<< Financial Education

Financial Education: Home Ownership

Your Own Home

Your Own Home

Should you own your own home? Like anything else, there are advantages and other things you should think about before becoming a home owner. This course will help you with some of the basics. When you have completed this course, you will have a better understanding of:

Renting vs. Buying a Home

House Renting versus Buying

Renting

What are the benefits of renting a home?

• Property maintenance is the responsibility of the landlord;
• You are only under a rental contract for one year or less, and
• You do not have other costs associated with owning a home, such as property taxes or homeowners insurance.

Renter's insurance, while not required, can be obtained from the same companies as homeowner's insurance. Renter's Insurance protects your belongings if there is a fire or theft in the apartment or home you are renting. Renter's Insurance is also generally cheaper than homeowner's insurance.

Renting also has some challenges.

• When you rent, you are not the owner of your home;
• Your rent might increase, and
• You might not be able to renew your rental contract and then will have to find a new place to live.

Owning

What are the benefits of owning a home?

• You can build equity. Equity refers to the value of the home minus the debt you owe on it. As you pay down the loan, you build up the equity.
• One of the benefits of equity is that you can borrow against it for many purposes, usually at a lower interest rate. For example, you can pay for a child or other family member's education.
• Homes generally increase in value over time, so it can be a good way to invest your money.
• Once your mortgage is paid in full, the home is yours. A mortgage is a loan to purchase a home.
• Homeownership can reduce the amount of income tax you owe since mortgage interest and property taxes are deductible, and
• You can pass your home on to family members.

Owning also has some challenges.

When you own a home, property maintenance and upkeep are your responsibility. You are also responsible for the additional costs of:

• Homeowner's Insurance
• Real Estate taxes, and
• Homeowner's association fees, in some cases. These fees pay for maintenance of the common areas and the exterior of the buildings and grounds.

When you own a home, it is not as easy to move as when you rent. You will typically have to sell or rent your home before you can afford to buy or rent another one.

It is also important to understand you can lose your home, and your investment in it, if you do not make timely mortgage payments.

Are You Ready to Buy a Home?

Are You Ready to Buy a Home?

Use these questions to help you decide if you are ready to buy a home:

  1. Do you have a steady source of income? This usually means you have a job or other source of income.
  2. Have you been employed on a regular basis for 2-3 years?
  3. Is your income reliable?
  4. Do you have a credit history? This refers to whether you have ever borrowed money for any purpose.
  5. Do you have a good record of paying bills?
  6. Are you able to pay your bills and other debts?
  7. Do you have the ability to make a mortgage payment every month plus handle additional costs for taxes, insurance, maintenance, and repairs?
  8. Do you have money saved for a down payment? The down payment is the portion of the home's purchase price the buyer pays in cash. The more you have for a down payment, the less you will need to borrow.

Lenders prefer that you have 20% of the purchase price of your home for a down payment. For example, 20% of a $50,000 mortgage is $10,000. However, there are many special programs that require a smaller or no down payment.

If you make a down payment of less than 20%, you will generally have to purchase Private Mortgage Insurance, or PMI, or participate in a government mortgage program.

Mortgage insurance protects the lender if you default on the loan. It is an additional cost of the mortgage. If you answered yes to the above questions, you might be ready to buy a home.

If you answered no to any of them, concentrate on strengthening those areas.

There are many other questions to answer when you decide to explore home ownership. For example:

  1. Where do you want to live?
  2. What kind of school and neighborhood do you want for your children?
  3. How much space do you need?

While we will not cover these questions in this course, it is important for you to consider these questions when deciding to buy a home.

Assistance Programs

Home-Buying Assistance Programs

There are a number of different programs available for first-time home buyers. Many people start the home buying process with one of these programs or with a community organization.

For example, in an Individual Development Account, or IDA, program, participating organizations match your savings contributions to help you save for a down payment or closing costs. (Closing costs are various charges associated with the transfer of property. The lender must disclose these costs to you.)

All home ownership IDA programs require you to complete financial education classes.

Many home-buyer assistance programs are offered by cities or local government offices. Many banks offer loan products in conjunction with these agencies.

Ask your lender or local government about the home-buyer assistance programs they offer.

Government loan programs are generally targeted to individuals and families with modest income. They will have one or more of these characteristics:

• Zero or low down payment requirements. For example, some require 3% down payment; some require 5% down payment with 3% having to come from the borrower and the other 2% coming from gifts or other grants.
• More flexible underwriting standards. This means the lender will consider non-traditional forms of credit history, such as rent or utility payments, and higher ratios of debt compared to your income.
• Longer payment terms than typical mortgage loans. This means your monthly payment will be lower.
• The program might require homeowner education. Homeowner education programs help people understand the home buying process. These programs cover such things as budgeting, finding a home, getting a loan, and maintaining a home.
• One example is the Home buyer Education Learning Program, or HELP, for FHA loans. You might be eligible for a reducation in initial FHA mortgage insurance under this program.
• Government program restrictions might include purchase price limitations, service charges, and higher loan origination fees.

Here is a summary of some of the most popular home-buyer Assistance Programs.

Federal Housing Administration (FHA) Insured Loans The 203(b) is the most common FHA loan featuring:

• Low down payment
• Flexible qualifying guidelines
• Limited lender fees
• Maximum loan amounts

Department of Veterans Administration (VA) Insured Loans Features of VA loans include:

• You must be an eligible veteran
• There are no down payment requirements
• Competitive and negotiable fix
• Longer payment terms

Federal National Mortgage Association (FNMA) Loans The FNMA Community home-buyers Program Features:

• 5% down payment
• Expanded debt-to-income ratios (33% and 38%)
• You must attend home-buyer education
• You must earn no more than the median income for the area in which you live
• One family principal residence

The Fannie 97 features include:

• Fixed rate 3% down payment
• Expanded debt-to-income ratios (33% and 38%)
• You must attend home-buyer education
• You must earn no more than the median income for the area in which you live
• You must have saved enough money for one month advance payment in an account at closing

The Flexible 97 features include:

• You must have very good credit
• 15-, 20-, 25-, 30-year terms
• 3% down payment can be a gift or a grant from a nonprofit or government agency
• No borrower income limits or property location restrictions
• Up-front mortgage insurance costs are lower than FHA loans

The Fannie 3/2 features include:

• Fixed rate
• 15- or 30-year term
• 5% down payment - 3% from your own resources, 2% from a government agency, nonprofit organization, employer, or private foundation
• Expanded debt-to-income ratios (33% and 38%)
• You must attend home-buyer education
• You must earn no more than the median income for the area in which you live

United States Department of Agriculture (USDA) Rural Housing Services The 502 Rural Housing Direct Loan is offered only in rural areas. Features include:

• You must have low income - between 50% and 80% of the median income for the area in which you live
• The loan can be financed at 100%
• Payments are usually 22% to 26% of your income
• You must not be able to obtain financing elsewhere

502 Single Family Housing Loan Guarantees features:

• You must earn up to 115% of the median income for the area in which you live
• You must be without adequate housing
• You must be able to afford the payments
• You must not be able to obtain credit elsewhere
• 30-year term
• No down payment

502 Mutual Self-Help Housing Loans:

• Primarily used to help low and very low income households construct their own homes
• Intended for families unable to buy clean, safe housing through conventional methods
• Families must perform at least 65% of construction labor on each other's homes under qualified supervision
• You must be unable to get credit elsewhere
• You must be able to make payments
• Payments are usually 22% to 26% of your income
• 33- or 38-year terms
• No down payment

Terms Used in the Mortgage Process

Mortgage Terms

There are four components that will make up your monthly Mortgage Loan Payment. They are:

• P=Principle.The amount applied to the outstanding balance of the loan.
• I=Interest.The amount of the charge for borrowing the money.
• T=Taxes.1/12th of the estimated annual real estate taxes on the home.
• I=Insurance./12th of the annual homeowner's insurance premium. This figure will include flood insurance and private mortgage insurance, or PMI, if required.

If the lender requires you to pay the taxes and insurance as part of your mortgage payment, the lender will open an escrow account to hold this money until the payments are due. The escrow account earns interest. Many people consider this convenient because they don't have to make separate payments.

If the lender allows you to pay the taxes and insurance separately:

• You will usually get a quarterly or semi-annual property tax bill.
• You will have to pay a separate insurance premium, usually annually, for homeowner's insurance.

Some people prefer to do this because it allows them to keep the money under their own control in their own savings or investment accounts to earn interest until the payments are due.

However, in many cases, it is better to pay for these items monthly with your loan payment. That way, you don't have to worry about having the money available when it's needed.

Qualifying for a Loan

There are three factors lenders use to qualify you for a loan. They are known as the Three Cs:

• Capacity is your present and future ability to meet your payment obligations.
• Capital refers to your savings and other assets that can be used as collateral for a loan.
• Character refers to how you have paid your bills or debts in the past. Your credit report is one tool lenders use to consider your willingness to repay your debts. Your willingness to repay your debts is important because a mortgage is likely the largest loan you will obtain. See our Your Credit session for more information on Credit Reports.

Pre-qualifying for a Loan

Pre-qualification is an informal way to find out how much mortgage you can obtain. You can be pre-qualified by giving the lender some basic information over the phone. Such as:

• Employment
• Income
• Down payment information, and
• Outstanding debts

No paperwork is required. There is no obligation. The pre-qualified amount is not exact; it is only a ballpark figure.

Pre-approval

Another term you may hear when discussing mortgage is pre-approval. Pre-approval is a commitment from the lender to lend you money. The pre-approval process lets you know how much you can obtain and tells sellers you are prepared to buy a home.

To obtain pre-approval, you need to assemble financial records and fill out an application. You will usually need:

• Pay stubs for the last 2-3 months W-2 forms for the last 2 years
• Tax returns for the last 2 years
• Information about your assets and long-term debts
• Recent bank statements, and
• Proof of any additional income - - you do not need to disclose alimony or child support payments unless you want them considered in repaying the loan.

How Much Can You Afford?

How Much Home can You Afford?

As a rule of thumb, many people estimate they can afford a mortgage of 2 or 2 1/2 times their household income. For example:

Annual Income = $30,000

$30,000 X 2 = $60,000

$30,000 X 2 1/2 = $75,000


Keep in mind that just because you qualify for that amount, it does not mean you can afford or be comfortable with those monthly payments. You need to consider your particular circumstances and your future financial needs and goals.

Lenders look at debt-to-income (DTI) ratios when they consider your application or pre-qualification for a mortgage loan.

They consider housing expenses as a percentage of income and total monthly debt as a percentage of income. Both ratios are important factors in determining whether the lender will make the loan.

Lenders usually require the PITI, or principle, interest, taxes, and insurance, or your housing expenses, to be less than or equal to 25% to 28% of monthly gross income. Lenders call this the "front-end" ratio.

In other words, if you gross $2,500 a month, or $30,000 annually, your mortgage payment should be $700.00 or less.

Lenders usually require housing expenses plus long-term debt to be less than or equal to 33% to 36% of monthly gross income. Lenders call this the "back-end" ratio.

In other words, if you gross $2,500 a month, or $30,000 annually, the combination of your mortgage and other long-term debt (like car loans and monthly credit card payments) should not total more than $900.00

Long-term debt is outstanding debt with a remaining term of more than ten or eleven months. It can include student loans, credit cards, car loans, and other non-housing expenses.

Other factors to consider:

Other factors can affect how much mortgage you can afford. Such as:

• The length, or term, of your mortgage affects how much mortgage you can afford. Most mortgages are for either 30- or 15-year terms. A 30-year mortgage is the most common because the mortgage payment is lower.

A 30 year mortgage allows you to borrow more money, but will generally have a slightly higher interest rate than a 15-year mortgage. In addition, over the life of the loan, you pay a lot more interest with a 30-year mortgage than with a 15-year mortgage.

For example, if you borrowed $75,000 for 15 years at 7.5%, your monthly principle and interest payment would be $675. The total interest over 15 years would be $46,500. If you borrowed $75,000 for 30 years at 8%, your monthly payment is less with this 30-year loan, however, the total interest paid over 30 years would be $121,200, compared with only $46,500 for the 15-year loan.

• Whether your mortgage is variable or fixed will also affect how much mortgage you can afford.

If you have a fixed rate loan, your interest rate stays the same for the term of your loan. Your payments are predicable and are not affected by interest rate changes.

If you have a variable rate loan, the interest rate can increase or decrease during the term of your loan. You might have a low rate at the beginning of the term. However, be aware that the rate and your payment can increase significantly throughout the term of your loan.

Shopping for the Best Deal

Shopping for the Best Deal

The mortgage industry is very competitive and there are many resources available for you to shop for the best deal.

• Check advertisements in local newspapers and on the Internet to get an idea of the best terms and rates. Be mindful, however, that rates change frequently, and you may not be able to get the published rate. Contact several lenders on the same day to compare quotes.

• Negotiate the best deal you can. Ask the lender for better terms than originally quoted. Lenders might offer different prices to different borrowers even with the same qualifications. Ask the lender to waive or reduce one or more of the fees, or agree to a lower rate or fewer points, and make sure they do not lower one fee and raise another in its place.

• Do not be afraid to let lenders compete for your business by letting them know you are shopping for the best deal.

• Make sure the lender gives you all the costs of the loan in writing.

For example, Truth in Lending requires the lender or broker to disclose estimates of how much the loan will cost.

The Real Estate Settlement Procedures Act requires the lender or broker to give you an estimate of these fees so you have an idea of how much the loan will cost.

These disclosures are not required until you apply for a home loan. To compare terms before you fill out an application, ask the lender for the basic information on this mortgage comparion worksheet.

Resources

Mortgage Information Resources

Federal Deposit Insurance Corporation (FDIC)
Division of Compliance and Consumer Affairs
550 17th Street, NW
Washington, DC 20429
1-877-ASK-FDIC
(1-877-275-3342)
Email: consumer@fdic.gov

Department of Housing and Urban Development (HUD)
Office of Fair Housing and Equal Opportunity
451 Seventh Street, SW, Room 5100
Washington, DC 20410
202-708-4252
1-800-669-9777

Glossary

Glossary of Credit Terms

- A -

Account Verification
Before opening an account, most banks will review your history of using checking accounts through companies such as TeleCheck or ChexSystems. Some banks will run a full credit report to determine the level of risk.

The account information is collected from financial institutions. If you have a history of bouncing checks or misusing your accounts, financial institutions may not open an account for you.

Annual Fee
A yearly fee charged by credit grantors for the privilege of using credit.

Annual Percentage Rate (APR)
The cost of credit expressed as a percentage per year.

Annual Percentage Yield (APY)
APY is the amount of interest you will earn on a yearly basis expressed as a percentage. The APY includes the effect of compounding. When comparing different accounts, you should compare the APYs of the savings products, not the interest rates. The higher the APY, the higher the interest you will receive. The interest you earn is considered income and is taxable.

Applicant
A person applying for credit privileges, employment or some other benefit.

Asset
Any item you own that has economic value or use.

Attachment
A lien against personal property.

Automated Teller Machines (ATM)
This is a computer where you can deposit, withdraw, or transfer money from one account to another 24 hours a day. Use of an ATM requires a card issued by the bank and a personal identification number (PIN). A PIN is a special password or set of numbers to use your debit or ATM card. The PIN is used for security purposes, so no one else can access your account.

Authorized Account User
The person authorized by the contractually responsible party to use the account.

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Balance
Balance is the amount of money you have in your bank account.

Balance Computation Method
This will determine how your interest is calculated. There are a variety of methods. The most common is the average daily balance.

Balloon Mortgage
A balloon mortgage is one with a large payment at the end of your loan term. This is often after a series of low monthly payments. A balloon mortgage generally offers very low rates for an initial period of time (usually 5, 7 or 10 years). After the period ends, the entire balance is due. Many borrowers pay the balance by refinancing their mortgage.

Bank
A bank is a business that offers you a place to keep your money and uses it to make more money. Banks offer you different services for keeping your money.

Bankruptcy
A legal declaration of insolvency. A proceeding in U.S. Federal Court that may legally release a person from repaying debts owed. The law contains several chapters which relate to different methods of relief:

  • Chapter 7 - Straight Bankruptcy (total liquidation of assets)
  • Chapter 11 - Business Reorganizations
  • Chapter 12 - Farm Debt Bankruptcy
  • Chapter 13 - Wage Earner Repayment Plan

Bankruptcy Discharged
A court order terminating bankruptcy proceedings on old debts.

Bankruptcy Dismissed
A court order that denied a bankruptcy petition making the debtor still liable for all debts.

Bonds
When you purchase a bond, you are essentially loaning money to a corporation or to the government for a certain period of time, called a term. The bond certificate promises the corporation or government will repay you on a specified date with a fixed rate of interest.

Branch Manager
A branch manager is the person who supervises the bank operations and helps fix problems that cannot be solved by other bank employees.

Broker
A mortgage broker helps a prospective borrower shop around for the best rate and terms in obtaining a mortgage loan.

Budget
A financial plan for saving and spending money.

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Caps
Caps are provisions of an adjustable rate mortgage, which limit how much the interest rate can change at each adjustment period or over the life of the loan. A payment cap limits how much the payment due on the loan can increase and decrease.

Cashier's Check
For a cashier's check, you provide cash or money from your account in the amount of the check plus a service charge (usually form $2 to $5). You also tell the institution who is receiving the check. The institution writes a check (also called a bank check or teller's check) for you. This check is guaranteed not to bounce. A cashier's check is available from financial institutions.

Certified Check
A certified check is a check you write and take to your financial institution. The bank will mark it "certified" for a fee (usually $2 to $5) and place a hold on the money in your account until the check is processed. A certified check is guaranteed not to bounce.

Charge Card
A card which requires payment in full upon receipt of the statement.

Charge Off
Accounting term to indicate that the creditor has removed a loan from its balance sheet because collection is unlikely.

Checking Account
A checking account is an account that lets you write checks to pay bills or to buy goods. The financial institution takes the money from your account and pays it to the person named on the check. The financial institution sends you a monthly record of the deposits made and the checks written.

Closing Costs
Closing costs are various charges associated with the transfer of property. The lender must disclose these costs to you. Different costs can be found on the Mortgage Shopping Worksheet.

Collateral
Property acceptable as security for a loan or other obligation.

Collection Account
An account that has been transferred from a routine debt to a Collection Department of the creditor's firm or to a separate professional debt collecting firm.

Compensating Factors
Compensating factors are favorable factors that might outweigh the negative factors. For example, a borrower has high ratios, but he or she balances this with good credit history and extra cash in a savings account.

Condominium
A condominium is an apartment building or multiple-unit housing area in which the living units are owned individually.

Consolidation Loan
A loan usually obtained for the purpose of reducing the amount of the payments of bills owed by consolidating the bills into one loan payment. The consumer pays off several bills with the proceeds from one loan and is left with one consolidated monthly payment.

Consumer
Person who uses and/or buys goods and services for family or personal use.

Consumer Credit Counseling Service
Organizations which help consumers find a way to repay debts through careful budgeting and management of funds. These are usually nonprofit organizations, funded by creditors. By requesting that creditors accept a longer payoff period, the counseling services can often design a successful repayment plan.

Convenience Checks
A convenience check is a cash advance that is used like a regular check. However, the money is charged against your credit limit. There is usually a grace period and the interest charge is usually higher than for purchases.

Conventional Loan
A conventional loan is a mortgage that is not guaranteed, insured, or made by the federal government.

Co-Signer
Person responsible for repaying a debt if the borrower defaults.

Credit
A trust or a promise to pay later for goods or services purchased today.

Credit Card
A rectangular piece of plastic used instead of cash or checks authorizing payment for goods and services.

Credit Grantor
Person or business that loans money or furnishes consumer goods and/or services on credit.

Credit History
Record of how a consumer has paid credit accounts in the past, used as a guide to determine whether the consumer is likely to pay accounts on time in the future.

Credit Limit
The maximum amount of money that can be charged on a particular credit account.

Credit Repair Companies
Individuals or Companies that promise to "clean-up" or "erase" a consumer's bad credit and give him/her a fresh start. Also known as Credit Clinics.

Credit Report
A record or file to a prospective lender or employer on the credit standing of a prospective borrower, used to help determine credit worthiness.

Credit Reporting Agency
A company that gathers, files and sells information to creditors and/or employers to facilitate their decisions to extend credit or to hire.

Credit Union
A nonprofit financial institution owned by people who have something in common. You have to become a member of the credit union to keep your money there.

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- D -

Debit Card
A debit card is a plastic card sometimes called a "Check Card". The debit card has a MasterCard® or Visa® logo and a magnetic strip on the back that allows you to pay for goods and services at stores and other businesses that accept MasterCard or Visa credit cards.

The debit card also functions as an ATM card. With ATM Cards, you can make deposits to or withdrawals from your checking account at ATMs. Most debit cards require a PIN if you use the card as an ATM card.

Debt-to-Income Ratio (DTI)
DTI is the ratio of monthly debt payments to monthly gross income. Lenders use DTI ratio to determine whether a borrower's income qualifies him or her for a mortgage.

Deposit Products
Deposit Products are bank accounts that allow you to add money to the account. Checking and savings accounts are two examples of deposit products.

Direct Deposit
Direct Deposit is one method your employer or a government agency might choose to give you your paychecks or benefits checks. With direct deposit, your paychecks or benefits checks are electronically transferred and directly deposited into your account. The amount of money is immediately available Some banks will not charge the monthly fees if direct deposit is used.

Diversification
Diversification means you spread the risk of loss in a variety of savings and investment options. It is the concept of "don't put your eggs in one basket."

Down Payment
The down payment is the portion of the home's purchase price the buyer pays in cash.

Duplex House
A duplex is a house divided into two living units.

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Equal Credit Opportunity Act (ECOA)
A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.

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401(k) and 403(b) Retirement Plans
401(k) plans are retirement plans that some private corporations offer their employees. A 403(b) plan is similar to a 401(k), but is offered to employees of some nonprofit organizations. In both types of plans, you choose to deduct part of your paycheck and place it into the investment strategy you design.
The plan allows you to choose different types of investments, depending on how much risk you want to take. The money you place into the account lowers your taxable income. The employer usually matches a portion of your contribution, sometimes up to 50 percent. The funds grow tax-free until the money is withdrawn during retirement.

Fair Credit Reporting Act
A federal law, established in 1971, and revised in 1997, which enables consumers to learn what information Credit Reporting Agencies have on file about them, and to dispute inaccurate data in the file. It also establishes specific permissible purposes for which credit reports may be requested, and places time limits on how long adverse information may be reported.

Fees
Financial Institutions may charge you different fees for different services. For example, a monthly maintenance fee might be charged for keeping your account open. In addition, you might also be charged a penalty fee if you misuse your account, such as by bouncing a check.

Fixed Rate Loan
A fixed rate loan has an interest rate and payment amount that stays the same throughout the term of the loan.

Foreclosure
A legal proceeding initiated by a creditor to take possession of collateral that secured a defaulted loan.

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- G -

Garnishment
A process initiated by a court order through which a lender can obtain money owed to a borrower who has defaulted on a loan, directly from a third party.For Example, a borrower's employer can be required to pay a portion of the borrower's paycheck directly to creditors that have obtained a judgment against the borrower.

Good Faith Estimate of Settlement Costs (GFE)
A process initiated by a court order through which a lender can obtain money owed to a borrower who has defaulted on a loan, directly from a third party.For Example, a borrower's employer can be required to pay a portion of the borrower's paycheck directly to creditors that have obtained a judgment against the borrower.

Government Mortgages
A government mortgage is insured by HUD (through the Federal Housing Administration (FHA)) or guaranteed by the Department of Veteran's Affairs or the Rural Housing Service.

Grace Period
The period allowed to avoid any interest charges by paying off the balance in full before the due date.

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- H -

Home Equity Loan
A loan that can typically be used for any purpose that is secured by a mortgage on the borrower's home.

HUD-1 Settlement Statement
A HUD settlement statement is a summary of all the costs paid by the buyer and seller in a mortgage transaction.

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- I -

Index
The index is a base interest rate used to calculate the interest rate that will be charged on a variable rate loan. The rate you will pay on a variable rate loan is usually a set percentage rate above the base rate, or index.

Individual Development Account (IDA)
An IDA is a matched savings account. When an account is matched it means that another organization, such as a foundation, corporation, or government entity agrees to add money to your account.

Individual Retirement Account (IRA)
An IRA is a retirement account that lets you save and invest money tax-free until you withdraw it when you retire. You can contribute up to $2,000 a year. There are different types of IRAs including traditional and Roth IRAs

Installment Loan
A credit account in which the amount of the payment and the number of payments are predetermined or fixed.

Interest
Interest is the extra money in your account that the bank pays you for keeping your money. One of the main advantages of having a deposit account is the interest you earn.

Interest Charge
The interest charge is the cost of credit. It includes interest, certain service charges and transaction fees. This charge is calculated on your balance using different methods.

Investment
A savings option purchased for future income or financial benefit.

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- J -

Judgment
The official court decision of an action or suit. This public record may be listed on a credit report in matters of money and debts owed.

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- L -

Lease
A written document containing the conditions under which the possession and use of real and/or personal property are given by the owner to another for a stated period and for a stated consideration.

Lien
A legal hold or claim of one person on the property of another as security for a debt or charge. The right given by law to satisfy debt.(A lien must be paid and released).

Line of Credit
A commitment by a bank to lend funds to a borrower up to a specified amount over a specified future period.

Liquidity
Liquidity refers to the ease with which an asset (a thing of value) can be turned into cash without losing its value. For example, cash is the most liquid; a certificate of deposit (CD) may be liquidated, but you pay an early withdrawal penalty; a house might be your least liquid asset because it takes time to sell.

Loan Officer
The loan officer is the person who takes applications for loans offered at the bank. The officer can answer questions for you, provide written information explaining loan products and help you fill out a loan application.

Loan Origination Fees / Underwriting Fees
These are fees charged by the lender for processing or evaluating the loan application and are often expressed as a percentage of the loan amount.

Loans
A loan is money you borrow from a bank with a written promise to pay it back later. Banks charge fees and interest. This is extra money you pay to borrow the money. You can talk to the customer service representative for more information about loans offered at a bank.

Loan to Value (LTV)
LTV is the amount of money you borrow compared to the value of the property you are buying.

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- M -

Minimum Payment
The minimum payment is the minimum dollar amount that must be paid each month. On a credit card account, the minimum payment can be as little as two to three percent of the amount owed and is often based on the balance on the billing date.

Money Order
A money order is similar to a check. It is used to pay bills or make purchases when cash is not accepted. Many businesses sell money orders for a fee. If you need to use a money order, it is best to shop around for the best price.

Mortgage
A security interest in real property given by the buyer to the lender as security for money borrowed. 1st Mortgage-Also known as the "primary" mortgage-has priority over the claims of subsequent lenders for the same property. 2nd Mortgage-Also know as the "secondary" mortgage-is a loan secured by mortgage or trust deed, which lien is "junior" to another mortgage or trust.

Mutual Funds
A mutual fund is a professionally managed collection of money from a group of investors. A mutual fund manager invests your money in some combination of various stocks, bonds and other products. The fund manager determines the best time to buy and sell the products in the fund. by combining your resources with other investors in a mutual fund, you can diversify even a small investment, which should reduce risk.

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Non-deposit Products
Many banks also offer non-deposit products and services that are not insured by the FDIC. Stocks, bonds, and mutual funds are examples of non-deposit investment products.

Bank personnel are supposed to provide a written explanation that the FDIC does not insure these products and the money you invest might lose value. You can find out more about these non-deposit products at your bank.

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Periodic Rate
The periodic rate is an interest rate applied to your balance to calculate the finance charge. For example, the monthly periodic rate for a card with an 18% APR is 1.5% (18% divided by 12 months). If your monthly balance were $1,000, you would multiply it by 1.5% to get your monthly interest charge of $15 ($1,000 x 1.5%=$15). The daily periodic rate for the same 18% APR is 0.04932% (18% divided by 365 days).

Permissible Purposes
As defined in section 604 of the Fair Credit Reporting Act, only the named reasons for requesting a credit report are deemed "permissible". Requests not meeting these criteria must be denied.

Personal Line of Credit
The maximum amount one can owe at any time, based on income, debt and credit history.

Personal Loan
A loan based on a consumer's income, debt and credit history.

Point
A point is the amount equal to one percent of the loan amount. It is a fee paid to the broker or lender for the loan, often linked to the interest rate.

Previous Balance
The previous balance is the amount you owed at the end of the previous billing period. Payments, credit and new purchases during the current billing period are not included. Some creditors also exclude unpaid interest charges.

Principal
The outstanding balance of a loan, exclusive of interest and other charges.

Principle, Interest, Taxes andInsurance (PITI)
PITI are the factors included in the standard mortgage payment.

Private Mortgage Insurance (PMI)
A risk-management product that protects lenders against loss if a borrower defaults.

Public Record
Information obtained by the Credit Reporting Agency from court records, such as liens, bankruptcy filings and judgments. Public records are open to any person who requests them.

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Rate Lock
A rate lock is the time period, usually 30 to 60 days, that a mortgage lender agrees to hold the mortgage rate and points payable by the borrower to the rate quoted by the lender on a given day.

Repossession
Forced or voluntary surrender of collateral as a result of the borrower's failure to repay a loan. There are several types and descriptions of repossession actions.

Revolving Account
A credit account that usually requires at least a specified minimum payment each month plus a Interest charge on the balance. As the balance declines, the amount of the Interest charge, or interest, may also decline.

Risk versus Return
This means that the more risk you take in your investment, the higher the expected return on that investment. However, there is also a higher risk that you might lose the entire amount you invested.

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Savings Accounts
A savings account is an account that always earns interest. You cannot write checks on a savings account. You can open a savings account with a few dollars, but you might pay a monthly fee if the balance is below a certain amount. The bank will help you keep track of your account by either sending you a statement or providing you with a booklet called a passbook.

Secured Credit Card
A credit card secured by a savings account that has been established in advance by the borrower. The amount in the account usually determines the limit on the credit card. These accounts present limited risk for creditors and are, therefore, much easier to obtain than unsecured credit.

Settlement Costs/ Closing Costs
Fees associated with the transfer of property to a purchaser and recording the mortgage lien on the property deed by the bank financing the transaction. This may include application fees, title examination, abstract of title, title insurance, and property survey fees; fees for preparing deeds, mortgages, and settlement documents; attorney's fees; recording fees; and notary, appraisal, and credit report fees.

Smart Card
An electronic prepaid cash card, usually sold at banks and exchanged at face value.

Stocks
When you buy stocks (shares), you become part owner of the company. If the company does well, you might receive periodic dividends. Dividends are part of a company's profits it gives back to you when you own stock in the company. If the company does poorly, you might lose your money.

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Telephone Banking
Telephone banking allows you to:

  • Check your account balance by phone
  • Transfer money between accounts
  • Obtain account history, such as most recent deposits or withdrawals
  • Stop payment on a check
  • Obtain information on branch hours or other information, and
  • Report a lost, stolen, or damaged card

Teller
The teller is the person behind the counter who takes money, answers questions, cashes checks, or refers you to the person who can help you. You can go to any teller in the bank.

Thrift
A thrift is a savings bank or savings and loan association that is similar to a bank. Thrifts were created to promote home ownership and must have a majority of their assets in housing-related loans.

Title
The title indicates the right of ownership in the property.

Title Insurance
Title insurance protects the buyer and lender against losses arising from disputes over the ownership of property.

Townhouse
A townhouse is one of a row of houses connected by common side walls.

Trans Union
One of the three major Credit Reporting Agencies.

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U.S. Savings Bonds
Savings bonds are one type of Treasury securities. They are a long-term investment option backed by the full faith and credit of the U.S. government. Purchasing these bonds is an easy way to save small amounts of money and are often purchased for a child's education; however, they may be used for any purpose. Savings bonds can be purchased at a financial institution for as little as $25 or through payroll deduction.

U.S. Treasury Securities
U.S. Treasury securities are debt instruments. When you purchase a Treasury security, you are loaning money to the government. Treasury securities are backed by the full faith and credit of the U.S. government, which means the government guarantees interest and principal payments will be paid on time. Treasury securities include:

  • Savings bonds, which can earn interest for up to 30 years, but can be cashed after 6 months.
  • Treasury bills, which mature in one year or less from their issue date.
  • Treasury notes, which mature in more than a year, but not more than 10 years from the issue date.
  • Treasury bonds, which mature in more than 10 years from the issue date.

Treasury bills, notes and bonds are transferable, which means you can buy or sell them in the securities market. You can buy Treasury bills, notes and bonds for a minimum of $1,000.

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Variable Rate Loan
A variable rate loan has an interest rate that might change during any period of the loan as written in the contract (loan agreement). Variable rate mortgages are often referred to as adjustable rate mortgages (ARMs).

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Wire Transfer
A wire transfer is a method of electronically transferring money from one bank to another.

Withdrawal
A withdrawal is the process of taking money from your bank account. You do this by writing a check, using an ATM, or by giving a teller a withdrawal slip. A withdrawal slip looks similar to a deposit slip, except you are taking money out rather than adding money to your account.

You need to be sure you do not withdraw more money than you have in your account. If you do, you will be overdrawn, or bounce a check, and be charged a fee.

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