
Individual practice association plan (IPA)
An HMO made up of independent doctors, in which the patient visits the doctors’ regular offices to receive medical treatment
Group practice plan
An insurance plan in which doctors are generally employed directly by an HMO and members of the HMO must receive their medical treatment from these doctors at a central facility
Point of service plan
An insurance plan that allows its members to seek medical treatment from both HMO-affiliated doctors and non-HMO-affiliated doctors
Preferred Provider Organization (PPO)
An insurance plan under which an employer or insurer negotiates with a group of doctors and hospitals to provide healthcare for its employers or members at reduced rates
Group Health Insurance
Health insurance usually sold without a medical exam, to a specific group of individuals who are associated for some purpose other than to buy insurance
Individual Insurance Policy
An insurance policy that is tailor-made for you, reflecting your age, health, and chosen deductible size
Workers compensation laws
State laws that provide payment for work-related accidents and illnesses
Medigap insurance
Insurance sold by private insurance companies aimed at bridging gaps in Medicare coverage
Medicaid
A government medical insurance plan for the needy
Flexible Spending Account (FSA)
is a savings plan established by an employer that allows each employee to have pretax earnings deposited into a specially designated account. Employees can withdraw funds from their accounts to pay for unreimbursed medical or dental expenses
Health Reimbursement Arrangements (HRA)
An account that your employer deposits money into for you that can go toward qualified medical expenses
High-Deductible Health Plan (HDHP)
With a savings option such as an HRA or HSA (Health Savings Account)
Disability insurance
Health insurance that provides payments to the insured in the event that income is interrupted by illness, sickness, or accident
Short term disability (STD)
Provides benefits over a given period, generally from 6 months to 2 years
Long term disability (LTD)
Provides benefits until an individual reaches the age specified in the contract, generally 65 or 70, or for the insured’s lifetime
Waiting or elimination period
The period after the disability occurs during which no benefits occur
Waiver of premium
A disability insurance provision that allows insurance to stay in force should the policyholder become unable to work because of disability or illness
Rehabilitation coverage
A disability insurance provision that provides payments for vocational rehabilitation, allowing the policyholder to be retrained for employment
Long term care insurance
Aimed at covering costs associated with long-term nursing home care, commonly associated with victims of stroke, chronic illness, or Alzheimer’s disease or those who can simply no longer manage to live on their own
Peril
An event or happening, whether natural or human-made, that causes a financial loss
HOs
The 6 standard homeowners insurance policies available to homeowners and renters
Named Perils
A type of insurance that covers a specific set of named perils. If a peril isn’t specifically named, it isn’t covered