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Learning Curve

Adjustable-rate mortgage: A mortgage loan that allows the interest rate to be changed periodically according to changes in a specified index.

Amortization: The gradual repayment of a mortgage, both principal and interest. An amortization schedule is a table that shows the periodic payment, interest and principal requirements, and unpaid loan balance for each period of a loan.

Annuity: A contract sold by insurance companies that guarantees payment of specified amounts at set times, or a single lump sum payment. Annuities either are fixed or variable. While the main purpose of life insurance is to provide an income for the beneficiary at the death of the insured, an annuity is intended to provide an income for life for the contract holder.

• Variable annuities: A tax-deferred vehicle (invested in stocks, bonds or cash) that comes with an insurance contract. Withdrawals made after age 59 � are taxed as income. Earlier withdrawals are subject to ax and a 10 percent penalty. Variable annuities can be immediate or deferred. With a deferred annuity, the account grows until it's time to make withdrawals. At that time, the sum can be withdrawn or regular payments can be established over a designated period of time.

• Fixed annuities: In fixed annuities, a lump sum is invested and a guaranteed fixed rate of interest for a period of time is established.

Appraised value: An appraiser's professional opinion or estimate of the value of property. A property owner may have an appraisal made of a specific property to determine a reasonable offering price in a sale.

Assessed value: A public tax assessor's appraisal of the value of property to calculate property tax.

Back-end load: A redemption charge paid when withdrawing funds from an investment.

Bankruptcy: A court proceeding in which a debtor is relieved of debt obligations, depending on the type of bankruptcy filed. Chapter 7 is the more drastic form, allowing individuals to erase debts with the exception of back taxes, child support, alimony and most student loans. The court sells off their assets, except exempt assets. What's exempt varies from state to state, but generally includes their home, clothing, a car, furnishings, life insurance (not necessarily all the cash value) and pension assets. Chapter 7 stays on a credit record for 10 years. Chapter 11 involves reorganization, whereby the debtor remains in possession of the business and in control of the operation. The debtor and creditors work together to determine a repayment plan.

Bear market: A prolonged period of falling prices. A bear market in stocks usually is brought on by the anticipation of declining economic activity, and a bear market in bonds is caused by rising interest rates.

Bequeath: To transfer personal property to heirs through a will.

Bond funds: Mutual funds with portfolios comprised of corporate, municipal or federal government bonds. Bond funds are considered income funds because they often pay out dividends.

Bull market: A prolonged period of rising prices.

Buy-and-Sell Agreement: An approach used for sole proprietorships, partnerships and close corporations in which the business interests of a deceased or disabled proprietor, partner or shareholder are sold according to a predetermined formula to the remaining members of the business.

Bypass trust: An agreement allowing parents to pass assets on to their children to reduce estate taxes. Assets put in such a trust usually exceed the amount that children an other heirs can receive tax free at a parent's death.

Cafeteria benefits plan: An arrangement under which employees may choose their own employee benefit structure.

Capital gains distribution: When a fund sells a stock at a profit, it passes the profit along to shareholders in the form of capital gains. These gains are normally realized at the end of each year and are subject to short-term (held a year of less) or long-term (held more than a year) taxes.

Capital growth: When the value of a mutual fund increases in value.

Certified Financial Planner (CFP): A professional designation by the College for Financial Planning. Along with professional financial planning experience, recipients must pass national exams in insurance, investments, taxes, employee benefit plans and estate planning.

Chartered Financial Consultant: A professional designation awarded by The American College. Along with professional financial planning experience, recipients must pass national exams in insurance, investments, taxes, employee benefit plans, estate planning, accounting, management and economics.

Child and Dependent Care Credit: A tax credit allowed for a percentage of expenses incurred for household services or for care of a child or other dependents. The percentage of credit varies according to the taxpayer's income.

Churning: Excessive trading in a stock investment account.

Closed-end mutual fund: A mutual fund with a limited number of outstanding shares.

Closing: When a homebuyer signs mortgage documents and pays closing costs to finalize the sale of property.

Closing costs: Fees and other expenses that are paid by buyers and sometimes sellers when transferring ownership of property. The costs typically include a loan origination fee, attorney's fees, an advance on taxes (which is place in an escrow account), title insurance fees and other fees.

Community property: All property that a husband and wife acquire by joint effort during marriage. Property owned prior to marriage or acquired by gift or inheritance is considered separate property.

Compound interest: Interest earned on principal plus interest that was earned earlier.

Conventional mortgage: A residential mortgage loan, usually from a bank or a savings and loan association, with a fixed rate and term.

Credit history: A record kept by a credit bureau that details a person's line of credit and debt repayment history. It is used by lenders to help determine if potential borrowers are a good risk.

Deferred compensation plan: A means of supplementing retirement benefits by deferring a portion of earnings.

Defined benefit pension plan: Eligible to business owners or self-employed individuals, and employees who worked at least 1,000 hours in the past year or two years, if there is no vesting period. There are no set limits for employer contributions, which are based on actuarial assumption. But the maximum annual retirement benefit is $130,000 or 100 percent of the participant's average compensation for his or her highest three consecutive earning years.

Disability insurance: Provides income to those recovering from an injury or illness. Some employers provide disability insurance coverage. Otherwise, disability insurance must be purchased. Most policies will pay 60 percent of one's income at the time the policy was purchased. Policyholders who pay their premiums do not have to pay income tax on disability premium payments. However, if an employer pays the premiums, the benefits are taxable.

Diversification: Spreading investments among a variety of vehicles or securities to reduce risk.

Dogs of the Dow theory: Holds that if investors buy the 10 stocks in the Dow Jones Industrial Average that have the highest dividend yields on Dec. 31, during the ensuing year they will enjoy strong returns.

Dollar cost averaging: Investing a fixed sum in a mutual fund or security at regular intervals. This investment technique doesn't require investors to time the market to invest at market lows, and it generally compensates for investments made at market highs.

Down payment: The part of a property's purchase price the buyers buys in cash.

Employee profit sharing: An employee benefit plan that entitles employees to a share in the profits of a company. When the company does well, employees get a bonus; when the company loses money, employees receive only their regularly established pay.

Employee Stock Ownership Plan (ESOP): An ESOP is established to allow employers to make tax-deductible contributions to a qualified plan. The contributions are used to invest in the common stock of the employer. The advantage to an employee is the opportunity to own a part of his or her employer and to accumulate assets for retirement.

Equity: The difference between property's fair market value and the amount still owed on a mortgage.

Escrow: A deposit held by a third party to be delivered on the fulfillment of a stated condition.

Estate: All property owned by an individual at the time of death.

Estate planning: The planning for the orderly handling, disposition and administration of an estate when the owner dies. Estate planning includes drawing up a will, setting up trusts and minimizing estate taxes.

Estate tax: The amount due to the government generally based on the net value of one's property at death. The federal estate tax exemption is set to rise to $675,000 in 2000 and to $1 million in 2006. Each year, you can gift up to $10,000, without having to pay gift taxes. Married couples can jointly give away up to $20,000.

Estimated tax: Incomes taxes that are paid quarterly by a taxpayer on income that is not subject to withholding taxes, in an amount that represents a projection of ultimate tax liability for the taxable period.

Executor: A person named to carry out the wishes expressed in a will.

Expense ratio: (For mutual funds) The amount, expressed as a percentage of total investment, that shareholders pay for mutual fund operating expenses and management fees.

Foreclosure: Termination of all rights of a mortgagor or the grantee in the property covered by a mortgage.

401(k) plan: A salary-reduction retirement plan that allows employees to contribute pretax earnings to a company pool, which is invested in stocks, bonds or money market instruments. Many employers will match all or part of an employee's contribution. For instance, some match dollar for dollar, while others match 50 cents or 25 cents for a dollar. Some employers require that employees stay at the company for a certain number of years before they become fully vested.

• Contributions are deducted before taxes, which reduces an employee's taxable income.

• Employees may be able to roll their 401(k) into a qualified retirement plan to avoid tax penalties, if they leave their job. Otherwise, contributions and earnings are taxed at one's income tax rate at the time withdrawals are made.

• Some employers will allow you to roll over a previous 401(k) into their retirement plan.

• Penalty-free withdrawals are allowed by your beneficiaries after your death; if you become disabled; to pay medical expenses over 7.5 percent of your gross income; if you leave your job after you reach age 55; and if you take out equal installments intended to last the rest of your life.

• Borrowing from a 401(k): A typical 401(k) loan has a maximum 30-year term if the money is used to purchase a primary residence. For other eligible purchases, such as paying for college, it has a maximum five-year term. But those who change jobs have only 30 to 90 days to pay off their loan. If you neglect to repay the loan, you'll owe income tax on the amount borrowed, plus a 10 percent penalty for early withdrawal.

403-retirement plan: A program for employees of certain charitable or nonprofit organizations such as schools, hospitals or foundations. Employees can elect to forgo up to a certain percentage of their salary each year and place this amount in an annuity or mutual fund. Employers also may contribute to an employee's 403(b) account. As in qualified retirement plans, the earnings accumulate tax-deferred and withdrawals are taxable income.

Freddie Mac: The Federal Home Loan Mortgage Corporation, which buys qualifying residential mortgages from lenders, packages them into new securities backed by those pooled mortgages, provides certain guarantees, then resells the securities on the open market.

Front-end load: A sales fee charged on an investment at the time of purchase.

Full-service broker:A broker who provides a wide range of services to clients. Unlike a discount broker, who usually just executes trades, a full-service broker offers advice on which stocks, bonds, commodities and mutual funds to buy or sell.

Growth fund: A mutual fund that invests for long-term growth of capital. Growth funds tend to be more volatile than more conservative income or money market funds.

Hope Scholarship credit: The Hope credit equals 100 percent of the first $1,000 paid for college tuition and fees (not including room and board), plus 50 percent of the next $1,000. So the maximum credit is $1,500. However, the credit is phased out if your adjusted gross income exceeds $40,000 or $80,000 if you are married and file jointly. Phase-out is complete at adjusted gross income of $50,000 and $100,000 respectively. The Hope credit can be used only for the first two years of college.

Income fund: A mutual fund that invests for income rather than capital growth.

Index fund: A fund that seeks to mirror a broad-based index, such as Standard & Poor's 500 Index. These funds normally have low management fees since they are not actively managed.

Individual Retirement Account (IRA): An individual tax-sheltered retirement account. Earnings in these plans can grow tax-deferred, or in the case of the Roth IRA, tax-free.

• Traditional IRA: Individuals may be able to deduct some or all of their IRA contributions, depending on their income. Interest, dividends or capital gains are not taxed until they are distributed, usually after retirement. Any individual under the age of 70 � who receives taxable earnings may establish an IRA with a maximum contribution of $2,000 per year.

Contributions must be made no later than the due date for filing income tax returns. For most people, this means that contributions for the previous year must be made by April 15. Withdrawals or distributions may begin at age 59 �. Individuals must begin to make withdrawals from their IRA in the year they turn 70 1/2. Withdrawals can be made to pay college expenses, without the 10 percent penalty that usually applies to withdrawals before age 59 �. However, withdrawals are subject to federal income tax.

• Roth IRA: Unlike traditional IRAs, withdrawals from Roth IRAs after age 59 1/2 generally are not taxed. Contributions (but not gains) can be withdrawn for any reason. (Those who converted their traditional IRAs into Roth IRAs must wait five years.) And after age 59 �, the gains may be withdrawn tax-and-penalty-free if the account has been open for five years.

Joint filers with modified adjusted gross income (before IRA contributions) below $160,000, and individuals with modified adjusted gross income below $110,000 are eligible. But eligible contributions start to phase out at $150,000 for joint filers and $95,000 for individuals. Roth IRAs allows annual contributions up to $2,000 ($4,000 for couples).

• Spousal IRA: An IRA established for a nonworking spouse. Two spouses cannot jointly own an IRA; each spouse must have his or her own account. To contribute to a spousal IRA, contributors must be married at the end of the tax year and file a joint income tax return. The combined annual contribution to an individual IRA and a spousal IRA is $2,250. Contributions can be divided between the individual and spousal IRAs in any way so long as no more than $2,000 is contributed to either account.

• Education IRA: Allows contributions up to $500 annually for anyone under the age of 18. Contributions are nondeductible, and eligibility is unaffected by any amounts contributed to traditional or Roth IRAs. However eligibility phases out for joint filers with an adjusted gross income between $150,000 and $160,000, and singles with adjusted gross income between $95,000 and $110,000. Gains accumulate tax-free and can be withdrawn tax-free as well. If a child does not go to college, the account can be used to pay for the college expenses of another family member. Otherwise, liquidating the account will trigger an income tax bill and generally a 10 percent tax penalty.

IRA rollover: An individual may withdraw all or part of an IRA and exclude the withdrawal from income if it is deposited to another or the same IRA within 60 days after the withdrawal. Any portion not directed to an IRA will be taxed as ordinary income and may be subject to the additional 10 percent penalty. Only one rollover is permitted per year.

Inflation: The rise in prices of goods and services caused by an increase in spending and a decrease in production and supplies. There are a number of inflation measures, of which the most commonly quoted is the Consumer Price Index (CPI).

Inheritance tax: A tax, based on property value, imposed in many states on those who acquire property from a decedent.

International fund: A mutual fund made of foreign securities.

Keogh plan: A profit sharing retirement plan for the self employed or those who own a partnership business. Keoghs can be established either as a profit sharing or a money purchase pension plan, or a combination. Plans must be set up by the end of a calendar or fiscal year, and contributions must be made by April 15. For profit-sharing Keoghs, contributions up to 15% of one's net income or $24,000, whichever is less, is allowed. For money purchase pension plans, contributions up to 25 percent of one's net income, or $30,000, whichever is less, is allowed. Contributions are tax deferred.

Liability insurance: Insurance coverage that protects against claims against a property owner for injuries or property damage sustained as a result of the property owner's negligence or inappropriate actions.

Life insurance: There are two types of life insurance policies: • Term insurance: Coverage that stays in effect for only a specified, limited period. If an insured dies within that period, the beneficiary receives the death payments. If the insured survives, the policy ends and the beneficiary receives nothing. Term insurance generally offers lower premiums than whole life insurance. Policies can be purchased from one year to 30 years. Premiums are usually inexpensive for people in good health up to about age 50. After that, premiums start to get progressively more expensive.

• Whole life insurance: A policy that offers protection in case the insured dies and also builds up cash surrender value at a guaranteed rate, which can be borrowed against. The policy stays in effect for the lifetime of the insured, unless it is canceled or lapses. The policyholder usually pays a set annual premium for whole life, which does not rise as the person grows older, as is the case with term insurance. It is usually expensive, due to high fees and commissions.

• Universal life insurance: Adjustable life insurance, under which premiums are flexible, not fixed. Insurance company expenses and other charges are specifically disclosed to a purchaser. As selected by the policy owner, the death benefit can be a specified amount plus the cash value.

• Variable life insurance: A policy under which the face value (death benefit) can fluctuate. It increases or decreases in value, but never below a guaranteed minimum. The savings can be invested in mutual funds, which generally are managed by the insurance company.

Lifetime Learning Credit: The Lifetime credit equals 20% of out-of-pocket tuition and related expenses up to $5,000. (The maximum credit is $1,000.) After 2002, the maximum amount of expenses allowed will increase to $10,000, or a maximum credit of $2,000. No credit is allowed for individuals with an adjusted gross income of $50,000 or $100,000 for married couples filing jointly. The Lifetime Learning Credit cannot be used for those already taking advantage of the Hope Credit for the same year.

Living will: A legal document that expresses medical decisions if a person is unable to speak for himself or herself.

Load fund: A mutual fund that is sold for a sales charge by a brokerage firm or other sales representative.

Lock-in period: The time during which a lender agrees to guarantee a specified interest rate on a specified mortgage.

Lump-sum distribution: A single payment to a beneficiary covering the entire amount of an agreement. Participants in IRAs, pension plans, profit sharing and executive stock option plans generally can opt for a lump-sum distribution.

Margin call: Money market fund: Low-risk funds pay money market interest rates by investing in safe, liquid securities like bank Certificates of Deposits and US government securities.

Mortgage: A debt instrument in which the borrower (mortgagor) gives the lender (mortgagee) a lien on property as security for the repayment of a loan. Generally, mortgage lenders require buyers to put a down payment of 20 percent of the property's value. A lower down payment is accepted for those who qualify for a Federal Housing Administration or Veterans Administration loan.

Types of mortgages: • Fixed-rate mortgage: Has a fixed interest rate for the mortgage term.

• Adjustable-rate mortgage: Has an interest rate that fluctuates depending on some benchmark rate, such as the interest on US securities. Most adjustable-rate mortgages set a maximum and minimum interest rate.

• Balloon mortgage: A short-term loan in which the principal is not reduced to zero over the loan term. A large part of the mortgage becomes due and must be paid at the end of the term, which is usually between five to 10 years. Generally, balloon mortgages offer a lower interest rate and lower fixed monthly payments than a fixed-rate mortgage because the lender expects repayment in a short period of time.

• Jumbo mortgage: A mortgage loan for amounts higher than $200,000. Mortgage lenders will lend a lower percentage of your purchase price, so home buyers will have to make a larger percentage down payment than with other types of mortgages. The interest rate is usually higher on jumbo mortgages.

• FHA (Federal Housing Administration) loan: A government-sponsored loan for those with limited resources for a down payment and up-front expenses. Those who qualify for the loan program may buy a home with a minimal down payment, borrow a higher percentage of the purchase price, and include closing costs in the loan sum.

• VA (Veterans Administration) loan: A government-sponsored loan for qualified veterans or their widowed spouses. Those who qualify can purchase a home with no down payment and higher debt-to-equity ratio allowances.

Net worth: The value of all of a person's assets minus liabilities.

No-load fund: A mutual fund with no sales commission. Investors buy shares in no-load funds directly from the fund companies, rather than through a broker, as is done in load funds.

Origination fee: A loan-processing fee paid to the lender. The fee is expressed in the form of points. One point equals 1 percent of the mortgage.

Pension fund: A fund set up by a corporation, labor union, governmental entity, or another organization to pay the pension benefits of retired workers. Earnings on the investment portfolios of pension funds are tax exempt.

Power of attorney: A legal document that authorizes a specific person to act on one's behalf. It can give complete authority or be limited to specified acts and periods of time.

Pre-approval: A process used to assess a prospective borrower's ability to pay back a loan. It determines how much money a prospective homebuyer can borrow.

Private Mortgage Insurance (PMI): Mortgage insurance used to protect lenders against loss if a borrower defaults on the loan. Most lenders require PMI for loans exceeding 80% of the property's cost.

Probate: The process of distributing a deceased person's estate.

Qualified plan rollover: Any part of a taxable portion of a distribution from a qualified plan may, within 60 days, be rolled over to another qualified plan or an IRA. Rollovers from qualified plans are subject to a mandatory 20 percent federal tax withholding. A direct transfer from a qualified plan to another qualified plan or IRA will eliminate this tax withholding.

Real Estate Investment Trust (REIT): A pool of capital from many investors that is invested in real estate. Most REITs trade on one of the exchanges or in the over-the-counter market. REITs offer investors an opportunity to own real estate through the purchase of marketable securities. Many REITs provide a good yield and have a record of increasing the dividend on a regular basis. As long as a REIT pays out 95 percent of its taxable net income and meets other IRS qualifications, it pays no tax on its earnings. The REIT's income is passed through to the REIT investors and taxed at that time.

Replacement value insurance: Type of coverage that pays the amount it would cost to replace the covered item today.

SIMPLE IRA: A Savings Incentive Match Plan for Employees is a tax-deferred retirement plan used by a sole proprietor or offered by a small business with 100 employers or less that doesn't contribute to another retirement plan. SIMPLE IRAs allow employee contributions, and they mandate an employer match. Annual contributions are limited to $6,000, plus up to 3 percent of your salary.

Simplified Employee Pension (SEP-IRA): A tax-deferred savings retirement plan for the self employed or those who own an S-corporation or a C-corporation. Employees must have worked for the corporation for three of the past five years and earned at least $400 last year. Employer annual contribution limits are the lesser of $30,000 or 15 percent of annual compensation. The limit for the self-employed is the lesser of $24,000 or 13.04% of annual compensation. Employees cannot contribute, but the employer must contribute to eligible employee accounts the same salary percentage he or she contributes.

Student loans:

Types of Federal Student Loans:

• Federal Stafford-Subsidized: An unsecured loan, with a variable interest rate, available to undergraduate or graduate students with financial need. Undergraduate students can borrow up to $2,625 for the first year, $3,500 for the second year, and $5,500 for the third through fifth years. Graduate students can borrow a maximum of $8,500 per year. Payments are deferred until six months after the student graduates or drops below half-time attendance. While the student is in school, the federal government pays the interest on the loan. The maximum interest rate is about 3 percent over the 91-day Treasury bill rate.

• Federal Stafford-Unsubsidized: An unsecured loan, not based on need, available to all undergraduate and graduate students while they are in school at least halftime. The maximum annual loan limits for undergraduates who are financially dependent on their parents are $2,625 for the first year, $3,500 for the second year, and $5,500 for the third through fifth years.

The maximum limits for independent undergraduates are $6,625 for the first year, $7,500 for the second year, and $10,500 for the third through fifth years. Graduate students can borrow up to $18,500 per year. Borrowers are responsible for interest payments while they are in school. Principal payments begin six months after the student graduates or drops below half-time attendance. The interest rate is variable, and the maximum rate is about 3 percent over the 91-day Treasury bill rate.

• Federal PLUS (Parental Loans for Undergraduate Students): Government-sponsored loans to parents of a dependent student who is enrolled in school at least halftime. The maximum loan amount per year is the cost of education minus other financial aid. Principal and interest payments must begin 60 days after the loan is made. The interest rate, which is variable, is capped at 9 percent, but is usually higher than the interest on Stafford loans.

• Federal Consolidation Loan: Available to college graduates who have difficulty paying off their student loans. Allows student to combine student loans so there is only one monthly payment. The borrower must have at least $5,000 of federally guaranteed loans outstanding and must be current on all payments. The borrower usually locks into a low fixed rate and a specific monthly repayment schedule.

Super Bowl Theory: A theory that stock prices will increase for the year if the Super Bowl winner is or was a member of the original National Football League.

Title search: An examination of title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims on the home.

Will: A legal document that specifies what people wish to do with their assets and instructs their executor to carry out their wishes upon their death. A will contains a number of legal clauses, including the executor, legal guardians for minor children, the provision

 
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