Personal Finance Test 5

Mortgage Loan

Loan to purchase real estate in which the property itself serves as collateral

Rent

Cost charged for using an apartment or other housing space

Security Deposit

Ensures that you do not move without paying your rent

Damage Deposit

For repairs beyond normal wear and tear

Lease

Contract specifying both tenant and landlord legal responsibilities and restrictions

Periodic Tenancy

Lease agreement stays in effect unless either party gives proper notice (month to month)

Tenancy for a Specific Time

Lease agreement that expires at end of period. Agreement terminates unless both parties agree to renew. (one year lease)

With _____, the agreement stays in effect unless either party gives proper notice.

a) a periodic tenancy lease

b) a security deposit

c) a sublease

d) a tenancy for a specific time

a) a periodic tenancy lease

Single-Family Dwelling

Housing unit that is detached from other units

Condominium

A housing unit that is part of a multi-unit building where individual units are owned separately, but common areas are shared.

Homeowner’s association

An organization in a community of homeowners that makes and enforces rules for the properties and residents. The association typically manages common areas and amenities.

Homeowner’s association fee

A monthly or annual fee paid by homeowners to their association for the maintenance of common areas and shared amenities.

Cooperative (or Co-op)

A type of housing where residents own shares in a corporation that owns the building, allowing them to occupy a unit, with shared ownership of common areas.

Manufactured housing

A type of prefabricated home that is built in a factory and transported to the site. These homes are often more affordable and can be placed on a permanent foundation or in a mobile home park.

Down Payment

Portion of the purchase price that is not borrowed

Closing Costs

include fees and charges other than the down payment

Points

Fee equal to 1% of the total mortgage loan amount. The IRS considers points to be prepaid interest

Escrow Account

used to accumulate funds for both the real estate property taxes and the homeowner’s insurance premiums

Loan-to-Value Ratio

a number that shows how much you're borrowing compared to the value of the home.

Private mortgage insurance (PMI)

a type of insurance you might have to pay for if you buy a home with a down payment that's less than 20% of the home's price.

The abbreviation PITI stands for principal, interest, real estate taxes, and investment.

True or False

False

The escrow account is used to accumulate funds for

a) both homeowner's insurance premiums and    real estate property taxes.
b)  the down payment.
c)  real estate property taxes.
d)  homeowner's insurance premiums.

a) both homeowner's insurance premiums and real estate property taxes.

Steps in the home-buying process

1. Get your finances in order

2. Get preapproved for a mortgage

3. Search for a home online an in person

4. Agree to term with the seller

5. Formally apply for a mortgage loan

6. Prepare for the closing

7. Sign your name on closing day

Amortization schedule

a table that lays out the amount of each payment that goes towards principal and interest

The dollar value of the home in excess of the outstanding mortgage debt is called

  a)  asset value
  b)  equity
  c)  amortization
  d)  PITI

  b)  equity

The conventional mortgage loan

a regular home loan that’s not backed by the government, generally consider to be a fixed rate, fixed-term, and fixed payment mortgage loan

The adjustable-rate mortgage loan

a type of home loan where the interest rate can change over time based on the rising or falling cost of credit in the economy

Federal Housing Administration

insures loans that meets its standards to encourage home ownership.

Department of Veterans Affairs

guarantee’s loans for eligible veterans.

Second Mortgage

another loan you take out using your home as collateral, in addition to your main mortgage.

Listing Agreement

the contract between the seller and the broker

The mortgage clause that prohibits a seller from letting a new buyer assume the mortgage is the _____ clause.

a)  accelerator
b)  prepayment
c)  due-on-sale
d)  contingency

c)  due-on-sale

Property Insurance

protects you from financial losses resulting from the damage to or destruction of your property or possessions

Liability Insurance

covers the insured when he or she is held responsible for losses suffered by others

Both property and liability insurance protect you from financial losses resulting from damage to or destruction of your property.

True or False

False

Speculative Risk

exists in situations where there is potential for gain as well as for loss

Pure Risk

Exists when there is no potential for gain, only the possibility of loss

Peril

an event that can cause financial loss, like property damage, illness, injury, or legal liability from an accident.

Loss Frequency

Likely number of times that a loss might occur over a period of time

Loss Severity

The potential magnitude of the loss(s)

Risk Avoidance

Retain from owning items or engaging in activities that expose you to possible financial loss, like not owning or driving a car

Risk Retention

to retain or accept the risk

Loss Control

to reduce loss frequency and loss severity, like installing heavy-duty locks, fire alarms or smoke detectors.

Risk Transfer

an insurance company agrees to reimburse you for a loss, like a star running back pays an insurance company to insure his legs.

Risk Reduction

includes mechanisms such as insurance, that reduce the overall uncertainty about the magnitude of loss

Large-Loss Principle

Insure the losses that you cannot afford, pay the small losses out of your own pocket

The primary difference between a speculative risk and a pure risk is that there is a chance for _____ in a speculative risk, but a chance for _____ in a pure risk.

a) gain and loss; only gain

b) gain and loss; only loss

c) only gain; gain and loss

d) only loss; gain and loss

b) gain and loss; only loss

Which of the following is a peril?

a) Fire

b) Frozen water pipes

c) All of these

d) Wind

c) All of these

Insurance

financial product used for transferring and reducing risk by having a large number of people share in the financial losses suffered by members of the group

Premium

monthly or annual fee charged for insurance protection

Insurance Policy

a contract between the person buying insurance and the insurance company.

Hazard

Any condition that increases the probability that a peril will occur

Physical Hazard

a particular characteristic of the insured person or property that increases the chance of loss. An example of a physical hazard is high blood pressure in a person covered by health insurance.

Moral Hazard

when a person is indifferent to a peril. For example, a morale hazard exists if the insured party, knowing that theft insurance will pay for the loss, becomes careless about locking doors and windows.

Moral Hazard

the possibility that the insured person will want or even cause a peril to occur in order to collect reimbursement from the insurance company. 

Fortuitous losses

unexpected in terms of both their timing and their magnitude

Financial Loss

any decline in the value of income or assets in the present or future

Principle of Indemnity

Insurance will pay no more than the actual financial loss suffered

Policy limits

Specify the maximum dollar amounts that will be paid under the policy

Deductibles

requirements that the insured pay an initial portion of any loss

Coinsurance

method by which the insured and the insurer share proportionately in the payment for a loss

Insurance companies often limit or deny coverage if a loss occurs as a result of a _____ hazard.

a) moral

b) moral or morale

c) physical

d) morale

b) moral or morale

Homeowner’s general liability protection

applies when you are legally liable for the losses of another person

Homeowner’s no-fault medical payments protection

will pay for bodily injury losses suffered by visitors regardless of who was at fault

Homeowner’s no-fault property damage protection

will pay for property losses suffered by visitors to your home

Replacement-cost requirement

Requires a home to be insured for 80–100% of its replacement value to fully cover a loss.

Actual Cash Value

the purchase price of the property less depreciation

Contents replacement-cost protection

pays the full replacement cost of any personal property

Homeowner's insurance includes

a) property coverage.

b) liability coverage.

c) life insurance coverage.

d) both property coverage and liability coverage.

d) both property coverage and liability coverage.

Automobile Bodily Injury Liability

occurs when a driver or car owner is held legally responsible for bodily injury losses that other people, including pedestrians, suffer.

Automobile Property Damage Liability

occurs when a driver or car owner is held legally responsible for damage to other’s property

Automobile medical payments insurance

covers bodily injury losses suffered by the driver of the insured vehicle and any passengers, regardless of who is at fault

Personal Injury Protection (PIP)

medical payments coverage for the driver and any passengers for bodily injury losses as well as possibly lost wages and rehabilitation expenses common in no-fault accident states

Collision insurance

reimburses an insured for losses to their vehicles resulting from a collision with another car or object or from a rollover

Comprehensive automobile insurance

protects against property damage losses to an insured vehicle caused by perils other than collision and rollover. Covered perils include fire, theft, vandalism, hail, and wind among many others

Umbrella liability insurance

extends the basic liability coverage limits provided by currently held homeowners, automobile, and professional liability policies

Professional liability insurance

people who work in professions that expose them to liability for losses suffered by their clients or patients

Floater policies

provide protection for moveable assets with limits above and beyond what a homeowner’s insurance policy might cover (often included in a standard homeowners policy)

After a Halloween night of madness on Sixth Street, Mario and two friends took Mario's four-wheel-driving Bronco for a midnight tour of campus. The next morning campus police found Mario and his Bronco in the middle of the campus fountain. Damage to the fountain is covered by Mario's _____ insurance, and damage to the Bronco is covered by _____ insurance.

a) comprehensive; collision

b) property damage liability; collision

c) comprehensive; property damage liability

d) property damage liability; comprehensive

b) property damage liability; collision

Claims adjuster

will assess the loss and make an estimate of the amount the insurance company will pay

Signing a release

Only sign once you are satisfied, and that the full magnitude of the loss has become evident