FIN 1050 – Personal Finance

Test 3: Chapters 7-10 Loans & Insurance

1. What is the difference between a secured and unsecured loan? What are 2 common secured
loans? What is a common unsecured loan? Why is this type of unsecured loan a really bad
idea?
a)-Secured: collateral
-Unsecured: no collateral
b)-Home and Car Loans
-Payday loan
c) There is high fees and a high interest
2. What is the debt limit ratio? What is the maximum recommended percentage of non-mortgage
debt to take home pay?
a) Total monthly non-mortgage payments/total monthly take home pay
b) 20%
3. What is the difference between grants & scholarships and student loans?
a) Grants & scholarships: Do not need to be repaid
b) Student loans: Do need to be repaid
4. What application must be filled out to receive student aid?
a) FAFSA
5. List the 3 types of education savings accounts, their maximum contribution levels, tax treatment
and income qualification limits.
a) 529 College Savings Plans -Max contribution: $250,000 per beneficiary
-Growth and withdrawals tax free if used for qualified education
& limited to investing in mutual funds
-Income limits: N/A
b) 529 Prepaid Tuition Plans -Max contribution: no standard max, more state specific
-Growth and withdrawals tax free if used for qualified education
-Income limits: N/A
c) Coverdell Education Savings Accounts -Max contribution: $2,000/yr
-Growth and withdrawals tax free if used for
qualified education
-Income limits: Single $95,000-$110,000; Married
$190,000-$220,000
6. What are 2 good sources of information to consult when purchasing a new or used car?
a) Kelly Blue Book
b) Consumer Reports
7. What is the difference between purchasing and leasing a car? When should you lease?
a)-Purchasing: Own the car
-Leasing: Renting the car
b) When you only plan to use the car for up to 3 yrs - leasing is less
8. What percentage of your income should you keep your mortgage at or below? What should be
the total maximum percentage of mortgage debt + all other debt relative to pay? What is the
maximum some lenders will accept when approving a home loan?
a) 28%
b) 36%
c) 45%
 FIN 1050 – Personal Finance

9. What is a down payment? How much do you need for an FHA loan? A conventional loan?
a) Initial percent ownership/ how much money you initially put down for a personal asset
b) 3%
c) 20%
10. What is PMI? When is it needed?
a) Private Mortgage Insurance
b) when one puts <20% in down payment for a home loan
11. What is a pre-payment privilege?
a) Can payoff loan early without penalty
12. What are the 2 main types of home loans? How do they differ?
a) Fixed rate – same interest rate over the life of the loan
b) ARM – adjustable rate mortgages
13. When is it a good idea to get an ARM mortgage? What is the major risk of an ARM?
a) When you are going to stay in the house for 5-7 years
a) If you stay longer, your rate and payments will go up
14. What is PITI? List the 4 components. What is the max percentage of your income for PITI? For
PITI + all other debt?
a) Calculation of your monthly mortgage obligation and how much you can afford to borrow
-Payment (Loan amnt), Interest, Taxes, and Insurance
b) 28%
c) 36%
15. What is the minimum FICO score to qualify for a home loan? What score will help you get a
lower interest rate?
a) 620
b) 760
16. What is the MLS? What information does it provide?
a) Multiple Listing Service(www.utahrealestate.com)
b) It’s a database of homes for sale
17. What is an earnest money deposit? What is a common amount when making an offer on a
home?
a) Good faith deposit towards purchase of home
b) Around $1000 or 1% of the home price
18. What are closing costs? List the 6 most common closing costs.
a) Fees paid at the closing of a real estate transaction.
b) Points, loan origination fee, loan application fee, appraisal fee, title insurance, and
recording costs
19. Ken and Barbara want to buy a $250,000 house. Current 30-year fixed mortgage rates are 4.5%,
a 5/1 ARM is 3.75%. If they use FHA financing, what is the minimum they need for a down
payment? What will their monthly P&I mortgage payment be with the min. FHA down payment
and a fixed rate mortgage? With the 5/1 ARM? What is the minimum down payment for a
conventional home loan without PMI? What is their monthly P&I mortgage payment with that
down payment using a 30-yr. fixed rate mortgage? Using the 5/1 ARM? Round off all answers to
the nearest dollar.
a) $7,500
b) $1,229
c) $1,123
 FIN 1050 – Personal Finance

d) $50,000
e) $1,013
f) $926
20. Jack and Jill want to buy their 1st home. Their combined income is $72,000/year. Jack’s car
payment is $300/month & Jill’s is $250/month. Jill has $300/month in student loans, they have
no other outstanding debt. What is the maximum monthly PITI payment based on 28% of total
income before other debt? What is the maximum monthly mortgage payment based on 36% of
total debt/monthly income? Assuming they buy a condo with $200/mo. HOA fees and
$1,200/year property taxes, what is the maximum P&I payment based on 28% of total income?
Based on 36% including other debt? Based on the 36% total debt amount, what is the maximum
loan they would qualify for using a 4.5% 30 year fixed rate mortgage? Using a 3.75% 5/1 ARM?
Round off all answers to the nearest dollar.
a) $1,680
b) $1,310
c) $1,380
d) $1,010
e) $199,335
f) $218,088
21. What is a foreclosure? What is a short sale?
a) -Missed payments result in lender assuming ownership of house
-Owner loses all equity in the home
-Results in poor credit(7yrs)
b) -Negotiated sales between owner and lender to prevent foreclosure
-Must be court approved
-Lower impact on credit rating(2yrs)
22. What is the HUD foreclosure counseling phone number?
a) 888-388-HOPE
23. What is term life insurance? What is the primary difference between term and whole/universal
life insurance? Which is more expensive?
a) Protects for a specified time period (1 to 30 years), has a fixed death benefit, may have
fixed or increasing premiums, no cash value, and premiums increase with age
b) Universal Life Insurance provides PERMANENT protection
c) Universal Life Insurance
24. What is variable life insurance? What does it commonly invest in?
a) Provides permanent protection, either fixed or flexible premiums, flexible death benefits –
depends on investment performance, flexible cash value – depends on investment
performance, and investment portion tax is deferred
b) Mutual Funds
25. What is the needs based approach to determining an appropriate amount of life insurance?
a) Looking into what your family would need to survive if you were to die.
-Payoff mortgage, provide for living expenses, provide for children’s education, provide
for spouse’s retirement, expected Social Security benefits can reduce the amount
needed, spouse’s income producing ability can reduce the amount needed
26. What is the earnings multiple approach to determining an appropriate amount of life insurance?
What is a common range for the multiple?
a) Designed to replace an income stream
 FIN 1050 – Personal Finance

b) 5 to 15 times earnings
27. What is a rider? What are 5 common riders?
a) An option on an insurance policy
b) Disability & Dismemberment, Accident Death, Guaranteed Insurability, COLA-Cost of Living
Adjustment, and Living Benefits
28. What are the superior and excellent ratings for life insurance companies? What are the good
and adequate ratings? What do the ratings mean in terms of the safety of the insurance
company?
a) A++ to A-(AM Best), AAA to AA-(S&P and Fitch), and Aaa to Aa3(Moody’s)
b) B++ to B-(AM Best), A+ to BBB-(S&P and Fitch), and A1 to Baa3(Moody’s)
c) Their relative safety- the lower the risk, the lower the fall
29. What is the annual limit on an FSA account? How much can be carried over to the following
year? What happens to the unspent balance?
a) $2,500
b) $500
c) forfeited
30. What is an HSA account? What are the tax benefits? Can it be used for non-medical expenses?
How is it taxed if used for non-medical expenses?
a) Health Savings Account
b) tax- free!!!
c) Yes
d) taxed like a regular IRA