Copyright © 2008, The McGraw-Hill Companies, Inc.
10.1 Credit Cards 433(^5) Throughout this section, we will use the terms house and home loosely, and not exclusively to refer to a single-
family home.
- Suppose that Neil’s girlfriend Alecia was also looking for a credit card. Unlike Neil, though, she doesn’t plan to use it
much, but just wants to have it for occasional purchases. When she does use her card, she plans on paying the entire
balance right away. Which of the four options Neil was considering would be best for her? - A credit card offers the following cash-back rewards: ¼% of the fi rst $5,000 in purchases, ½% of the next $5,000 in
purchases, and 1% of all purchases beyond that annually, subject to an annual maximum cash-back of $150. Find the
total cash-back reward you would receive if your charges to the card for the year totaled:
a. $2,000
b. $5,000
c. $8,000
d. $12,500
e. $20,000
f. $50,000 - At what point (in terms of the total amount charged to the card for the year) do you stop earning any cash back on the
card described in Exercise 29?
10.2 Mortgages
Owning a home has long been the considered a key part of “the American dream,” and home
ownership can offer plenty of financial advantages. Real estate, however, is not cheap, and
it is rare for someone to be able to buy a house^5 without having to borrow the money to
do it. Borrowing and lending money to finance real estate ownership is an enormous busi-
ness, both in the United States and around the world. Having a good understanding of the
mathematics of these loans is important both because most of us at one point or another
will be involved in such a loan of one type or another, and because of the size and impor-
tance of this lending to the overall economy and business world.The Language of Mortgages
The entire process of buying real estate, including mortgage loans, can be awfully intimi-
dating and confusing. The amounts of money involved are large, and so the stakes are high,
and the terms and process involved are usually unfamiliar, especially for first-time buyers.
Before proceeding, it is worth defining and explaining some basic terms and processes.
Additional terms will be defined throughout this section as the need arises.
A mortgage is a loan that is secured by real estate. That is to say, when the loan is made
the borrower pledges some piece of real estate as collateral. If the borrower fails to pay
back the loan as promised, the lender has the right to take the real estate from the borrower.
The legal process by which a lender does this is called foreclosure. Another way of saying
that the lender has the right to do this is to say that the lender has a lien on the property.
Mortgages can be taken out on all sorts of real estate. Probably the most familiar example
to most people would be a mortgage that someone takes out to buy a single-family house, but
mortgage loans are also commonly made for apartments, townhouses, condominiums, vaca-
tion homes, and so on. (Mobile homes, however, are not considered to be real estate since
they can be moved, and so loans made for them are not considered mortgages.) A landlord
often will have a mortgage on rental property, a farmer may have a mortgage on agricultural
land, and a business may have a mortgage on properties it owns as well.10.2 Mortgages 433