Investment Analysis and Financial Concepts Flashcards

What is equity in a homeowner's context?

Answer: The difference between the property's current market value and the outstanding mortgage balance

Equity represents the homeowner's ownership stake — what would be left after selling the property and paying off the mortgage.

What is a home equity line of credit (HELOC) and how does it differ from a home equity loan?

Answer: A HELOC is a revolving line of credit with variable rates; a home equity loan is a fixed lump-sum loan

A HELOC functions like a credit card secured by home equity with variable rates and flexible draws, while a home equity loan disburses a fixed lump sum at a fixed rate.

What does 'cash flow' mean in the context of a rental property investment?

Answer: The amount of money remaining after all operating expenses and mortgage payments are paid from rental income

Positive cash flow means the rental income exceeds all expenses including the mortgage, generating actual monthly income for the investor.

What is an amortization schedule in a fixed-rate mortgage?

Answer: A table showing each monthly payment broken down between principal and interest over the loan term

An amortization schedule breaks each payment into its principal reduction and interest components, showing how the loan balance decreases over time.

What is the difference between a capital expenditure (CapEx) and an operating expense for a rental property owner?

Answer: Operating expenses are routine costs deducted in the current year; CapEx is a long-term improvement depreciated over its useful life

Operating expenses (repairs, management fees) are fully deductible when incurred, while CapEx improvements (new roof, HVAC) must be depreciated over their IRS-assigned useful lives.

What does PMI (Private Mortgage Insurance) protect and when can it be removed?

Answer: It protects the lender against default and can be removed when the borrower's equity reaches 20%

PMI protects the lender if the borrower defaults; under the Homeowners Protection Act, borrowers can request cancellation when LTV reaches 80%, and it must be terminated automatically at 78%.