FIN 2114 Exam 3 (8-11, 16-17)

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