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What is a Variable Cost?

When budgeting for companies, some expenses are fixed overhead and some are variable, which depend on the amount of work being done. The direct cost of materials and labor are a good example of variable costs that will fluctuate with production levels. There may be an equation that the company can use to reliably predict these variable costs, but they are not fixed costs. From an accounting perspective, of course, these costs would be in separate sections. Fixed costs include warehousing, depreciation, insurances, rent, taxes, salaries, and so forth. These can be put into the budget before anything else happens or any orders have been taken for the year. The variable costs must be taken into account on the fly. Continue reading...

What is an Adjustable Rate Mortgage?

A mortgage whose rate is variably adjusted according to the interest rate environment is known as an ARM. With an adjustable rate mortgage (ARM) , the interest rate is lower at the beginning than the fixed-rate alternative, but the customer bears the risk of interest rates going up in the future. The bank or institution creating such a product will usually peg the rate to a specific index or benchmark rate, and will also probably give the customer a cap at which rate hikes would stop. Continue reading...

What is a Leveraged Loan?

A leveraged loan is a commercial loan that is generally created by a few participants, and packaged and offered by one or several investment banks. Leveraged loans are typically targeted at companies that already have a significant amount of debt and may be limited in their options to access capital elsewhere. They are considered on the higher end of the risk spectrum. Continue reading...

What is a Home Equity Line of Credit (HELOC)?

Much like a Reverse Mortgage or Second Mortgage, a HELOC gives homeowners the ability to convert their home equity into cash. A HELOC is a line of credit secured by the equity in your home. Homeowners can choose when to use the funds, and there are repayments due according to a schedule in the contract. It functions as a revolving line of credit, similar to a credit card with large limits. Some people find themselves interested in a HELOC if they have a large balloon payment due on a loan, perhaps even their home mortgage loan. They are also sometimes used as a debt consolidation tool to pay off credit cards and other outstanding debts (but, for this, fixed-rate home equity loans are more popular). Continue reading...

What is Universal Life Insurance?

Universal Life Insurance is a permanent cash value insurance that has a term-insurance component and a savings component as well. The savings component is invested in a tax-deferred account, designed to create a cash build-up that can increase the death benefit or to be used at the discretion of the policy-owner. The cash grows inside the policy tax-deferred, and if money is taken out as a loan, it avoids taxation as income. Continue reading...

What is a Mortgagor?

The mortgagor is the borrower in a mortgagor/mortgagee relationship, where the mortgagee is the lending institution that makes the mortgage loan. Mortgages are used to purchase real property, usually single family homes. The purchase of a home with a mortgage and the payments on the mortgage are one of the largest financial decisions or obligations that a mortgagor will ever make. If a mortgagor is delinquent on payments, he or she might be categorized as a home debtor, and the loan would be subject to foreclosure. If there is a foreclosure, the bank or lender will reposes the house, evict the former owner, and sell the house as quickly as possible, sometimes through an auction. Continue reading...

What is Bank Credit?

Bank Credit is the amount of loaned capital that an individual or business is capable of getting from a bank at a given time. This amount will be based on a series of evaluative metrics such as the total amount of assets an individual has, home equity, income, liquid net worth, work history, credit rating, and so forth. An individual can only borrow so much at a time, and, using these variables, a banker can essentially estimate how much credit could be extended that a given individual at that time. Continue reading...

What is Bad Credit?

Bad credit implies that an individual or business has a low credit score or rating. Credit histories are reported and kept in publicly accessible databases. FICO (Fair Isaac & Company) is a credit rating institution that gives individuals a credit rating score based on reported credit histories. Scores range from 300-850, generally, but they also issue ratings based on auto loans and credit cards, which are on a scale from 250-900. Continue reading...

What is a Student Loan?

Expenses for tuition, room, and board at a secondary education institution can be loaned to a student and paid off over time in the form of a student loan. Tuition and other college expenses have inflated at a much faster rate than the rest of the consumer price index. These institutions can charge more and more as they experience student housing crunches and an ever-growing demand for college education. Continue reading...

What is an FHA Loan?

The Federal Housing Act of 1934 sought to make it easier for Americans to buy homes. It was believed and still is today to an extent that homeownership is a positive foundation for a healthy economy because it provides stability to communities, facilitating healthy family life, community involvement, and the development of businesses in an area where a community will support the business. The Federal Housing Administration runs the FHA loan program with the help of certified lending institutions. FHA loans are a way for lower income earners to be able to purchase a home. Continue reading...

What is a Mortgage?

When a mortgage loan is made to a consumer, the bank or loan institution is the mortgagee, while the consumer is the mortgagor. Mortgages are long term loans secured by the real property of the individual borrowing the money, and they are generally used for homes, called home mortgages. The lending institution, which might be a bank or a mortgage company, is the mortgagee, lending money to the homebuyer, who is the mortgagor. Continue reading...

What is the Prime Rate

The prime rate is the lowest interest rate that banks will charge on loans at a given time, based on the Federal Funds Rate. Individual banks set their own prime rate, which they may also call their "Reference Rate" or "Base Lending Rate." It is the least they will charge for a loan at a given time, based on the creditworthiness of the customer, and the only clients whose risk of default is low enough to approach the prime rate are very large commercial clients. Continue reading...

What is Amortization?

Amortization is like giving a life span to a financial obligation, over a set number of years, and gradually killing-off the obligation with set payments. Amortization is the calculation of a fixed payment schedule over a set number of years to allow the repayment of a loan, such as a home mortgage. From an accounting standpoint, it can refer to the practice of spreading-out the cost of any intangible asset over time. For example, the IRS will allow a taxpayer to amortize the premium of a bond for deductions. Continue reading...

What are the Different Types of Annuities?

There are fixed annuities, fixed/indexed annuities, variable annuities, hybrid annuities, income annuities, period income annuities, and possibly more. Insurance companies, and the insurance subsidiary wings of investment companies, have had many years to develop strategies and marketing ploys that help clients accumulate, protect, and distribute assets within various kinds of annuities. Variable annuities allow the annuitant to participate in the market through mutual funds — or, more accurately, “separate accounts” that mimic mutual funds. Continue reading...

What is an Interest Rate?

An interest rate is a simple financial principle that’s been around for centuries, whereby a borrower has to pay for money borrowed. The interest rate is agreed to between the lender and the borrower, and there may be provisions under which the rate could change over the course of  a loan. In simple terms, an interest rate is the cost of money. Continue reading...

What Types of Life Insurance Exist?

There are more than a few types of life insurance, and more are introduced as time passes. There is group life, term life, whole life, universal life, variations of these, as well as situations that use these products in contexts that warrant their own category such as bank owned life insurance (BOLI), captive insurance companies, and others. Term life insurance is the most common type of life insurance, and it serves as pure insurance, with no cash value, and a limited time in which it has level premiums or will pay the guaranteed death benefit. Continue reading...

What are Subprime Loans?

Subprime loans are loans made by institutions to individuals who do not meet the industry standards for a desirable loan client. Lenders such as banks and mortgage companies are able to shift much of the risk of loans they make by selling the debt off to investors and investment banks in the form of collateralized mortgage obligations and other forms of securitized debt. This paves the way for lenders to adopt more liberal guidelines around who can receive a loan for their home purchase and so forth. A thorough banker who is preserving the financial stability of his employing institution will perform due diligence to prove that a client can meet the repayment schedule for the loan by showing adequate cash flow and credit history. Continue reading...

What is a Jumbo Loan?

A jumbo loan is a mortgage loan that exceeds the conforming loan limits set by the Office of Federal Enterprise Housing Oversight. For borrowers with low debt to income ratios and good credit scores, jumbo loans are often utilized for purchases of larger or luxury homes. Often times jumbo loans are too large in size to be guaranteed by Fannie Mae and Freddie Mac, and are securitized in other ways. Continue reading...

What Investment Options Do Annuities Have?

The investment options in an annuity depend on the insurance company offering the product. The investment options are generally limited, however. If you decided on a Fixed Annuity, the insurance company agrees to pay you a fixed percentage for a set period of time – the rest is completely handled by the company. Usually, this percentage is higher in the beginning (teaser rate), and might go down periodically. Continue reading...

What is Contribution Margin?

Contribution margin measures how efficiently a company can produce a good relative to its variable cost. Goods with high contribution margins are the most profitable. The contribution margin can be helpful in deciding what goods can go on sale and for how much, and it allows management to decipher how to improve efficiency in production while keeping variable costs low. Additionally, if there is a bottleneck in the supply chain for an input that is used to produce two different products, management could use contribution margin to decide which product takes takes priority. Continue reading...