New User Special Price Expires in

Let's log you in.

Sign in with Facebook


Don't have a StudySoup account? Create one here!


Create a StudySoup account

Be part of our community, it's free to join!

Sign up with Facebook


Create your account
By creating an account you agree to StudySoup's terms and conditions and privacy policy

Already have a StudySoup account? Login here


by: Jeffery Rohan


Jeffery Rohan
GPA 3.67


Almost Ready


These notes were just uploaded, and will be ready to view shortly.

Purchase these notes here, or revisit this page.

Either way, we'll remind you when they're ready :)

Preview These Notes for FREE

Get a free preview of these Notes, just enter your email below.

Unlock Preview
Unlock Preview

Preview these materials now for free

Why put in your email? Get access to more of this material and other relevant free materials for your school

View Preview

About this Document

Class Notes
25 ?




Popular in Course

Popular in Housing And Consumer Economics

This 31 page Class Notes was uploaded by Jeffery Rohan on Saturday September 12, 2015. The Class Notes belongs to HACE 2100 at University of Georgia taught by Green in Fall. Since its upload, it has received 23 views. For similar materials see /class/202284/hace-2100-university-of-georgia in Housing And Consumer Economics at University of Georgia.

Similar to HACE 2100 at UGA

Popular in Housing And Consumer Economics


Reviews for FAM EC ISS TR LF CO


Report this Material


What is Karma?


Karma is the currency of StudySoup.

You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!

Date Created: 09/12/15
Family Economic Issues Through the Life Cycle 819 Overview o Most common family resources Money and Time o Economic decisionmaking is complex 0 Issues we face are complex Uncertainty We like easy solutions We prefer more to less and thus prefer not to make decisions Information can be expensive The Macro View o Aggregate broad scope the typical American family The Micro View o Family economy a unit of economically interdependent individuals whose goal is to attain their desired level of living o Single or multiple o Used to examine differences between American families Economic Perspective o Rational Decision Making 0 Not all consumers are rational but we assume they are rational o Rational people are goal oriented act with purpose identify alternatives to the choices that will help them further their goals rank alternatives Maximize utility satisfaction subject to constraints a Constraints Resources o physical housing location appliances cars o human knowledge and skill of the consumer time Technological getting clean clothes Legal and sociocultural restraints gender race religion and fertility rates o CostBenefit Analysis 0 The objective and subjective costs and benefits associated with the alternatives Objective something that is factual Subjective opinion based Measures of Family Economic WellBeing Traditional Measures o Gross National Product GNP 0 Total value of all goods and services produced in one year measured in dollars o Gross Domestic Product GDP 0 Total value of all the goods and services produced in one year by domestic factors in a country during the year Most widely followed Less than 2 is low growth greater than 4 is vigorous growth 0 Leisure time is not included in GDP value of clean air or taking care of kids at home o Personal Income 0 The total of wages rent interest dividends transfer payments etc Disposable Income Money after taxes Discretionary Income Money left over after necessities have been purchased 0 Per Capita Personal Income total income of countrytotal people in the country even the unemployed money to each individual person in the country c Median Household Income 0 The amount which dividends the distribution into two equal parts one having incomes about the median and the other having income below the median o Non Economic Wellbeing crime rate pollution health education divorce rate 0 O 0 Traditional Measures o Adjusting for Inflation 0 Inflation rate at which prices of goods and services rise Determine purchase power of at o What are some causes of Inflation 0 Government printing excess of money to deal with a crisis 0 Rise in production cost 0 National debt 0 Taxes put on consumer products o Deflation 0 General decline in prices 0 Caused by Reduction in the supply of money or credit Decrease in government personal or investment spending o Consumer Price Index CPI 0 Index of price changes in 400 goods and services basket of 400 goods sold across country tracked weighted Indicator of when the price of living increases 19821984 are the baseline years 8410009190 53 increase in the price of living 0 Compiled by the US Bureau of Labor Statistics 0 Shows changes in prices weighted by the quantities of goods and services bought If a product represents a large share of a typical budget it s weighted more heavily n Simply means it contributes in proportion to its budget share o Median Real Household Income 0 Median household income that has been adjusted for inflation Reflects purchasing power of a Measuring WellBeing o Broad traditional measures discussed were not meant to measure wellbeing o NonTraditional Measures of Family Economic WellBeing 0 Index of Economic WellBeing comes out of Canada Based on 4 Components n Consumption flows does not include household chores production a Wealth Stocks physical made by people and human capital knowledge a Income distribution n Economic security divorce rates amp unemployment 0 Human Development Index United Nations HDI map Includes life expectancy education and GDP 0 Happy Planet Index UK HPI map Looks for countries that seem to be happy and not ruining the planet Look at life expectancy do surveys about consumption of natural resources happiness DecisionMaking o Economic Perspective 0 Scarcity THE economic problem Requires that decisions must be made 0 Rationality rational choices models presume that rational actors can Identify all alternatives Rank alternatives in order of tastespreferences Select the alternative that furthers one s goals maximizes one s utilitysatisfactionprogress toward goals We have preferences about the consequences of our behavior and make decisions based on these preferences Given a number of possible outcomes we can rank outcomes from mostlikes to leastlikes Faced with a choice then we take actions expected to lead to the bestpossible outcomes But Rationality Doesn t Necessarily Imply n Anything about the qualitymoralitywisdom of a person s decision a That rational behavior is smart or sensible a That given enough time and resources the right decision is made O Costbenefit Analysis simplest form Should I do activity X If Bx gt Cx do x otherwise don t n Where Bx the benefits of doing x n Where Cx the cost of doing x a Can be monetary or non monetary Opportunity Costs one alternative is selected over another and there is a cost attached to this choice If doing activity X means not being able to do activity Y then the value to you doing Y had you done it is an opportunity cost of doing X The value of the next best but foregone alternative Expenses incurred or attached when one alternative is selected over other choices 0 TradeOff the differences between the good service or activity chosen and the foregone alternative EX Study Hours 0 Levels of Economic Decision Making o Strategic crucial longlasting and widespread effects o Tactical continues action in above relatively infrequent moderately longlasting and important effects o Policy involves execution of decisions above somewhat frequent set rules and norms o Control regulates changes slightly or facilitates prior decision frequent o Program modifier regular actions very frequent Focus on Strategic Central Decisions o Crucial longlasting and widespread effects o Made infrequently o Examples 0 Whether to buy or rent housing 0 Whether to marry or not 0 Whether to have a child or not DecisionMaking Model o Deciding to Act o Identifying Alternatives o Evaluating Alternatives o Committing to Decision o Evaluating Results o And so on Maynes Model of DecisionMaking Under Risk o Scott Maynes o Risk uncertainty different outcomes can flow from given alternative o Steps in Model Identify alternative actions Think of outcomes of each action Assess the probability of each outcome Assess the utility of each outcome Objective benefits easily measures direct savings Objective costs easily measures direct outlays or losses Subjective benefits difficult to measure emotional sources of satisfaction Subjective costs difficult to measure emotional sources of satisfaction 0 Use a decision rule to decide upon an ACTION In risky decision situations people cannot DECIDE outcomes we can only select and ACTION Decision Rules MAXIMAX n For each action list the outcome with the HIGHEST NET UTILITY n Ask which of these outcomes has the highest net utility n Choose the ACTION associated with this outcome Decision Rules Best of the Most Probable n For each action list the outcome with the highest probability a Ask which of these outcomes has the highest net utility O O O O n Chose the ACTION associated with this outcome Decision Rules MINIMAX n For each action list the outcome with the lowest NET UTILITY Ask which of the these outcomes has the highest net utility n Take the ACTION associated with this outcome Decision Rules Highest Expected Value n Calculate the expected value of each ACTION o EV Sum of probability of outcome X net utility of outcome n Take the ACTION with the highest expected value Maynes Model Hurricane Example MAIMAX 0 Action A Outcome 1 0 0 Action B Outcome 4 100 0 Select A BEST OF MOST PROBABLE RULE 0 Action A Outcome 2 51000 0 Action B Outcome 5 6000 0 Select B MINMAX 0 Action A Outcome 3 infinity 0 Action B Outcome 5 6000 0 Select B HIGHEST EXPECTED VALUE RULE 0 Action A Outcome 20075 5100005Infinityinfinity Action B Outcome 2010086000 4820 Select B n O Issue 1 Family Production of Income 8192009 15800 PM Definitions o Labor Force Participation Rate 0 in the labor force employed amp unemployed in the population o Unemployment Rate 0 of unemployed in labor force o Discouraged Workers 0 Been looking for employment but not in the past 4 weeks 0 Includes individuals who believe there are no jobs out there and ones that don t believe they qualify o Fulltime Workers 0 35 hrsweek o PartTime Workers 0 lt 35 hrsweek Historical and Current Patterns of Labor Force Participation of Women o PreIndustrial America pre 1840 Economy primarily based off of agriculture Primary economic unit was the family Made everything that they consumed The Golden Age of Equality Says that women and men are equal and that they work sidebyside in their efforts of production Consumed equally as well Wide variety of what a woman could do fix fences help along with the shop if one was owned Such Supposed Equality is a Myth Despite how the economic family appeared to be working it was very rigid where men and women had very separate roles Women s place was in the home Women also didn t have certain rights a Couldn t own her own property a Could not vote a Could not serve any legal duties a Wife beating was legal 0 O O n Never own her own business o Period of Industrialization 18401915 0 Women began to step into the labor force and stepping outside the work of home 0 Demand in factories increased household items were being produced in factories instead of homes Men could go in and work in factories but women couldn t o 40 of women made money by working in domestic type jobs WWI Period 19151920 s 0 Women s presence in the work force increased once men went off to war Increased by 10 0 Some women got the be managers 0 Post War men come home and get theirjobs back o Depression Period 1930 s 0 Stock market crashed Jobs available decreased Inflation went up Unemployment rate about 33 among the males Women went back into the work force to help their families out during the depression WWII Period 19401945 0 Women s Labor Force Participation Rate 289 0 Women working along side but getting paid less o Post War Period 1945 0 Women s LFPR 339 1950 Women s LFPR 377 1960 Women s LFPR 433 1970 Women s LFPR 515 1980 Women s LFPR 575 1990 2000 s 602 O O O O O O O O 0 Historical Progression of Family Economic System o Mutually Interdependent pre 1890s 0 Both spouses working at one thing such as farming or family owned business family provider role is shared and each provider is dependent upon the other o Dependent 1890s1960s 0 Family provider role is primarily performed by one family member and other members are dependent upon the primary provider o Independent 1960s present 0 Family providers are independent not dependent upon each other both spouses working WOMENS LABOR FORCE PARTICIPATION Causes of Women s Increased Labor Force Participation o Changes in government policy about work affirmative action o Increase family need to make ends meet o Timesaving innovations in household production o Demographic changes marriage fertility divorce o Increased real wage rates 0 Entices people into the marketplace o Expansion of service sector of economy Earnings Ratio o Women s earnings as a percentage of men s earnings Objective Benefits o Increased real median income o More inkind income employee benefits o Higher percapita total resources o Increased future income over life 0 Today labor force participation translated into increased future productivity and income Changing Environment o More men choosing to be stay at home dads o Work at home 0 Self employed 0 Homebased businesses 0 Nature ofjob allows DIFFERENCVES IN MEDIAN FAMILY INCOME BY WIVES EMPLOYMENT Objective Costs o Increase consumption costs of employment for women and their families 0 Work clothing 0 Food away from home 0 Transportation 0 convenience consumption Subjective Benefits o Increased life satisfaction of women o Increased socioeconomic status associated with employed wide o Increased power in decisionmaking of employed women Subjective Costs o Decreased marital satisfaction of husbands of employed women o Decreased family interaction time Example Questions from Issue 1 o The earnings ration of women and men 0 Is the same across all age ranges o Declines as we examine older ages 0 Increase as we examine older ages I o Is the highest of all among people 65 yrs old and older 0 Is the lowers among people age 4554 o One objective cost of women s paid employment for their families is Increased consumption costs I Lower husband s marital satisfaction Employee benefit earned by wives Lower children s academic achievement Decreased time spent with family and extended kin o In the year 2000 women s labor force participation was a o Singlepeaked pattern 0 Doublepeaked pattern 0 Triplepeaked pattern 0 Singleplateau pattern I O O O O O 0 Pattern exactly like men s o During which historical periods was there a drastic but temporary increase in women s labor force participation 0 O O O 0 Modern era since WWII Preindustrial period Period of WWI I Industrial period None of the above Issue 2 The Housing Decisions 8192009 15800 PM The American Dream Percent of Owner Occupied Housing in the US 1890 2005 Why drop in 1980 s 0 Housing prices escalated o In certain markets price of housing increased even more 0 Interest rates escalated rapidly to doubledigit during the early 19805 Housing markets are local and so are median sale prices Why an increase in homeownership in the 19905 to an all time high 0 Economic growth 0 Strong consumer confidence 0 Relatively affordable mortgage interest rates 0 Community living incentives closing cost assistance Recent Issues 0 Housing Bubble and Financial Crisis Feeling of more wealth than people really had Supply of housing is relatively fixed prices going up and demand going up Expectation of prices increasing helping build equity for free Builders start building value of financial market starts to decrease Saving rates decreased spending more saving less 2007 housing prices peaked Housing bubble and financial crisis perpetuated itself prices decreasing supply gets larger value decreases as well People began to foreclose on their houses mortgage default can t make monthly payments Involuntary foreclosure the family has nothing Voluntary foreclosure owe more on the house than its worth Lending practices became really lax make money off of selling houses Prime MarketLoan A borrower subprime marketloan credit off fluctuating income doesn t fit A Lenders made deals with the appraisers to jack up the prices of the home 2005 25 subprime loans AltLiar Loan people who could not document their income At the peak 40 subprime and liar loans in the market o Housing Affordability Index 0 The relation of a consumer s housing costs to hisher available resources 0 Median family income divided by annual income needed to buy average house with 20 down amp conventional mortgage payment National Association of Realtors When index falls below 100 median family income is less not sufficient than what is needed to buy a median prices home When index is above 100 median family income is more than what is needed to buy a median prices home Not including insurance and property tax 2007 HAI 1118 First time home buyers 1992 index 785 2001 index 801 2004 index 771 2007 index 741 Legal and Economic Distinctions in Housing Forms of Ownership o Singlefamily dwelling 0 One family owns land and all improvements upon it o Condominium 0 Family owns a particular unit in a multiunit project and also owns a proportionate interest in the common areas and facilities outside the unit Have the right to refinance Mortgage is separate o Corporative 0 Purchase shares in the company that owns this multifamily unit and then you lease your unit from them Right to use the playground pool etc Must get permission to update untie paint remodel etc Monthly fee for maintenance mortgage and taxes 0 O O O O O 0 Board of Directors that make policies Objective Costs of Buying Housing Opportunity Cost down payment X rate of return that could be earned on down payment Down Payment initial cash payment toward purchase of house 0 A shift in assets from one form to another not a cost per se 0 Could have used the down payment for some other purpose 0 Price of the house and the loan of the house are 2 different numbers don t always equal each other 0 Down payment price of house X down Loan to Value Ratio 0 95 loantovalue ratio o 90 loantovalue ratio Closing Costs 0 One time payments made at closing or settlement meeting 0 In total all closing or settlement costs generally run about 37 of principal of loan 0 Closing costs principal of loan X Points of principal borrowed 1 typically can pay a point to buy down your interest rate only good if you are gonna be there a veryyyyy long time Loan application fee for processing the loan Loan origination fee charge that is put up to the borrower 1 15 to finalize the loan NOT TAX DEDUCTABLE Title search fee make sure there are no leans on the home or partial ownerships Attorney fee to make sure all the paperwork was alright Appraisal fee Survey costs to know the boundaries of your property Pest inspection costs Others Mortgage Payment payments on loan made up of 0 Principal payment reduces the loan amount equity build up 0 Interest Payment interest due on the outstanding loan Property Insurance 255 of homes market value per year 5 down payment 10 down payment 0 Protect against disasters o Property taxes 52 of homes market value per year c Together with Principal and Interest we have PITI Principal interest taxes insurance o Maintenance and Operating Costs 0 Will vary widely by type of housing type of heatingcooling etc How Much House can a Family Afford o Ratios o Frontend ratio monthly housing expenses lt 28 of gross monthly income Housing expenses include mortgage principal and interest PI property taxes T Insurance on home I o Backend ratio housing expenses other debts lt 36 of gross monthly income Other debts auto loan payments credit card payments other debt payments 0 Conventional Loans 2836 Front endback end 0 FHA Loans 2941 Front endback end Other Factors that Might Affect Mortgage Eligibility or Terms o Consistently paying monthly rent close to amount of monthly PI o Making a largerthanaverage down payment c Having a very good credit record o Eligibility for special mortgage programs 0 Low and moderate income firsttime homebuyers program 0 Veterans programs 0 Rural housing programs o Gross monthly income got to have the money o Monthly debt can t be too high o Credit history Objective Benefits of Owning 0 Equity build up o Tax deductions 0 Mortgage interest Homeowners marginal tax rate X annual interest paid on mortgage Issue 5 Personal Financial Planning 1092009 15900 PM Spending Money Wisely Current Needs 0 Based on necessities of life and your average propensity to consume Average Propensity to Consume APC u The of each of income on average that a person spends for current needs rather than savings a Housing 30 Future Needs 0 Setting aside a portion of current income in savings or investments for future spending Retirement Home New Car for college for your kids Future health cost needs Planning for the unexpected Steps in the Financial Planning Define financial goals Develop financial plans and strategies to achieve goals Implement financial plans strategies Periodically develop and implement budgets to monitor and control progress toward goals Use financial statements to evaluate results of plans and budgets taking corrective action as required Redefine goals and revise plans and strategies as personal circumstances change Define Financial Goals Results that an individual wants to attain Without goals it is impossible to effectively manage your financial resources Goal Statement 0 Long Term Goals 6 Years Future Value Estimates counting for inflation Time Horizon How many years are we looking at Prioritized high low etc 0 Intermediate Goals 2 5 years Time horizon Prioritized o Short Term Goals 1 year Time Horizon Prioritized 3 Important Ideas When Setting Effective Goals Prioritize Attach time horizon or target date Attach value in future value Tim ampAndrea Sheppard s Financial Goals pg 252 Plans to Achieve Your Financial Goals Asset Acquisition Planning 0 Acquiring assets liquid investment personal property and real property assets Liability and Insurance Planning 0 Things we owe on Savings and Investment Planning Employee Benefit Planning Tax Planning 0 Earned income is taxed differently then what you get from an investment Retirement and Estate Planning 0 Time Value of Money the earlier that you save the more you are gonna get Pg253 Life Cycle Hypothesis Theory Personal Financial Statements Taking stock of your current financial situation 0 Up to date evaluation of your financial well being 0 Point out potential financial problems 0 Make better informed financial decisions 2 Types of Personal Financial Statements 0 Balance Sheet Describes your financial position at a given point in time snap shot on that one day How much are you worth today Assets a What you own the value of owned items stated in Liabilities of debts a What you owe financial obligations for which an individual or family is responsible Net Worth Format amp Preparation a List your assest at their fair 0 Income and Expense Statement Balance Sheet Current Status 0 Describe your financial position at a given point in time snap shot on that one day 0 How much are you worth today 0 Assets What you own the value of owned items stated in s o Liabilities or Debts What you owe financial obligations for which an individual or family is responsible 0 Net Worth Format and Preparation 0 List your assets at their fair market value as of the date you are preparing the balance sheet 0 List all current and long term liabilities 0 Calculate net worth 0 Calculate solvency ratio amp liquidity ratio Assets 0 Liquid Assets Assets held in the form of cash or near cash those that can be readily converted to cash with little or no loss in value 0 Investments Assets that earn a return rather than provide a service 0 Real Property tangible assets Immovable property mostly appreciate in value 0 Personal Property tangible assets Movable mostly depreciate in value 0 Fair Market Value Price at which we can reasonably expect to sell an asset Liabilities 0 Current Short term owned ampdue within 1 year 0 Long Term debt due 1 year or more from the date of the balance sheet on larger assets 0 Outstanding Balance 0 Types Short Term bills outstanding revolving credit Long Term include only principal portion of loan on mortgage installment debt mortgage other debt Net Worth 0 Measure of you financial worth 0 Equity in owned assets 0 The difference between one s total assets and total liabilities o What remains after selling all your owned assets and paying off all your liabilities 0 Net worth Total Assets Total Liabilities o Insolvent Condition in which you owe more money than your assets are worth Net worth is 0 or negative IncomeExpense Statement Past Behavior Income Cash In 0 Earned income 0 Non earned income Expenditures Cash Out 0 Fixed vs flexible 0 Certain vs uncertain 0 Results in 4 types of expenditures Fixed certain a necessity amount known Fixed uncertain a necessity amount not known Flexible certain not a necessity amount known Flexible uncertain not a necessity amount not known Preparing the Income amp Expense Statement 0 Record your income from all sources for the chosen period 0 Establish meaningful expense categories 0 Subtract total expenses from total income to get cash surplus a positive number or deficit a negative number Evaluating a Family s Financial Status Solvency Ratio Shows how much of a decline in the market value of their assets a family can have 0 before becoming insolvent solvency more assets than liabilities Solvency Ratio Net Worth Total Assets The higher the better Desirable solvency ratio gt 50 The Sheppard s Solvency Ratio 281 or 281 Liquidity Ratio 0 O O O 0 Shows how much of their one year liabilities they could pay with their liquid assets O O O O O O O O O Pulled from current liabilities income and expense statement and from the balance sheet Liquidity Ratio Liquid Assets Total Current Debt Total current debt all unpaid bills all of the revolving credit card bills one year s worth of mortgage installment loans and other loans The higher the better Desirable liquidity ratio gt 50 The Sheppard s Liquidity Ratio 099 or 99 112 83 9983 12 months of liquid assets to cover current liablilties 222522589 99 Desirable 3 6 of your after tax income available or put away to cover your current debts to increase your liquidity ratio pg 283 Evaluating a Family s Financial Behavior Savings Ratio 0 O O O 0 Shows the family s level of preparation for the future Savings Ratio cash surplus amount saved Annual Net Income Net after taxes gross taxes The higher the better Desirable savings ratio gt 05 The Sheppard s savings ratio 197 or 197 Debt Service Ratio 0 O O O O 0 Shows the burden that the family s debt is relative to their income their ability to repay that debt Debt Service Ratio monthly debt payments monthly gross income The lower the better Desirable debt service ratio lt 35 We will include credit card obligations paid this year s debt service ratio Sheppard s debt service ratio 297 or 297 Budget Development Income and expense statements and balance sheets are used to develop budgets O O 0 Past The income and expense statement provides a record of what was earned and spent in a previous period Present The balance sheet shows a peron s current financial situation Future The BUDGET u Based on previous and forecasted cash flows incomeexpenses u A tool to help one Anticipate surpluses and deficits Allocate future spending based on short term and long term goals a Developing a budget Estimate income Estimate expenditures 0 Building Wealth from FRB of Dallas See if budget balances o If not make adjustments Finalize budget Implement budget and keep records Factors that Affect Cash Flow Stage in your career closely related to stage of life cycle Type of job or career Number of earners in your households Size of household Age Personal consumption behavior What if Predict Deficit Increase income Decrease expend itu res O O O 0 Flexible uncertain Flexible certain Fixed uncertain Fixed certain Sell assets Credit Abuse Non revolving credit mortgages car loans schoolstudent loans consumer loans have increased from 1970 2008 Revolving credit outstanding increased from 1990 2007 239 to 9395 in billions O O A little bit harder to get credit People are not spending as much Non Business Bankruptcy Fillings 1980 2008 steady increased through 2004then spike and then a sharp decrease through 2005 2006 and then rise again in 07 0 Household Filing Highest CA OH GA Lowest RI NH ME Types of Bankruptcy Chapter 7 Straight Bankruptcy 0 Person s assets given to trustee to be sold distributed to creditors Some exclusions for housing and cars a If you only have one car you are most likely to keep it a Only take some of your equity not all of it from your house Chapter 13 Wage Earner Plan Repayment plan 0 Develop plan to pay off over 3 5 years 0 Based on government decision of what categories you need to budget no saving allowed 0 If you fail to make a payment then you have to start all over again 0 Some creditors simply lose out Since 2005 if you file you have to take a financial education class within 2 months of filing Cap put on the amount of debt if you file Chapter 13 of over a million 5 If you stop making payments on a loan it is considered income and will be taxed on the income 0 Forgiven loans and debts will not be taxed Types of Credit Consumer debt 0 Charge accounts revolving 0 Credit Cards revolving o Installment Loans fixed term non revolving 0 Single payment loans 30 day 90 day note All due in one lump sum Mortgage Debt 0 1St Mortgage 0 2quotd Mortgage equity installment loan using your equity to make the 2quotd mortgage loan suggested to use to rebuild your equity home improvements 0 Equity credit line Line of credit on your equity credit card on your equity mortgage Objective Benefits of Credit It s cheaper to buy when interests rates are low Sometimes tax advantages of buying on credit ie equity loan 0 tax implications if you borrow more than the value of your loan When traveling abroad better exchange rate Subjective Benefits of Credit Obtaining expensive goods NOW while spreading out payments for them over time immediate gratification Convenience of purchasing and record keeping particularly with credit card Safety and security of not carrying large amounts of cash Objective Cost of Credit It s more expensive to buy when interest rates are HIGH Sometimes price increases with credit purchase Increasingly common application fees membership costs points miscellaneous charges Subjective Costs of Credit Risk of overspending impulse buying overextension of debt Psychological distaste of owing money apart from any danger of overspending With variable rate credit greater risk from increases in interest rates Danger Signals in Credit Use Having to borrow to meet normal or necessary living expenses Bouncing checks regularly Paying only minimum balance on credit cards Using one form of credit to pay off another pyramiding debt Realizing all revolving credit cares are at the limit Having no cash reserves or emergency fund or additional borrowing capacity Being regularly hounded for payment by creditors or their collection agencies 10 Steps to a Debt Free Life Stop using credit cards Find out how bad it is Evaluate your spending Cut your spending Beware of easy answers Pay off most expensive card 1St Try to lower the cost of credit Boost your payments Use automatic payment plans Celebrate Remedies for Debt Trouble Reexamine family budget Discuss debt with creditors Investigate consolidation loans Consider sale of assetsretu rn of assets for secured debts Visit consumer credit counseling 0 Budgetdebt counseling 0 Debt repayment plan 0 Consumer Credit Counseling of Atlanta Consider filing legal bankruptcy Issue 6 ReEvaluating the Housing Decisions 1092009 15900 PM Re Evaluating the Housing Decisions Family Factors 0 The typical family owns 3 dwellings in their lifetime Starter Home low cost small Full nest Home high cost more space Empty Nest smaller low upkeep Macroeconomic Factors 0 Wide range of financing options 10005 0 Economic conditions can t always be in control but they control what the mortgage market is driving our decisions Three Characteristics to Consider When Financing a Home Mortgage Loan Principal 0 Can you afford it Maturity or Term of the Loan 0 What is the term of the loan 30 yrs 15 yrs Interest Rate 0 Who do they function How much are we gonna pay Increasingly Important Characteristics Whether interest rate ampor monthly payment changes over the life of the loan and if it can only talk about the principal and interest 0 How often can it change 0 How much can it change Fixed Rate Mortgage PI never changes Once they get older the of their income towards their mortgage decreases Advantages 0 Stable Payment 0 Long term tax advantages 0 Shield from future interest rate increases Disadvantages 0 Interest rate higher 0 Monthly payment higher 0 Non benefits if marker interest rates decrease 0 May be more difficult to qualify for FIXED RATE MORTGAGE FIXED HATE MORTGAGE a1 Intem igtu l mm mg How It Works Mortgage prInpraI and Interest Pawnth W it Works a 50000 Ioan a 8 30w rnontnw pawnth 366 88 812 00666666 Montn 1 6 Interest Pawnth 50000 x 0066666 333 33 a prInpraI Pawnth 366 887333 33 33 55 a New Outstanding Loan Baiance 49966 45 Montn 2 6 Interest Pawnth 49966 45 x 0066666 333 11 a prInpraI Pawnth 366 887333 11 33 77 New Outstanding Loan Baiance 49932 68 40rYear Fixed Rate sIrnIIar to 30 xed rate rnortgage o Borrower stretches out pavments a Shghtiv nIgner Interest rate a os Lower monthiv pawnth 0 Con Over iIfe of rnortgage Increases amount paId In Interest 0 Good tor oniv rstntime buvers Wno don39t pIan to stav In tne house tor rnore tnan a tew veers AiternatIve Mortgages Graduated Payment Mortgage GPM 7 Negative Amortization 1 5 7yrs u 7 on 100000 rnortgage ontn a PrInprai 18 97 a Interest 583 33 a 4 an smuuuu rncrtdade 1m rn cntn imam Am mm Em Me mu pzvmui39 Nevxhve swam am a Advantages aner rnma rncntnw Davment Fammes mav nuawv fur tnrs and nut dtners K rn derate ncreases m rncntnw Davmems Fur fammes mat wanttnerr rnnrtdade Davmentstn rncre cmsew rnatcn tnerr a Drsadvantades Hrdnertdtaw mterest casts war We cr man Nedatwe Amumzatmn ccurs wnen me mnrtdade mterest rate H525 butthe rnnrtdade Davmem remamsthe sarne ND benzms rr mterest rates decrease sarne ccncept asmed rate Adjustable Ram Mcngages ARM Interest Rate an ARM rs made up at 2 parts Index Marum a Index Mrdnt be attacned m a Dartmu ar mdex Measure cr mterest rates deneraHv basehne tnat captures tne mavement m mterest rates a Rates an Iyr ccnstantsrn aturIty Treasury securItIes Isyr IscIIIs Cast Bf Funds Index con 7 Iess ycIatIIe Lundun Interbank Offered Rate LIBOR s rncre ycIatIIe c Margm Extra arn cunt tnat Ienuers add Ienders fees In Index Margm ARM Inter st rage Teaser Rates InItIaI ARM Interest rate wnIcn Is Icwer tnan thatderwed fmm addmg tne INDEX EtMARGIN ADJUSTABLE RAI39E Momma ARM B Frequency ufrate cnange cr adjustment InteryaI TENS ycu new u en tne ARM rncrtgage Interest rate can cnange a As u en as eyery 3 rncntns tc 3s5years c Rate Ca s Permdmcap s In a egen InteryaI can cnIy cnange by gtlt pcInts OyeraII cr tItetIrne Cap 7 rnaxIrnurn tne Interest rate can eyer gc Exarn pIe a 25 wnere 2 rnaxIrnurn Increasedecrease In rate eacn tIrne It cnanges permdm 5 rnaxIrnurn Increasesdecrease In IItetIrne thhe ARM a 1 Vear AqustacIe s 5 5 25 slumuuu rncrtgage Vear 15 5 55EPIPaym2ntquot12 rams Increase Max 7 perIcaIc 7 5 599I2 saaaa Decrease Max 7 perIcaIc 3 5 499 12 V5333 Ma Increase an 5 5 25 11 5 c Beware DfThese RcssIcIIItIes Frequency Dfpaym ent cnange Haw ctten ARM payrn ent can cnange a chcIern Dfnegatwe arn crtIzatIcn Rayrnent rnIgntnct cnange at tne sarne tIrne tnat tne Interest rate cnanges Rayrnent Caps O O u Limit on the monthly payment increase that may result from a rate adjustment a Problem of negative amortization Advantages Initial interest rate lower Initial monthly payment lower Tax advantages u Deduct interest from your taxable income More available during certain periods Caps reduce uncertainty When interest rates are high and you expect the rates to drop ARM avoid the cost of refinancing to get lower rate Disadvantages Uncertainty about future interest rate and monthly payments Negative Amortization May be higher total cost than fixed if rates increase Hybrid ARMS O O 0 These ARMs are a mix or a hybrid of a fixed rate period and an adjustable rate period The interest rate is fixed for the first several years of the loan after that the rate could adjust annually 51 hybrid ARM 5 number of years fixed 1 year ARM after the first fixed time period can move once a year after those first 5 years Interest rate will be very low for the 1St 5 years PaymentOption ARM ARM that allows you to choose among several payment options each month 0 O O 0 Options Typically Include A traditional amortizing payment of principal and interest An interest only payment A minimum payment that may be less than the amount of interest due that month GPM u Would result in negative amortization Advantages Flexible to deal with economic circumstances Disadvantages Potentially lose much of tax advantages determined by which method used predominantly Balloon Mortgage 0 Like a fixed rate for the first 3 5 years low interest rate at the end of the 3 5 year period you must pay off the rest of your mortgage at one time Growing Equity Mortgage o Pre payment is automatically planned 0 Applies to conventional or fixed rate mortgages 0 Advantages Allows homeowner to pay mortgage down more quickly equity grows faster 0 Disadvantages Less flexible than just prepaying your fixed rate mortgage Assumable Mortgage o A mortgage that a buyer can assume or take over from the seller of the property A series of equal monthly payments and a large final payment balloon mortgage Interest rate is fixed for 1St several years and after that the rate can adjust annually hybrid ARM TF an assumable mortgage is one which the borrower can assume that the interest rate can assume that the interest rate cannot go up over 5 points over the life of the loan FLASE


Buy Material

Are you sure you want to buy this material for

25 Karma

Buy Material

BOOM! Enjoy Your Free Notes!

We've added these Notes to your profile, click here to view them now.


You're already Subscribed!

Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'

Why people love StudySoup

Bentley McCaw University of Florida

"I was shooting for a perfect 4.0 GPA this semester. Having StudySoup as a study aid was critical to helping me achieve my goal...and I nailed it!"

Allison Fischer University of Alabama

"I signed up to be an Elite Notetaker with 2 of my sorority sisters this semester. We just posted our notes weekly and were each making over $600 per month. I LOVE StudySoup!"

Steve Martinelli UC Los Angeles

"There's no way I would have passed my Organic Chemistry class this semester without the notes and study guides I got from StudySoup."


"Their 'Elite Notetakers' are making over $1,200/month in sales by creating high quality content that helps their classmates in a time of need."

Become an Elite Notetaker and start selling your notes online!

Refund Policy


All subscriptions to StudySoup are paid in full at the time of subscribing. To change your credit card information or to cancel your subscription, go to "Edit Settings". All credit card information will be available there. If you should decide to cancel your subscription, it will continue to be valid until the next payment period, as all payments for the current period were made in advance. For special circumstances, please email


StudySoup has more than 1 million course-specific study resources to help students study smarter. If you’re having trouble finding what you’re looking for, our customer support team can help you find what you need! Feel free to contact them here:

Recurring Subscriptions: If you have canceled your recurring subscription on the day of renewal and have not downloaded any documents, you may request a refund by submitting an email to

Satisfaction Guarantee: If you’re not satisfied with your subscription, you can contact us for further help. Contact must be made within 3 business days of your subscription purchase and your refund request will be subject for review.

Please Note: Refunds can never be provided more than 30 days after the initial purchase date regardless of your activity on the site.