Financial Stewardship Exam 2

For a homeowner with a mortgage, which of the following payments will be unchanged throughout the loan?

principle + interest

The author of Your Money Map suggests all of the following tips to pay off a mortgage more quickly, except

shop for the best interest rate

People tend to value the assets they already own above their market price because

the endowment effect

Homebuyers who are looking for a mortgage but can't pay at least 20% as a down payment will

likely pay PMI or a higher interest rate

Which of the following best describes cognitive bias?

a tendency in all people to mispercieve relevant information.

When the author of Your Money Map describes the snowball principle, he is referring to

paying off debt

If lending money involved no risk whatsoever, interest rates would still be charged on debt due to

the cost of loaning funds

a history of your payment of previous obligations is known as a

credit report

which answer is the best example of credit?

Rashida pays for work expenses on an account that charges 12% interest on unpaid balances

which of the following accounts typically charges the lowest interest?

Home loans

which of the following is the best reason to take on a loan?

the loan increases a person's earning interest

Which of the following was not discussed as an important detail when buying life insurance?

selecting a policy that bundles with an auto and home insurance

the purpose of any insurance, in general, is to

protect you from financially devastating events

how much will an insurer pay if you claim a 2,500 loss with a 1,000 deductible?

1,500

which of the following people most need life insurance?

Emma, a primary income earner with a stay at home husband and kids

the primary purpose of life insurance is to provide

financial security for dependents in the event of death

which of the following would likely raise the costs of health insurance premiums?

adding dependents to the plan

which type of insurance provides for the partial replacement of income by employees as a result of accident, illness, etc.?

disability

health savings accounts are available to people who hold what type of health insurance?

high deductible health plan

a standard homeowners insurance policy does NOT provide full value protection for which of the following?

rare and valuable art

some common liability risks include

driving a car, entertaining guests at home, being careless in performing professional duties. (all of the above)

auto insurance premiums would be affected by

All of these
- Auto body type
- Age of the Driver
- Business usage

what type of auto insurance would compensate Emily in the event that hail damaged the roof of her SUV?

Comprehensive

Behavioral Economics argues that:

people aren't always rational

cognitive bias

a systematic error in thinking that occurs when people are processing and interpreting information in the world around them

3 cognitive biases

Endowment Effect
Sunk Cost Fallacy
Transaction Utility

Endowment effect

an emotional bias that causes individuals to value an owned object higher, often irrationally, than its market value

sunk cost fallacy

reluctance to abandon a bad strategy or course of action because one's heavy investment makes it too emotionally painful to give up

sunk cost

money that has already been spent and cant be recovered

transaction utility

the happiness a consumer gets from the perceived value of the deal

3 primary ways to buy a car

1. Buy New
2. Buy used
3. Lease- long term renting

Paying for a car

1. Cash
2. Financial Institiution Loan
3. Seller Loan

Cash:

most ideal, always possible; no interest, less likely to buy more than you can afford

Financial Institution Loan

better than seller loan, must get pre-approved, check with your existing bank or credit union

Seller Loan

dealer or independent lot; more likely to pressure

where to buy a car

franchise partner- new
Superstore- larger selection
Independent used car lots
Private individuals

important trade-off

more reputable = more expensive
lower priced seller= pay price of time

costs of owning a home with mortgage

1. closing cost
2. down payment
3. private mortgage insurance (sometimes)
4. Monthly Payments (w or W/out mortgage)
5. maintenance fees

closing costs

up front costs paid when the sale of the home is closed

closing costs include

Loan application origination fees
title search insurance
real estate agent fees
attorney fees
appraisal fees

title search insurance

proof of ownership

real estate agent fees

help find and transact the sale

Attorney fees

ensure legality of deal is correct

appraisal fees

ensure the home is worth what you are paying

down payment

represents buyers initial net worth in the home; at least 20% of purchase price

monthly mortgage payment components (PITI)

principle
interest
taxes
insurance

principle

funds that directly pay on the loan; lowers outstanding liability (constant)

interest

funds that go to the financial institution to cover their costs in lending the money (constant)

property taxes

funds collected to pay for city services like education, fire, protection, police officers, etc

home insurance

funds that compensate the value of the home in the event of unexpected change

home insurance and property taxes will probably

increase over the years

why renting may be better deal

1. cant afford downpayment
2. life is changing
3. cant afford homeowner responsibility
4. don't want homeowner responsibility

why owning may be a better deal

1. home is investment
2. tax reductions
3. home is inflation hedge
4. personal satisfaction

the steps to buying a home

1. prequalify for loan with lender
2. choose real estate agent to rep you
3. visit homes
4. enter a contract for a specific time
5. close

debt

a promise to pay someone back

2 main reasons a borrower pays interest

1. lenders cost
2. risk

3 ways to pay for something

cash
loan
credit

when is debt bad?

if you are gaining liabilities faster than assets

When is debt good?

when it improves your earning potential: education
when debt allows you to purchase an asset that appreciates

when is debt "okay"?

when its not possible to do something you need without it.

types of debt

-mortgages (lowest interest rate/ less risky)
-car loans
-lines of credit with collateral
-student loans
- credit cards
- check/cash advance (highest interest rate)

collateral

Something pledged as security for repayment of a loan to be forfeited in the event of a default

Types of mortgage loans

1. Fixed rate mortgage
2. Adjustable rate mortgage

Fixed Rate Mortgage

A mortgage in which the interest rate does not change during the entire term of the loan.

2 types of fixed loans

Federal housing association
Veterans administration

credit score

a signal of how risky you are

types of bankruptcy

chapter 13 & 7

Chapter 13 Bankruptcy

court approved plan to repay some/all debts

Chapter 7

Most Common type; court sells all assets

insurance

A contract between you (the insured) and an insurance company (insurer) under which the insurance company agrees to reimburse you for any losses you suffer according to specified terms

Personal risk

A chance of economic loss as a result of an unfortunate event

Adverse selection

A situation where the buyer or seller has more information about risk than the other party

Premium

Regular payments paid by the insurance buyer for the protection in the event of a loss

Claim

A request for reimbursement/payment from the insurance company

Deductible

A minimum amount paid by the insured person in the event of a claim before the insurance payout begins

Beneficiary

The recipient of claim funds if the loss occurs

Insurance payout = loss amount -deductible

deductible equation

Elise has a $3000 loss with a $400 deductible how much will insurance pay?

2600 payout

Thiago Mrs. his phone that was fully insured, worth $300,000. His deductible is 1% of the home value how much is his deductible? How much will insurance pay?

Deductible = $3000 insurance payout = $297,000

Why do insurers have deductibles?

It decreases the chance that the insured party would file a claim

deductibles _________ Insurer's cost and they can offer lower premiums to buyers

reduce

You should skip insurance when

The risk is common or not severe:
laptop
couch
child life insurance
any policy sold when you checkout at a store

you should get insurance for

Anything that can and would ruin your families' financial well-being losses so large you can't save for

Buy life insurance if

-dependents or spouse count on your financial support
-you have debts
-you want to provide for loved one's expenses

multiple-of-earnings method

multiply annual earnings by an arbitrary number:
7-10 X annual income

needs analysis method

better approach; estimate needs, changes in future expenses and available resources

term life insurance

payouts are only eligible during the term that you buy; simplest type of insurance policy

Advantages of Term Life Insurance

- low cost way for young families to purchase large amounts of life insurance
- provides insurance in earlier years when it is most needed
- simplest form of life insurance

disadvantages of term life experience

- premiums become more costly if you buy when you are older
- if you do not use it, it is not worth anything

Whole life insurance advantages

-Savings/investment account built in
- you can borrow from your saved funds
- contributions receive tax deduction

Whole Life Disadvantages

- Higher cost
- less death protection for young people (payouts are lower earlier on)
- inferior return on savings/investment compared to investing the money yourself

The main reason why you need health insurance

Protect against economic loss in the event of serious accidents or illnesses

Ways to get health insurance

Private:
-through employer who negotiates contracts or a spouse/parent who is employed (most common)
Government
- available to those who qualify or if you serve in a specific capacity

private insurance plan includes

- approved doctors and hospitals
- charge more for non-approved
- deductible per visit fee, though not always
- employer often pays part of the premiums
- employee pays the rest of the premiums

private insurance plans

traditional &
High Deductible Health Plans

Traditional plans

tend to cover more of the fees as a patient receives service

High Deductible Health Plan (HDHP)

patient pays more out of pocket as service is delivered
lower premiums
can use a health savings account

Health Savings Account (HSA)

A unique savings account is used for medical expenses only available to HDHP

what affects health insurance premiums

Age
where are you live
how many people are covered by the plan
if you use tobacco
if you qualify for a subsidy

Medicare

government insurance for retired individuals who have paid into the program