CH. 8 FIN 310

What are the two main categories of costs when purchasing a home?

One-time costs and recurring costs.

What does PITI stand for in mortgage payments?

Principal, Interest, Taxes, and Insurance.

What is a typical down payment percentage for a home purchase?

10% - 20% (20% is better to avoid PMI).

What is PMI, and when is it required?

Private Mortgage Insurance; required when the down payment is less than 20%.

What is a "point" in mortgage financing?

A fee equal to 1% of the mortgage amount, paid upfront to lower the interest rate.

Name two government-backed loans that allow lower down payments.

FHA (Federal Housing Administration) and VA (Veterans’ Administration) loans.

What is the purpose of paying points on a mortgage?

To reduce the mortgage interest rate over the life of the loan.

What is a key factor in deciding whether paying points is worth it?

How long you expect to keep the mortgage.

What is the maximum recommended percentage of gross monthly income that should go toward PITI?

28%.

What is the maximum recommended percentage of gross monthly income for total debt payments (including PITI)?

36%.

What are the two ratios lenders use to evaluate mortgage affordability?

Front-end ratio (PITI/gross income) and back-end ratio (PITI + other debt/gross income).

What is the main advantage of a fixed-rate mortgage?

Stable payments unaffected by market interest rate changes.

What is the main risk of an adjustable-rate mortgage (ARM)?

Interest rates (and payments) can increase over time.

What is a "cap" in an ARM?

A limit on how much the interest rate or payment can change.

What is negative amortization in an ARM?

When monthly payments are too small to cover interest due, increasing the loan balance.

Why might someone choose an ARM over a fixed-rate mortgage?

Lower initial interest rates and the possibility of rates decreasing.

What is a key advantage of a 15-year mortgage compared to a 30-year mortgage?

Lower total interest paid over the life of the loan.

What is a key advantage of a 30-year mortgage compared to a 15-year mortgage?

Lower monthly payments, providing more financial flexibility.

What is refinancing, and when should it be considered?

Replacing an existing mortgage with a new one; considered when rates drop significantly (e.g., 2% or more).

What is a subprime mortgage?

A mortgage for borrowers with low credit scores, often with higher interest rates.

What is predatory lending?

Abusive lending practices that take advantage of borrowers, such as excessive fees or hidden terms.

Name one predatory lending practice mentioned in the slides.

Charging excessive points/broker fees, steering borrowers to high-rate loans, or imposing prepayment penalties.

What is a balloon loan?

A loan with a large lump-sum payment due at the end, often hidden in predatory lending.

What is loan flipping?

Unnecessary refinancing of a loan with no benefit to the borrower, often to generate fees.

What is a key financial advantage of renting over buying?

Greater financial and lifestyle flexibility.

What is a key financial advantage of buying over renting?

Potential home appreciation, tax deductions, and forced savings through equity buildup.

If you own a home for only one year, why might selling it result in a financial loss?

Sales commissions may exceed any appreciation in home value.

What is the purpose of an appraisal fee in closing costs?

To assess the fair market value of the home for the lender.

What is a prepayment penalty?

A fee charged for paying off a mortgage early, often used in predatory loans.

What is a yield-spread premium in predatory lending?

A kickback to brokers for securing loans with excessively high interest rates

What are the one-time costs of purchasing a home?

Down payment

Closing/settlement costs

What are the recurring costs of purchasing a home?

Monthly mortgage payments - PITI