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TeachersEdition

Table of Contents
PART1EXERCISES
Chapter1FinancialLiteracy:theIntroduction
Exercise11RateofReturn 1
Exercise12ChapterReview 2
Chapter2TheFinancialSystemintheU.S.
Exercise21AnnualPercentageYield 3
Exercise12ChapterReview 4
Chapter3FinancialPlanningandBudgeting
Exercise31MonthlyBudget 5
Exercise32TimeValueofMoney 7
Exercise33ChapterReview 8
Chapter4BorrowingandConsumerCredit
Exercise41CostofConsumerCredit 9
Exercise42ChapterReview 10
Chapter5FinancialDecisionMakinginCollege
Exercise51ChapterReview 11
Chapter6SavingandInvesting
Exercise61Taxation 12
Exercise62ChapterReview 13
Chapter7BuyingYourFirstHome
Exercise71HomeMortgages 15
Exercise72ChapterReview 16
AnswerKeys 17

Table of Contents
PART2SUMMARYOFEXPERTINTERVIEWS
Chapter2TheFinancialSystemintheU.S.
KathySmith,NeighborhoodNationalBank 25
Chapter3FinancialPlanningandBudgeting
ScottBroberg,FinancialPlanner 26
Chapter4BorrowingandConsumerCredit
MannyEscuela,MoneyManagementInternational 28
Chapter5FinancialDecisionMakinginCollege
EmmiHarward,theBishopSchool 31
RichDusansky,UniversityofTexasAustin 33
ShannonFaulk,InsuranceAgencyOwner 34
Chapter7BuyingYourFirstHome
MarkRiedy,UniversityofSanDiego 36
ChrisSorenson,H.E.L.P. 38
JaquelineCarlisle,NID 40
MichaelSpilger,RealEstateAttorney 42
SupplementalInterviews
DionneFaulk,CaliforniaDRE 43
JeffDavi,CaliforniaDRE 43
SteveEllis,CaliforniaDRE 44
BillMoran,CaliforniaDRE 44
TomPoole,CaliforniaDRE 45
WayneBell,CaliforniaDRE 46
ChrisNeri,CaliforniaDRE 46
DanSandri,CaliforniaDRE 47

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Exercise11RateofReturn

1. Aninvestorboughtastockfor$35ayearagoanditisworth$42now.Whatisthe
investorsrateofreturnonthisinvestment?

2. Jasonboughtastockfor$20ayearagoanditisworth$18.4now.WhatisJasonsrate
ofreturn?

3. ThestockpriceofMicrosoftiscurrently$28.76.Janetpaid$24.89forthestock3
monthsago.WhatisJanetsrateofreturnontheinvestment?

4. Amyjustsold500sharesofGooglestockfor$625ashareandearneda7.20%rateof
return.WhatpricedidAmypayforeachshareofthestock?

Exercise12ChapterReview
1. Financeisasubjectthatdealswith____________,_____________,____________and
howtheyareinterrelated.

2. Investmentisanassetoritemthatispurchasedwiththehopethatitwill
_________________or__________________.

3. Rateofreturnisthemoneyyouearnonaninvestment,statedasa____________.

4. Thedegreeofuncertaintyoftherateofreturnonaninvestmentiscalled
____________.

Exercise21AnnualPercentageYield

(Roundyouranswerstothenearestthousandthofapercent.)
1. BankAoffersasavingsaccountthatpays1.25%interestrate.
a. Ifinterestiscompoundedannually,whatistheAPYonthisaccount?
b. Ifinterestiscompoundedmonthly,whatistheAPYonthisaccount?

2. BankBoffersamoneymarketaccountwithaninterestrateof3.0%andquarterly
compounding.WhatistheAPY?

3. Youareconsideringthreeoptionstosaveyourmoney.TheinterestrateonAccountXis
8.50%andcompoundedmonthly;theinterestrateonAccountYis8.75%and
compoundedannually;theinterestrateonAccountZis8.65%andcompounded
semiannually.Whichaccountprovidesthehighestrateofreturn?

Exercise22ChapterReview

1. _________________isthecentralbankoftheUS.Itconsistsofthe
_________________and___regionalFederalReserveBanks.

2. The_________________isresponsibleforproducingpapercurrencywhilethe
_________________isresponsibleforproducingcoinage.Bothgovernmentagencies
arepartoftheU.S.DepartmentofTreasury.

3. About___%ofthenewlyproducednotesandcoinsareusedtoreplacethosealreadyin
circulation.

4. ThechairmanoftheFederalReserveBoardisappointedbythe______________and
confirmedbythe______________.Thecurrentchairmanis_________________.

5. Depositoryinstitutionsrelyondepositsfromsaversastheprimarysourceofraising
capitalandusethefundstomakeloans.Examplesofdepositoryinstitutionsinclude
_________________,_________________,_________________and
_________________.

6. The_________________istheinterestrateactuallyearnedorpaidinoneyear,taking
intoaccounttheeffectofcompounding.

7. A_________________isanotforprofitinstitutionthatoffersfinancialservicestoits
members.

8. A_________________isafinancialinstitutionthatacceptssavingsdepositsandinvests
thebulkofthefundsinhomemortgages.

9. Whenselectingabankaccount,youshouldconsiderthefollowingfactors:1)
_____________,2)_____________,_____________,and_____________,and3)
_____________.

10. _________________isatypeofbankaccountthatpaysafixedinterestrateforaset
periodoftime.Youdonothaveaccesstothemoneyuntiltheendoftheperiod.

11. Theprocessofearninginterestoninterestthatwasearnedinapreviousperiodiscalled
_______________.

5

Exercise31MonthlyBudget

1. Jerrywouldliketoprepareamonthlybudgetandhascollectedthefollowinginformation
abouthisincomeandexpenses.Hehasaparttimejobandearnsabout$520eachmonth.
Hisemployerwithholds10%ofhiswagesfortaxes.Intermsofspending,Jerryneedstopay
forlunchesatschoolandgasolineforhiscar,whichaverageabout$135and$60each
month,respectively.Jerryplaysmanysportsandtypicallypays$80eachmonthforthose
activities.Heestimatesthathepays$40forhiscellphoneandspendsapproximately$70
onactivitiessuchasgoingtomovies,rentingvideogamesandhangingoutwithfriends.
Jerrysetsaside5%ofhismonthlyincomeforunanticipatedexpensesandplanstosaveat
least$50eachmonth.

HelpJerrypreparethebudgetusingthefollowingworksheet.

M Mo on nt th hl ly yB Bu ud dg ge et t
Category BudgetedAmount ActualAmount Difference
Income
Wages
OtherIncome
TotalIncome

Expenses
Taxes
Food
Gasoline
Sports
Entertainment
CellPhone
OtherExpenses
TotalExpenses

Contingencies
Savings
Surplus/Deficit

6

2. Afterfinishingthebudget,Jerrydecidestotrackhisactualexpensesandcomparethem
withthebudgetedamounts.Hestartsaspendinglogandrecordseverypaymenthemakes.
Attheendofthemonth,Jerrysummarizeshisspendinginthefollowingcategories:
a. Food:$128
b. Gasoline:$72
c. Sports:$80
d. Entertainment:$85
e. CellPhone:$40
f. SchoolFieldTrip(notbudgeted):$30
Jerrysincomefromhisparttimejobisthesameasheexpected;additionally,hereceives
$25forhisbirthdayinthemonth.

DoesJerryhaveasurplusoradeficitinthemonth?
Whatisthedifferencebetweenthebudgetedandtheactualamount?

7

Exercise32TimeValueofMoney

1. Howmuchmoneywillyouhavein3yearsifyousave$20inanaccountthatpaysa4.5%
annualinterestrate?

2. Howmuchwill$1,000becomein50yearsifitiscompoundedat3.0%annually?

3. Howmuchdoyouneedtodepositintoanaccountwitha7.5%interestrateinorderto
accumulate$200intenyears?

4. Yourbankaccountpaysa2.5%interestrate.Inordertohave$1,000infiveyearsinthe
account,howmuchdoyouneedtodeposittoday?

5. Ifyousave$1,000eachyearandtheinterestrateonyourbankaccountis5%,how
muchmoneywillyouhavein20years?

6. Iftheinterestrateonyourbankaccountis6%andyoustartsaving$500eachyearat
theageof18,howmuchmoneywillyouhaveattheageof30?

7. Givenaninterestrateof4%,whatisthepresentvalueofaseriesofpaymentsof$100
thatwillbereceivedeveryyearoverthenext15years?

Exercise33ChapterReview

1. A_______________isadetailedplanoffinancialactivitythatpertainstoincomeand
expensesexpectedduringaspecificperiodinthefuture.

2. Whenyourincomeexceedsyourspending,youhavea_______________;ontheother
hand,whenyourexpensesexceedtheincome,youhavea_______________.

3. Preparingadetailedplanforfuturefinancialactivitiesmayhelpyou:
a. _______________________________________________________________.
b. _______________________________________________________________.
c. _______________________________________________________________.
d. _______________________________________________________________.

4. Listthreepossiblesourcesofincomeforteenagers:_______________,
_______________,and_______________.

5. Listfivetypicalexpensesforteenagers:_______________,_______________,
_______________,_______________,and_______________.

6. _______________arethingsyoumusthaveinordertosurviveormeettheminimum
livingstandards;_______________arediscretionaryexpensesthatmaybedelayedor
substitutedwithoutaffectingyourabilitytosurvive.

7. Amajordifferencebetweenshorttermandlongtermbudgetingisthatyoushouldtake
intoaccountthe______________________whenplanningforthelongrun.The
conceptbasicallymeansthatadollartodayisworthmorethanadollarinthefuture.

Exercise41CostofConsumerCredit

1. Jackwouldliketoborrow$8,000forthepurchaseofacar.TheAPRona5yearauto
loanis6.0%.WhatisJacksmonthlyloanpayment?Whentheloanispaidoffatthe
endofYear5,howmuchtotalinterestwillJackhavepaid?

2. Sharonisplanningtobuyanewcarandneedstoborrow$13,000witha5yearloan.
Thebanktellsherthattheinterestratedependsonhercredit.Thefollowingtable
showstherelationshipbetweentheinterestrateandaborrowersFICOscore.
FICOScore InterestRate MonthlyPayment
720850 4.20%
690719 6.00%
660689 7.80%
620659 10.80%
Below620 18.00%

CalculateSharonsmonthlyloanpaymentgiveneachinterestrate.
SharonfindsoutthatherFICOscoreis650.Comparetsomeonewithexcellent
credit(FICO>720),howmuchadditionalinterestdoesSharonneedtopayoverthe
lifeoftheloan?

10

Exercise42ChapterReview

1. __________________istheuseofcreditforpersonalneedsbyindividualsandfamilies,
incontrasttocreditusedbybusinessesandgovernments.Thetwobasictypesare:
a. __________________,whichisaonetimeborrowingthathasaspecifiedloan
amountandisforaspecificpurpose.Itisusuallyrepaidwithequalperiodic
paymentsovertime.
b. __________________,whichisaloanwhosemaximumamountisapprovedby
thecreditorbutnotdeliveredtotheborroweratonce.Overtime,theborrower
cangetmoneyfromthelender(uptothemaximumamount),orpaybacka
portionortheentireamountoftheprincipal.

2. Thesituationwhereaborrowerfailstomaketimelypaymentofinterestand/or
principalonaloaniscalled______________.

3. __________________isthemaximumamountyoucanborrowusingaspecificopen
endcredit.

4. 4Csarethefourkeyfactorslendersofconsumercreditconsiderwhentheyassessthe
riskinessofaloan:_______________,_______________,_______________,and
_______________.

5. The__________________isanumberthatsummarizesanindividualshistoryofusing
credit.ItwasdevelopedbyFairIsaacCorporationandhasarangeof____to____.
Thisscoretakesintoaccountfivecategoriesofinformation:_______________,
_______________,_______________,_______________,and_______________.

6. __________________isthecostofcreditexpressedinayearlyrate;itincludesthe
interestrateaswellasotherlenderfeestheborrowerisrequiredtopay.

7. Thegradualrepaymentofloanprincipalovertimeiscalled__________________.

11

Exercise51ChapterReview

1. Whenmakingfinancialdecisions,youoftenneedtoconsidervarioustypesofcost.For
example,__________________isthecostassociatedwithoneadditionalunitof
production,orwithaspecificdecision;__________________isthecostofanactivity
thatismeasuredintermsofthevalueofthebestalternativethatisnotchosen.

2. Whenselectingacreditcard,thereareseveralfeaturesyoushouldconsider,including:
_______________,_______________,_______________,and_______________.

3. __________________isthesituationwhereapersonsidentification(includingname,
socialsecuritynumberand/oranyaccountnumber)isusedortransferredbysomeone
elseforunlawfulactivities.

4. Listfivefactorsyouwouldconsiderwhenchoosinganapartment:_______________,
_______________,_______________,_______________,and_______________.

5. A______________isawrittenagreementunderwhichapropertyowner(calledthe
______________)allowssomeoneelse(calledthe______________)tousethe
propertyforaspecifiedperiodoftimeinexchangeforamonetarybenefit(whichisthe
______________).

6. __________________isatypeofhomeinsurancethatprotectstheholderagainst
accidents,damagesandlossesthatoccurinarentedresidence.

12

Exercise61Taxation

1. Supposeyouaresubjecttoa33%taxrateandyourinvestmentinstocksearnsa15.00%
returnintheyear.Whatisyouraftertaxrateofreturn?

2. Youaresubjecttoa20%taxrateandyourgoalistoearna6.40%rateofreturnafter
payingtaxes.Howmuchbeforetaxreturndoesyourinvestmentneedtoproduceso
youcanreachyourgoal?

3. Yourinvestmentgeneratesan8.50%beforetaxreturn,butafterpayingtaxes,you
actualreturnis7.14%.Whatistaxrate?

13

Exercise62ChapterReview

1. ______________isanassetoritemthatispurchasedwiththehopethatitwillgenerate
incomeorincreaseinvalue.__________________isthemoneyyouearnfromit,
statedasapercentage.

2. Thefourstagesinthelifecycleofinvestinginclude:_______________,
_______________,_______________,and_______________.

3. Abondisacontractthroughwhichagovernmentoracorporation(the
______________)borrowsmoneyfrominvestors(the______________).Thesystem
thatevaluatesthepossibilityofdefaultbytheborroweriscalled_________________.

4. __________________arethosewhoseratingsarebelowinvestmentgrade(typicallyBB
andbelow).Theyhavemuchhigherriskthaninvestmentgradebonds.

5. ______________isatypeofinvestmentthatreflectsownershipofacorporation
representedbysharesthatareaclaimonthecorporationsearningsandassets.
Investorswhoownsharesofacorporationarecalled__________________.

6. Wheninvestinginastock,yourreturnmaycomefromtwosources:1)______________
aretheperiodicpaymentsthecompanymakestodistributeitsearningstoowners;2)
_________________istheamountbywhichthesalepriceofthestockexceedsitsinitial
purchaseprice.

7. Manyindexeshavebeencreatedtomeasuretheperformanceofthestockmarket.The
mostrecognizedexamplesare:
a. __________________,whichisbasedonthepricesof30largecompanies.Itis
theoldestandmostquotedstockmarketindicator.
b. __________________,whichisbasedonthepricesofallstockstradedonthe
NASDAQsystem.
c. __________________,whichisconstructedbyStandard&Poorsandbasedon
thepricesof500largecorporations.

8. __________________isdefinedaslandandimprovementsontheland(suchas
buildingsandlandscaping).Examplesincludehouses,condominiumsandothertypesof
properties.Propertiesthatarepurchasedforincomeproducingpurposesarecalled
__________________.

9. A__________________isanentitythatpoolsmoneyfrommanyinvestorsandinvests
inavarietyofinvestmentopportunities.Itprovidesinvestorsthebenefitof
_______________,whichmeanscombiningalargenumberofinvestmentstoreduce
risk.

14

10. A__________________isacollectionofinvestmentsownedbythesameindividualor
organization.

11. Listfourtypesoftaxthatindividualsandfamiliesmayneedtopay:_______________,
_______________,_______________,and_______________.

12. An__________________isaspecialinvestmentaccountthatallowstheownertodefer
payingtaxesonmoneysavedforretirement.

13. Rankbankaccounts,stocks,realestateandbondsbasedonthelevelofriskinvolvedin
eachinvestment(fromthehighesttothelowest):1)_______________,2)
_______________,3)_______________,and4)_______________.

15

Exercise71HomeMortgages

1. Considera$320,000,30yearmortgagewitha7.20%interestrate.Whatisthemonthly
payment?

2. Katieisplanningtobuyahomefor$260,000.Shehassavedsomemoneysocanafford
topay$50,000fordownpayment.Iftheinterestrateona30yearmortgageis6.00%,
howmuchisKatiesmonthlymortgagepayment?

3. Jamesneedstoborrow$450,000forthepurchaseofanewhome.Heisconsidering
twooptions:a15yearmortgagewitha3.60%interestrateanda30yearmortgage
witha4.20%interestrate.
a. Whatisthedifferenceintermsofmonthlymortgagepayments?
b. WhatisthedifferenceintermsoftotalinterestJamesneedstopayoverthelife
ofeachloan?

4. Kellyneedstoborrow$240,000withamortgageandthelendercharges2.50discount
points.Inordertogettheloan,shealsohastopayadditionalfeesof$3,600.Whatis
Kellystotalclosingcost?

16

Exercise72ChapterReview

1. The__________________isthemidpointofanorderedarrayofactualtransaction
pricesofhomes.Itisacommonlyusedmarketindicatorofhousingvalue.

2. Listthreeexpensesthatusuallyneedtobepaidbyhomeowners,butnotbyapartment
renters:_______________,_______________,and_______________.

3. Duringthehomebuyingprocess,youmayworkwithvariousrealestateprofessionals.
Oneexampleisa__________________,whoislicensedtoprovideservicessuchas
showinghomes,makingoffersandcounteroffers,negotiatingprices,andassistinginthe
closing.Anotherexampleisa__________________,whotakesamortgageapplication,
processesandreviewscredit,andpreparesdocumentsforthelender.

4. Aloanthatusesrealestateascollateralforitsrepaymentiscalleda_______________.

5. Therearemanydifferenttypesofmortgages.Forexample:
a. __________________:amortgagewhoseinterestrateremainsconstantover
theentirelifeoftheloan.
b. __________________:amortgagewhoseinterestratechangesperiodically
basedonapredeterminedformula.
c. __________________:amortgagewhosemonthlypaymentsdonotinclude
principalrepayment.

6. A__________________isaonetimefeepaidbytheborrowertoreducetheinterest
rateonamortgageandisequaltoonepercentoftheamountborrowed.

7. Considerafixedratemortgagethatisamortizedover30years:
a. Themonthlypayment__________________(increases/decreases/staysthe
same)overtime.
b. Theinterestpayment__________________(increases/decreases/staysthe
same)overtime.
c. Theprincipalrepayment__________________(increases/decreases/staysthe
same)overtime.

8. AccordingtotheU.S.taxcode,onlythe__________________portionofamortgage
paymentistaxdeductible.

9. Expensesthatarerelatedtocompletingarealestatetransactionbutseparatefromthe
actualpriceofthepropertyarecalled__________________.

10. __________________isthecostofcreditexpressedinayearlyrate;foramortgageit
includestheinterestrateaswellasotherlenderfeestheborrowerisrequiredtopay,
suchasdiscountpoints,originationfee,brokerfee,etc.

17

Chapter1AnswerKeys

Exercise11RateofReturn

1. Rotc o rcturn = (
vuIuc now-vuIuc ut tmc o] puchusc
vuIuc ut tmc o] puchusc
) = [
42-35
35
= 2u.u%

2. Rotc o rcturn = [
18.4-20
20
= -8.u%

3. Rotc o rcturn = [
28.76-24.89
24.89
= 1S.SS%

4. 7.2u% = (
625-vuIuc ut tmc o] puchusc
vuIuc ut tmc o] puchusc
)

Ioluc ot timc o Purcbosc =
62S
(1 + 7.2%)
= S8S.u2

Exercise12ChapterReview

1. Money;time;risk
2. Generateincome;increaseinvalue
3. Percentage
4. Risk

18

Chapter2AnswerKeys

Exercise21AnnualPercentageYield

AP = _1 +
i
m
]
m
- 1

1a.AP = [1 +
0.0125
1

1
- 1 = 1.2Su%
1b.AP = [1 +
0.0125
12

12
- 1 = 1.2S7%

2. AP = [1 +
0.03
4

4
- 1 = S.uS4%

3.
AP
X
= [1 +
0.085
12

12
- 1 = 8.8S9%
AP
X
= [1 +
0.0875
1

1
- 1 = 8.7Su%
AP
X
= [1 +
0.0865
2

2
- 1 = 8.8S7%
AccountXhasthehighestannualpercentageyield.

Exercise22ChapterReview

1. TheFederalReserve;BoardofGovernors;12
2. BureauofEngravingandPrinting;U.S.Mint
3. 95
4. PresidentoftheU.S.;Senate;Dr.BenBernanke
5. Commercialbanks,savingsandloanassociations;creditunions;mutualsavingsbanks
6. Annualpercentageyield(APY)
7. Creditunion
8. Savingsandloanassociation
9. Rateofreturn;privileges;restrictions;fees;safety
10. Certificateofdeposit
11. Compounding

19

Chapter3AnswerKeys

Exercise31MonthlyBudget

M Mo on nt th hl ly yB Bu ud dg ge et t
Category BudgetedAmount ActualAmount Difference
Income
Wages 520 520 0
OtherIncome 25 +25
TotalIncome 520 545 +25

Expenses
Taxes 52 52 0
Food 135 128 7
Gasoline 60 72 +12
Sports 80 80 0
Entertainment 70 85 +15
CellPhone 40 40 0
OtherExpenses 30 +30
TotalExpenses 437 487 +50

Contingencies 26 27 +1
Savings 50 50 0
Surplus/Deficit +7 19 26

1. Jerrysbudgethasa$7surplus.
2. Jerryhasanactualdeficitof$19inthemonth.Thedifferenceis$26.

20

Chapter3AnswerKeys(continued)

Exercise32TimeValueofMoney

1. FI
n
= PI (1 + i)
n
= 2u (1 + u.u4S)
3
= 22.82

2. FI
n
= PI (1 + i)
n
= 1,uuu (1 + u.uS)
50
= 4,S8S.91

S. PI =
FI
n
(1 + i)
n
=
2uu
(1 + u.u7S)
10
= 97.u4

4. PI =
FI
n
(1 + i)
n
=
1,uuu
(1 + u.u2S)
5
= 88S.8S

S. FI
n
= PHI
(1 + i)
n
- 1
i
= 1,uuu
(1 + u.uS)
20
- 1
u.uS
= SS,u6S.9S

6. FI
n
= PHI
(1 + i)
n
- 1
i
= Suu
(1 + u.u6)
(30-18)
- 1
u.u6
= 8,4S4.97

7. PI = PHI
1 -
1
(1 + i)
n
i
= 1uu
1 -
1
(1 + u.u4)
15
u.u4
= 1,111.84

Exercise33ChapterReview

1. Budget
2. Surplus;deficit
3. Avoidoverspending;assessyourabilitytoreachcertaingoals;indentifynecessary
adjustmentsinyourfinancialhabits;prepareforfinancialemergencies
4. Parttimejobs;allowances;gifts;interestonbankaccounts;othersources(Askstudents
forsuggestions)
5. Askstudentstoprovideanswers
6. Needs;wants
7. Timevalueofmoney

21

Chapter4AnswerKeys

Exercise41CostofConsumerCredit

1. Intheequation,PVistheamountborrowed,iisthemonthlyinterestrate,andnisthe
numberofmonths.
PHI =
PI
1 -
1
(1 + i)
n
i
=
8,uuu
1 -
1
(1 + u.uuS)
60
u.uuS
= 1S4.66

Overthe5yearperiod,Jackstotalpaymentis154.6660=9,279.60,ofwhich8,000
representsrepaymentofprincipal.Asaresult,thetotalinterestpaymentis$1,279.60.

2. Usetheformulaabovetocalculatemonthlypayments:
FICOScore InterestRate MonthlyPayment
720850 4.20% $240.59
690719 6.00% $251.33
660689 7.80% $262.35
620659 10.80% $281.36
Below620 18.00% $330.11
Sharonhastopay$40.77moreeachmonth(i.e.281.36240.59).Overfiveyears,she
willpayadditionalinterestof40.7760=$2,446.20.

Exercise42ChapterReview

1. Consumercredit;closedendcredit;openendcredit
2. Default
3. Lineofcredit
4. Capacity;capital;collateral;character
5. FICOscore;300;850;paymenthistory;amountowed;lengthofcredithistory;typesof
creditinuse;newcredit
6. Annualpercentagerate(APR)
7. Amortization

22

Chapter5AnswerKeys

Exercise51ChapterReview

1. Incremental(ormarginal)cost;opportunitycost
2. Interestrate(orAPR);creditlimit;feesandpenalties;incentives
3. Identitytheft
4. Location;quality;safety;convenience;amenities;cost(suchasrent,applicationfee,
securitydeposit,etc.);size;parking;otherfactors(Askstudentsforsuggestions.)
5. Lease;landlord;tenant;rent
6. Rentersinsurance

23

Chapter6AnswerKeys

Exercise61Taxation

AfterTaxReturn=BeforeTaxReturn(1TaxRate)

1. AfterTaxReturn=15%(133%)=10.05%

2. BeforeTaxReturn=AfterTaxReturn(1TaxRate)=6.4%(120%)=8.0%

3. TaxRate=1(AfterTaxReturnBeforeTaxReturn)=1(7.14%/8.50%)=16%

Exercise62ChapterReview

1. Investment;rateofreturn
2. Accumulation;consolidation;spending;gifting
3. Bondissuer;bondholders;bondratings
4. Junkbonds
5. Stock;shareholders
6. Dividends;capitalgain
7. DowJonesIndustrialAverage;NASDAQComposite;S&P500
8. Realestate;commercialrealestate
9. Mutualfund;diversification
10. Portfolio
11. Incometax;salestax;propertytax;capitalgainstax;socialsecuritytax;others
12. Individualretirementaccount(IRA)
13. Realestate(highest);stocks;bonds;bankaccounts(lowest)

24

Chapter7AnswerKeys

Exercise71HomeMortgages

1. Intheequation,PVistheamountborrowed,iisthemonthlyinterestrate,andnisthe
numberofmonths.
PHI =
PI
1 -
1
(1 + i)
n
i
=
S2u,uuu
1 -
1
(1 + u.uu6)
360
u.uu6
= 2,172.12

2. Katieneedstoborrow260,00050,000=$210,000
PHI =
21u,uuu
1 -
1
(1 + u.uuS)
360
u.uuS
= 1,2S9.u6

3. IfJamesborrowsthe15yearloan,hismonthlypaymentwouldbe$1,038.54more.
However,overthelifeoftheloan,hewouldsave$209,167.20ininterestpayment.
MonthlyPayment TotalPayment
15yearMortgage 3,239.12 583,041.60
30yearMortgage 2,200.58 792,208.80
Difference 1,038.54 209,167.20

4. Eachdiscountpointisonepercentoftheamountborrowed.Kellysclosingcosts
include240,0000.025and3,600.Thetotalequals$9,600.

Exercise72ChapterReview

1. Medianhomeprice
2. Mortgagepayment;property(orrealestate)tax;repair&maintenance;hazard
insurance
3. Realestateagent;mortgagebroker
4. Mortgage
5. Fixedratemortgage;adjustableratemortgage;interestonlymortgage
6. Discountpoint
7. Staysthesame;decreases;increases
8. Interest
9. Closingcosts
10. Annualpercentagerate(APR)

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25

Chapter2TheFinancialSystemintheU.S.

KathySmith,BankBranchManager
NeighborhoodNationalBank

Whataresomeoftheproductsandservicesofferedbyabank?
Checkingaccounts,savingaccounts,bankCDs,moneymarketsaccounts,businessaccounts,
loans,debitcards,andonlinebillpay.

Whyisitimportantforahighschoolstudenttoopenabankaccount?
Tolearnfinancialresponsibilities
Toknowhowtobalanceoutaccountwithmoneytheyearned
Toearnmoneyonsavingaccount
Togrowupinafinancialsoundworld

Whatshouldsomeoneconsiderwhenchoosingabank?
Thelocationofthebank
Willhe/shebecomfortablewiththebank
Thebanksproducts&services

Howsafeisthemoneyyoudepositinabank?
Itssafeandsecured.TheFDICinsuresupto$250,000.
Additionalbenefits:interest;notheftorrobbery!
(FormoreinformationaboutFDIC,gotohttp://www.fdic.gov/deposit/.)

Whatsthebiggestmistakeyouseeclientsmakeintheiraccounts?
Balancingcheckingaccounts
Clientsneededucationandthehelpofthefinancialinstitution.

26

Chapter3FinancialPlanningandBudgeting

ScottBroberg,Financialplanner

Whatdoesafinancialplannerdo?
He/shehelpspeopleestablishgoals(savemoneyforretirement,buyinghouse,gotocollege)
andcreate/developtheplantogettotheirgoal.Thereisnoguaranteethatitwillworkoutas
planned.However,planningaheadhelpsyoualongthewaywhenlifechanges.

Whocanbenefitfromtheservicesofafinancialplanner?
Everybodycanusefinancialadviceinsomeshapeorform.
Practicalityissue:Howmuchwouldyoupayfortheadvice?
Youmaygetadvicefromotherplaceswhenyoufirststartoutyourcareertheneventuallywork
yourwayintoafinancialplannerofficeonceyouhavemorecomplexitytoyourfinancial
situation.

Atwhatpointshouldsomeoneseektheservicesofafinancialplanner?
Today,assoonaspossible,becausetimeisshortandweneedtomakethemostofthetimewe
haveandthelimitedassetswehaveinourlife.Youngpeoplebeginningtosavemoneymaygo
toafinancialplannerandpayaonetimefeetogetguidancetomoveahead.Onceyoustartto
accumulateassets,thenitmakemoresensetohaveanongoingrelationshipwithafinancial
plannerthatyoupayonaregularbasis.

Whatshouldonelookforinafinancialplanner?
1. Goodfit!(comfortablewith,trustthathe/shecanhelpyou)
2. Comfortabletosharefinancialinformationtotheindividual
3. Howmuchareyoupaying?Areyougettingagoodvalueforwhatyouarepaying
him/her?

Whatsthebestfinancialadviceforhighschoolstudents?
Spendlessthanyouearn!Thisalsoappliestoallincomelevels!

Whatsthebestagetostartworkingwithafinancialplanner?
Today!Thinkaboutwhereyouareatthispresentsituationandstarttoplanoutforyour
future.Planthenextstep!
27

Whenyouareinhighschool,thinkaboutwhereyouaregoingtocollege,howyouaregoingto
payforcollege,andwhetherornotyouhavetoworkthroughoutcollege.Whenyouarein
collegethinkaboutwhatkindofcaryoucanafford,whereyouwanttolive,whereyoushop.

Whatsthebiggestmistakeyouseepeoplemakewiththeirmoney?
Overspendingoncarsforyoungpeople.
Advice:Saveupmoneyandbuyacaronyourown.Donotgooutfinancingavehicle.

Whataresomegoodfinancialhabitstobegincultivating?
Decidewhatthemostimportantfinancialgoalisforyou.Setthegoal,andsavemoneytoget
there.Savemoneyupforthatinliquid,andgoouttomakethatpurchase.

28

Chapter4BorrowingandConsumerCredit

MannyEscuela,RegionalDirector,Education,CommunityRelations&Development
MoneyManagementInternational

Whatdoesyourorganizationdo?
Itisthelargestconsumercreditcounseling&serviceeducationcompanyinthecountry.

Whatsortsofservices?
BudgetandDebtCounseling
DebtManagement
ForeclosurePrevention
BankruptcyCounseling
BankruptcyEducation
FinancialWorkshops

Whatshouldhighschoolstudentsbethinkingaboutintermsoftheirfinances?
Studentsshouldhavearolemodeltoemulateandseehowresponsiblehe/she(therolemodel)
bothearnandspendhis/hermoney.

Howcanstudentsprotectthemselvesfromaggressivecreditcardmarketing?
Parentsshouldknowtheirkidsneedsandeducatethekids.
Teachersororganizations(likeDRE)shouldbringfinancialliteracyintoschooland
educatekidssotheyunderstand.
(Interestingfact:Therewasalawpassedonrestrictingaggressivecreditcardmarketingon
campus.However,theaveragestudentdebtincreases.Thelawonlylimitedoncampus,but
thecreditcardcompaniesarenowusingsocialmedia.)

Whatsthedifferencebetweenacreditcard,debitcard,&securedcreditcard?
Adebitcardallowseasieraccesstothemoneythatsalreadyinyourchecking/savingaccount,
anditsonlygoodforthemoneythatyouhaveinyouraccounteventhoughithasVisa/Master
logoonyourcard.
Acreditcardgivesyouaccesstoasetamountofmoneybasedonacertaincreditlimitfor
whichyouhavequalified.Youhavetopaythemoneybackplusinterest.Highschool/college
studentinterestrateis1625percent.
Securedcreditcardisonlygooduptothelimitforwhichyouhavemadethedeposit.

29

Howcanahighschoolstudentestablishgoodcredit?
Donotexceed30%oftheavailablecredit.Itwillaffectyourcreditscore.

Howcanpeopleavoidbecomingoverwhelmedwithdebt?
Saveforitasmuchasyoucanorearnit.

Howimportantisapersonscreditscore?
Itsonlyimportantifyouaregoingtouseit.Everybodyeventuallyneedstousecredit.Four
areascreditorarelookingintoare:
character(repaytimely),
collateral(assetstobuy:car,home),
actualcredit,and
capacity(howyoucanpayitpayback).

Whatkindsofresourcesareavailabletohelppeoplekeeptrackoftheircreditscore?
Theonlyplaceyoucangetafreecreditreportis:
https://www.annualcreditreport.com/cra/index.jsp
NoFICOscore,butyouwillgetyourcredithistory.Getcreditreportatleastonceayear.

Whatsthebiggestmistakeyouseepeoplemakewiththeircreditchoices?
KeepingupwiththeJoneses,fallingformarketingmessages

Whatsthebestsignofcreditsuccess?
Peoplewhorealizedtheycantaffordtheircreditcardsbecausetheyoverextendeditand
enrolledinthedebtmanagementplan.Withminimumcost,theywillrepaytheirdebtinfull
withlow/nointerestrate.

Howdoesbankruptcyaffectapersonscreditscore?
Itaffectsacreditscoreforatleast710years.7yearsifitisreorganizeddebtpaidinfull.10
yearsifitisdischargedatbankruptcycourtwhichallowsthepersonstohavethedebt
dischargedwithoutpayingitback.

Whataresomethingspeoplecandotosetthemselvesupforagoodfinancialfuture?
Parentsshouldsetgoodexampleonspendingmoney.
Getkidsinvolveinfamilybudgeting(moneyyouhave,theamountofbillsyoupay).

Howcankidsplayaroleinhelpingmaintainthefamilysfinances?
Notbuyingbrandnames,buyinguseditems.
30

Referparentsto:
http://www.crediteducation.org/
http://www.moneymanagement.org/

Areallcreditcardsbad?
Lookonvarieswebsitetowhatisavailableintermofinterestrate.
http://www.cardtrak.com/
http://www.bankrate.com/
Getlowrate,noannualfee

Arepaydayloansagoodidea?
Stayawayasmuchaspossible.Highinterestrate!

Whatareyourguidelinesonsavings?
Utilizeemployermatching.
Saveatleast10%ofyourincomeforanemergencyfundandyourfinancialgoals.

Howisyourcreditscorecalculated?
Twoareashavethemostimpactonthescore:
Theamountofmoneytheyowed(30%)
Theirhistoryofrepayingtheirdebt(35%)

31

Chapter5FinancialDecisionMakinginCollege

EmmiHarward,HeadofCollegeCounseling
TheBishopSchool

Whatsortsofthingsshouldcollegeboundstudentsconsiderintermsofpayingfortheir
collegeeducation?
Whattheywanttostudy
Whattheywanttogetoutofthecollegeexperience
Figureouttheirfundingsources(private/publicschooltuition,scholarship,outside
sourcesoffunding,financing)

Whatcollegefinancingresourcesareavailabletostudents?
Highschool/collegecounselor
Websites(aboutstateaids/fedaids)
Parents
Internet
http://scholar.dlhjr.com/

Whenstudentsarelookingatpayingforcollege,whatshouldtheyconsider?
Valuevs.costofeducation

Isacollegeeducationworththeinvestment?
Fouryearcollegebecomesbasicrequirementformanyprofessionalorganizations.Itmakes
sensetostartlookingforfundingandfinancingearly.

Whatcanstudentdotoplanaheadforpayingfortheircollegetuition?
Talktofamilytoseeifthereisfinancialresourcefamilycanoffer
Federal/stateaid
Resourcefromhighschool
Collegewebsite
Community
Savemoney

32

TaliAbramson,PropertyManagementDirector

Whatqualitiesdoyoulookforinatenant?
Fairhousing(nodiscriminationbasedonrace,color,nationalorigin,religion,sex,
familialstatus)
Payrentontime
Greatcredithistory

Howcanprospectivetenantsbestpreparethemselvestorentanapartment?
Atleast18
WithcredithistoryRenterswithoutcredit/rentalhistoryrequireextramonthof
depositorneedtogetacosigner.

Whatsortofthingsshouldfirsttimerentersbethinkingaboutwhentheylookforaplace?
Cleanness,people(friendlystaffs),andlocation

Whattypesofquestionsshouldprospectivetenantsaskthelandlordorpropertymanager?
School?Library?Acceptpets?Funiture?Whataretheoptionswhenyouneedtobreakupthe
lease?

Whatstheadvantageofrentingfromapropertymanagementcompanyoveranindividual
landlord?
Lessmaintenanceissues,landlordmighthavefinancialproblemsandyouenduppayingthe
rentandgettingevicted!

Whatsthebiggestmistakeyouseetenantsmake?
Tenantsdidntmanagetheirexpectationsrightatthebeginningandendedupbreakingthe
lease.

33

RichDusansky,EconomicsProfessor
UniversityofTexasAustin

Whatdidyoudiscoverwhenyourecentlywenttobuyahouse?
Myidentitywasstolen!

Howwasyouridentitystolen?
Someonegotmysocialsecuritynumberandmyname,createdfalseW2,electronicallysentto
IRS,andgotahugerefund.

Whowasresponsibleforstealingyouridentity?
AringinBrooklyn,NewYork

Whatlessonhaveyoulearnerfromyourexperience?
Takepreventivemeasurement(creditmonitoring).
Becarefullywhengettingphonecallsaskingyoursocialsecurity,gettingemailinquiries
foryourSSN,bankaccountnumber.
Getcreditfreezesonoonecangetyourcreditreport.

Didtheidentitytheftaffectyourhomepurchase?
Withhelp,thedealwasclosedtimely.Ifnot,Imightlosethedeposit($10,000)Iputdownfor
purchasingthehouse.

34

ShannonFaulk,InsuranceAgencyOwner

Whoneedsinsuranceandwhy?
PeoplewhohaveacquiredpersonalbelongingsintheirlifeItwillprotectthemfromdisasters,
accidentsandnotcausefinancialruinfortheirfamily.

IsrentersInsuranceagoodidea?
Renterinsuranceisagoodcoveragetohave.Itcoversindividual&personalbelongs,theftand
liabilities.Itisforpeoplewhodonotowntheirhome.

Whatarethelegalrequirementsforhomeownerinsurance?
Purchasinghomeownersinsuranceisalegalrequirementwhenyouveborrowedmoneyfrom
alender,suchasabank,topayforyourhome.Whenyouborrowmoneyfromalender,youare
enteringintoacontractwiththatlender.Purchasingahomeownersinsurancepolicymore
oftenthannotcanbefoundinthetermsandconditions.Ifyourlendermakesitarequirement
foryoutopurchasehomeownersinsurance,andtheyusuallydo,thenyoumustpurchase
homeownersinsurance.

HowdoesPMIinsuranceaffectthecostofyourmonthlymortgage?
PMIisextrainsurancethatlendersrequirefrommosthomebuyerswhoobtainloans
thataremorethan80percentoftheirnewhome'svalue.Inotherwords,buyerswith
lessthana20percentdownpaymentarenormallyrequiredtopayPMItoprotectthe
lenderifthehomebuyersgointodefault.
Itsadditionalinsurancecoverageonthemortgage.Itaddsadditionalcostonthe
mortgage.PMIchargesvarydependingonthesizeofthedownpaymentandtheloan,
buttheytypicallyamounttoaboutonehalfof1percentoftheloan.
Keeptrackofyourpaymentsontheprincipalofthemortgage.Whenyoureachthe
pointwheretheloantovalueratiohits80percent,notifythelenderthatitistimeto
discontinuethePMIpremiums.

Whatshouldsomeonelookforinaninsuranceagent?
Knowledge
Integrity
Expertise

Whatisyourbestadviceonpurchasingcarinsurance?
Doresearchfirst.
Lookforbestproduct.
35

Findinsuranceagentwithexpertise.
Someothernotesoncarinsurance
Newdriverusuallypaysmoresincenoexperience.
Thecostwillbedifferentbasedontypeofvehicle,typeofpolicy(individualorfamily).
Youshouldconsiderifliabilityinsuranceistherighttypeforyou.

36

Chapter7BuyingYourFirstHome

MarkRiedy,Professor
UniversityofSanDiego

Whyaremortgagesimportant?
Aninstrumenttiesyoutothehouseandforcesyoutomakepaymentsontime.Ifyoudont
payitontime,youmayloseyourhouse.

Howimportantaremortgagestothestateofthehousingmarkets?
Thestateofmortgageschangeddramaticallyoverthelast20years.Nowpeoplegetcana
mortgagebetterfittedtotheirneeds.

Whataresomeofthedifferenttypesofmortgagesavailable?
StandardMortgage:30yearfixedrate,interestrateontheloanneverchanged
Nowwehavedifferentduration,variableratesformortgages.

Whyshouldahighschoolstudentcareaboutwhatsgoingoninthehousingmarket?
Thinkaheadabouthowtoqualifyforbuyingahouseandprepareearly.
Takegoodcareofyourcreditscore.

WhatmakestheCaliforniahousingmarketunique?
TheCaliforniahousingmarketisthemostcreativeonesincethehousedemandsare
morediverse.
Thehousingmarketwentdownin2008duetohighpricesanddecreasinghousing
demand.Thehomepricewentdown,andhomeownercouldntpaythemortgage.
Housingmarketwillhavecycles.Since2008,thehousingpriceswentdown
dramatically,especiallyinCalifornia.Thehousingmarketwillbemoreaffordablefor
highschoolstudentswhentheyarereadytobuyahouseinthefuture.

Whatlessonscanbelearnedfromthehousingmarketcrash?
Makesureyouhaveajob,agoodpayingjob.
Studymortgagemarket,workwithlender,andfindthebestmortgagetofityourneeds.
Dontbemisledthatthehousingpriceswillalwaysgoup!Itwillcomedown.
Thatbeingsaid,buyinghouses,especiallyinCalifornia,isagoodinvestmentoveryour
lifetime,butkeeprisksinmind.

37

Howhavethehousingandmortgagemarketschangedovertime?
Housingmarketdemonstratescycles.
Differentpartsofcountryreacttoeconomicsituationdifferently.

Whatstheimpactofthecreditscoreonthemortgagepayment?
Creditscoredoesacouplethings:
Ifyourcreditscoreislow,youmaynotbeabletoborrowatall.
Ifyouhavealowcreditscore,lendersmaychargehigherinterestratesormakeyoupay
points.

38

ChrisSorenson,Founder
HomeownershipEducationLearningProgram(H.E.L.P).

Whatquestionsshouldaprospectivehomebuyeraskarealtor?
Whoareyourteammembers?Howdoyouchooseyourteammember(loanofficers,
loanoriginators)?Arethereanybenefitstoyoudirectlyorindirectlybyreferringmeto
them?
WhatcanIexpectfromyoufromtheprequalificationphase,thehomesearchphase,
theescrowphase,thepostclosingphase?
Whatdoyouexpectfrommeasabuyer?
Gettheanswersinwritingtomitigatetheexpectationsbeingletdown.

Whatsthemostimportantqualityforarealestateprofessionaltohave?
Integrity(putclientsinterestabovetheirown)

Whatoptionsdobuyershaveiftheyreunhappywiththeiragent?
Ifbuyerentersintocontractualagreementwiththeagentthatrepresentsthem(enlisted
agent),itwillbeverydifficulttobreak.Youshouldonlyentertheagreementafteryoureviewit
verycarefullyanddecidethisistherightpersonforyou.Youalsoneedtomakesureyouand
youragentmatchpersonalities.
Stepsyoucantake:
Contactthebrokerofrecordthatthesalespersonisworkingforandrepresenting.
MakesurethattheBoardofRealtorsthattheseindividualsbelongtoaremadeawareof
thechallenges.
ContactDepartmentofRealEstate,andfileacomplaint.

Whoistheidealprospectivehomebuyer?
Buyerswhospendextensivetimegoingovertheirindividualbudget
Buyerswhounderstandtheborrowingprocess
Buyerswhoaredecisiveaboutwhatkindofhometheywanttobuy

Isitalwaysbettertobuythanrentahome?
Buyinghomeisalargecommitment.Thereareawholelotofissuesinrespecttomaintenance,
tax,andinsurance.Buyershouldconsideritasaverylongtermstrategyandseeifitisrightfor
them.

Whatadvicewouldyougiveahighschoolstudentwhowantstobuyahomeoneday?
Withcompoundinterest,puttingalittlemoneyawayeveryweekwilladduptoahugeamount.
39

Decidewhatyouwant.
Decidewhatyouarewillingtogiveup.
Deicidewhatyourprioritiesare.
Gotowork.

Howcanpeoplereachyouiftheyhavequestionsorneedhelp?
Course:
http://www.dre.ca.gov/pdf_docs/re18.pdf
Website
http://www.freehomeownershiphelp.org/
Email
info@freehomeownershiphelp.org

40

JaquelineCarlisle,ExecutiveDirector
NIDHousingCounselingAgency

Whatarethebiggestobstaclestobuyingahome?
Intimidationfactors:intimidatedbytheprocess,byengagingsomethingnew,bytoo
muchinformation
Credit
Downpayment&closingcost

Whatisthemostimportantthingapersoncandotobecomefinanciallyliterate?
Availingthemselvestoeducationopportunitiesthatareavailable
Knowing&understandingthetruecostofhomeownership

Whatarethestepstohomeownership?
Educateyourselfabouttheprocess.
Maintainstableemployment,atleast2years.
Knowyourcredithistory;knowwhatisonyourcreditreport.Correctthemistakeson
thecreditreport.
Haveabudget.Doapersonalbudgetanddeterminehowlargeamonthlypaymentyou
canaffordandcomfortablypay.
Researchasmuchinformationasyoucan.
Preapproval
Knowwhatyourprioritiesare.(Isitclosetoyouremployment?Isitclosetoyourchilds
school?)Itcannarrowyoursearchforthehouse.
Searchforarealestateprofessionalthatcanhelpyou.Lookupthelicensehistory.
Makesureyouarecomfortablesharingyourinformationwithhim/her.
Signcontracts.Makesureyoudoresearchandunderstanditbeforeyousignit.

Howcansomeonegetthemostoutofhomeownership?
Buywhatyoucanafford.Affordabilityisoneofthebiggestobstaclespeople
experiencedinnotgettingthemostoutofhomeownership.
Propertymaintenanceandrepair.Knowingitsimportantforongoingmaintenanceof
yourpropertysoyouwonthavebigchunksofunexpectedexpenses.
Budgetingisthekey.Budgetformaintenance,repairandlongtermthingsthathaveto
bedonetokeepitwellmaintained.
Energyefficiencyupgrades
41

Yourhomeshouldbetheplaceyoufeelcomfortableandyoucanenjoy.Itshouldnotbea
causeofstressinyourlife.Withproperplanningandequippingyourselfbasedonthe
affordabilityandoverallcostofthehomeownership,yourhousecanbeabeautifulhomethat
youcanenjoy!

Whyishomeownershipcounselingmoreimportantthanever?
Thereisalotofinformationoutthere.Somearecorrect;someareincorrect.Itcanbereally
confusing.Withcounseling,itcanhelpyounavigatethebulkinformationoutthere.

Whatdoesyourorganizationdo?
TheNationalInvestmentDivisionHousingCounselingAgency(NIDHCA)isaHUDapproved
nonprofitorganizationwith25yearsofexperienceinhousingcounselingandcommunity
building.NIDHCAhastakenaleadingroleinadvocatingforourdevelopingpoliciesthatwould
effectivelyaddressthehousingandcommunitydevelopmentneedsofunderserved
communitiesinneedoftraditionalresources,productsandservices.
http://nidonline.org/index.html

Whatsortofresourcescanyousuggestforthoseinterestedinpurchasingahome?
HUD(HousingandUrbanDevelopment)http://portal.hud.gov/hudportal/HUD

42

MichaelSpilger,RealEstateAttorney

Whatdoesarealestateattorneydo?
Therearealotofdifferentareasinrealestatelaw.Itcoverslanduse,landlord,tenant,
commercialleasing.Mypracticefocusesonbuyers/sellers,borrowers/lenders,onrealestate
saletransactions.

Whenshouldsomeoneseekouttheservicesofarealestateattorney?
Youusuallydontneedarealestateattorneywhenbuyingahouse.Itonlyhappenswhen
somethinggoeswrongandthedealgoesbad.

Whatsthedifferencebetweenshortsaleandaforeclosure?
Ashortsaleoccurswhenapropertyissoldatlessvaluethanitowesandthelenderagreesto
acceptadiscountedpayoff.Foreclosureistheprocessofthelendertakingpossessionofa
mortgagedpropertyasaresultofsomeone'sfailuretokeepupmortgagepayments.
ExampleofShortSale:
Iftheunpaidbalanceofaloanis,say,$100,000andapropertysellsfor$90,000,underashort
salethelendermightaccept$90,000aspaymentinfull.

Howdoesaforeclosureorshortsaleaffectthecreditscore?
Foreclosurewillaffectyourcreditscorefrom200to250points.Ashortsalewillaffectyour
creditscorefrom150to200.Youareintroubleanyway.Thewaitingperiodtogetaloanfora
personwhohasshortsalerecordissomewherebetween2to3years.Forpeoplewitha
foreclosurerecord,thewaitingperiodwilladdanotheryearortwo.

Whenisitimportanttoreadoverthetermsofarealestatedocument?
Youshouldhaveanattorneylookingovertheselfcreatedforms.Thebiggestblunderisnot
havingalloftheinspectionsbeforeyouclosethedeal.Thestandardcontractallowscontingent
onthebuyersapprovalofphysicalinspection,buyercheckingoutonschoolsystem,and
zoning.Thatisthehomeworkbuyersneedtodo.Hirephysicalinspectortocheckonthe
property.Ifinspectorredflagsanissue,youshouldhaveitcheckoutbylicensedrepairmen
beforeyouclosethedeal.

43

SupplementalInterviews

DionneFaulk,ManagingDeputyCommissioner
CaliforniaDepartmentofRealEstate

WhatisthepurposeoftheCaliforniaDepartmentofRealEstate?
Tosafeguardandtopromotethepublicinterestinallrealestatematters.Weprotect
consumersandsafeguardalltheirrealestateinterest,issuelicensesforrealestate
corporations,realestatebrokers,realestateagents.Wealsoinvestigaterealestatefrauds.
Wealsoverydynamicfinancialliteracyoutreachprogram.Weimplementtheprograma
coupleyearsagoandyoucanfinditavailableatallCaliforniacommunitycolleges.Thenameof
theprogramisFinancialSensetoWhitePicketFence.Iteducatesthecollegestudentson
financialliteracymatters.Wealsoarecurrentlyimplementingafinancialliteracyprogramin
allofthehighschools.Thegoalistoeducatehighschoolstudentsonfinancialliteracymatter
beforetheygraduate.
YoucancheckoutofalltheinformationonDREswebsite.
http://www.dre.ca.gov/

JeffDavi,FormerCommissioner
CaliforniaDepartmentofRealEstate

Whatisyourbestadviceforafirsttimehomebuyer?
FindarealestateagentwhoislicensedbystateofCaliforniaandwithwhomyouenjoy
working.
Getpreapprovedforyouloan.
Buyapropertythatmeetsyourbudget.
Learnthemarketinwhichyouarebuying.
Relyonyourrealestateagentandusetheirexpertisetomakeinformeddecisions.

44

SteveEllis,AssistantCommissioner
CaliforniaDepartmentofRealEstate

Whatarethefirststepssomeoneshouldtakewhentheydecidetheywanttopurchasea
home?
Getprequalified!Prequalifiedmeansaloanofficerhasdeterminedaborroweriscreditworthy
andfinanciallyabletoqualifyforacertainloan.

BillMoran,AssistantCommissioner,Enforcement
CaliforniaDepartmentofRealEstate

Whatsortsofresourcesareavailabletoconsumerswhowanttoknowtheyredealingwith
reputablepeopleduringthehomebuyingprocess?
CheckDepartmentofRealEstatewebsite(http://www.dre.ca.gov).
ChecklocalBetterBusinessBureau.
CheckinternetserviceproviderssuchasYelp,Angieslist.
Checkinternetsearchengines.

45

TomPoole,AssistantCommissioner
CaliforniaDepartmentofRealEstate

Whatsortofloantermsshouldsomeonelookforbeforesigningonthedottedline?
Beforesigningforit,youshoulddoduediligenceanddoyourhomework.Breakdowntheloan
intermsoftermsandconditions&costsandexpenses.
Theareasyoushouldlookatforloantermsare:
Theinterestratethatisbeencharged
Fixedoradjustableratemortgage
Thetermoftheloan,15,30yearsorhybrid
Isthereaprepaymentpenaltyassociatedwiththeloan?
Istheloanfullyamortized?
Whatisyourmonthlypayment?
Theareasyoushouldlookatforcostsandexpensesare:
Appraisalfee
Escrowfee
Tileinsurance
Processingfee
Points

Howcanapotentialhomebuyerprotectthemselvesduringtheloanprocess?
Youshoulddoduediligenceanddoyourhomework.
Pullyoucreditrecord.Ifthereisamistake,correctit.
Applyforloans.
Comparedifferentloanoffers.

Whatsortsofresourcesareavailabletoassistsomeoneinprotectingthemselves?
ThebrochureUsingtheservicesofamortgagebrokerprovidedbyDRE
(http://www.dre.ca.gov/pdf_docs/re35a.pdf).
DRECaliforniaRealEstateandFinancialServicesLicenseInformation.
http://www.dre.ca.gov/gen_lic_info.html
NationalMortgageLicensingSystem(NMLS)
http://www.nmlsconsumeraccess.org/
HUD(HousingandUrbanDevelopment)
http://portal.hud.gov/hudportal/HUD
FannieMae
http://www.fanniemae.com/portal/index.html

46

WayneBell,ChiefCounsel
CaliforniaDepartmentofRealEstate

Whatquestionsshouldsomeoneuseininterviewingarealestateprofessional?
Howlonghaveyoubeenintheresidentialrealestatebusiness?
Areyouexperiencedintheneighborhood/neighborhoodsthatIaminterestedin
purchasingthehome?
Doyouhaveanyexpertise?
Doyouhaveanyprofessionalaffiliations?AreyouamemberofaBoardofRealtors,a
memberofalocalboard?
HowmanyhomeshaveyousoldorassistedinpurchasingintheareathatIam
interestedinbuying?
Whatareyougoingtodotohelpmelocateahome?Openhouse?Internet?
Howmuchtimeareyougoingtospendwithmeeachweek?
Howareyougoingtohelpmetodeterminethevalueofthehome?
Whentheofferisreadytobemade,areyougoingtohelpmeputtogetheranoffer?
Howareyougoingtoaligntheofferwiththetruevalueofthehome?
Doyouhavealistofsatisfiedcustomers,alistofpersonalreferences?Getphone
numbersandcallthem.Makesurewhatyouaretoldistrue.

ChrisNeri,AssistantCommissioner
CaliforniaDepartmentofRealEstate

Whatarethemostcommonmistakespeoplemakewhentheygotobuyahome?
Nothiringrealestateprofessionals
Notgettingprequalified,preapproved
Overbuying
Rushingintobuying

47

DanSandri,ChiefAuditor,
CaliforniaDepartmentofRealEstate

Whatsortsofthingsshouldconsumersconsiderwhendecidingonahomeloan?
Whatpaymentamountdoesyourbudgetallowed?
Whichfitsbetter?A30yearor15yearloan?
Adjustablerateorfixedrate?
Whatarethepoint&feecharged?
Whatistheinterestrate?
Aretherespecialprogramsavailabletoyou?