Chapter 8 Purchasing and Financing a Home Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Chapter Objectives Explain how to select a home to purchase Describe the transaction costs of purchasing a home Describe the characteristics of various mortgage options Describe the characteristics of different types of interest rates Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Chapter Objectives (cont’d) Show how to compare the costs of purchasing versus renting a home Explain the mortgage refinancing decision Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Selecting a Home Single-family detached home Semi-detached home Duplex Townhouse Carriage Home Manufactured/Mobile Home Condominium Complex Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Selecting a Home (cont’d) Condominium Complex Individuals own units of a housing complex, but jointly own the surrounding land and common areas and amenities Best suited for situation where the common areas cannot be easily separated among the owners Offer less privacy Condominium expenses are shared among the owners Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Selecting a Home (cont’d) How Much Can You Afford? Pre-approval certificate: provides you with a guideline on how large a mortgage you can afford based on your financial situation Gross debt service (GDS) ratio: your monthly mortgage-related debt payments–including mortgage loan repayments, heating costs, property taxes, and half of any condominium fees–divided by your total monthly gross household income Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Selecting a Home (cont’d) How Much Can You Afford? –Gross debt service (GDS) ratio: your monthly mortgage-related debt payments–including mortgage loan repayments, heating costs, property taxes, and half of any condominium fees–divided by your total monthly gross household income Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Selecting a Home (cont’d) Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Selecting a Home (cont’d) Affordable Down Payment Savings Keep some funds to cover unanticipated bills and closing costs The Home Buyer’s Plan (HBP) can help first-time home buyers reach their goals Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Selecting a Home (cont’d) Affordable Monthly Mortgage Payments The larger your mortgage payments, the less you can add to your savings/investments, the lower your liquidity, and the greater your overall financial risk Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Selecting a Home (cont’d) Criteria Used to Select a Home Price Convenient location Maintenance School system (if applicable) Insurance Taxes Resale value Personal preferences Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Selecting a Home (cont’d) Relying on a Realtor Can assist you with: Assessing homes, Deciding whether to buy a home, or Determining which home to purchase Home seller is typically responsible for paying a realtor commission Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Selecting a Home (cont’d) Using Online Realtor Services Multiple Listing Service: an information database of homes available for sale through realtors who are members of the service Other online services allow sellers to list their homes in a database without providing real estate-related services Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Selecting a Home (cont’d) Negotiating a Price Seller may accept, reject, or suggest you revise the offer Contract can go back and forth a number of times Contract stipulates the price, and may include conditions such as the completion of a home inspection, the move-in date, and the approval of a mortgage Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Selecting a Home (cont’d) Focus on Ethics: Disclosing Defects The law requires disclosure of any defect that may affect the value of the home Disclosure is not only legal, but moral Failure to disclose can result in a lawsuit for misrepresentation Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Transaction Costs of Purchasing a Home Conventional mortgage: a mortgage where the down payment is at least 20 percent of the home’s appraised value High ratio mortgage: a mortgage where the down payment is less than 20 percent of the home’s appraised value Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Transaction Costs of Purchasing a Home (cont’d) Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Transaction Costs of Purchasing a Home (cont’d) Where do you get a down payment? Own savings RRSP HBP withdrawal Non-repayable gifts from a parent Money from the sale of another property Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Transaction Costs of Purchasing a Home (cont’d) Vendor take-back mortgage: a mortgage where the lender is the seller of the property Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Transaction Costs of Purchasing a Home (cont’d) Closing Costs Home Inspection Fee Appraisal Fee Real Property Report (Land Survey) Land Transfer Tax Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Transaction Costs of Purchasing a Home (cont’d) Legal Fees and Disbursements GST/HST Title Insurance Interest Adjustment Prepaid Property Tax and Utility Adjustments Homeowner’s Insurance Loan Protection Life and Disability Insurance Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Transaction Costs of Purchasing a Home (cont’d) Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Transaction Costs of Purchasing a Home (cont’d) Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Mortgage Options Amortization Period Amortization: the expected number of years it will take a borrower to pay off the entire mortgage loan balance Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Mortgage Options (cont’d) Mortgage Term Mortgage term: the period of time over which the mortgage interest rate and other terms of the mortgage contract will not change Terms include 6 months and 1, 2, 3, 4, 5 and 10 years Always less than or equal to the amortization period Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Mortgage Options (cont’d) Payment Options Payment option: the frequency with which you make a mortgage payment Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Mortgage Options (cont’d) Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Mortgage Options (cont’d) Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Mortgage Options (cont’d) Mortgage Type Closed mortgage: restricts your ability to pay off the mortgage balance during the mortgage term unless you are willing to pay a financial penalty Open mortgage: allows you to pay off the mortgage balance at any time during the mortgage term Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Characteristics of a Fixed-Rate Mortgage Fixed-rate mortgage: a mortgage in which a fixed interest rate is specified for the term of the mortgage Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Characteristics of a Fixed-Rate Mortgage (cont’d) Amortization Schedule Discloses the monthly payments you will make based on: a specific mortgage amount, a fixed interest rate, and an amortization period Allocation of the Mortgage Payment each payment includes repayment of a portion of the principal of the loan and an interest payment Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Characteristics of a Fixed-Rate Mortgage (cont’d) Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Characteristics of a Fixed-Rate Mortgage (cont’d) Impact of the Mortgage Amount on the Monthly Payment The larger the mortgage amount, the larger the mortgage payment Impact of the Interest Rate on the Monthly Payment The higher the interest rate, the larger the mortgage payment Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Characteristics of a Fixed-Rate Mortgage (cont’d) Impact of the Amortization Period on the Monthly Payment The longer the amortization period, the lower the monthly payment and the higher the amount of interest payable over the life of the mortgage Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Characteristics of a Variable-Rate Mortgage Variable-rate mortgage (VRM): a mortgage where the interest charged on the loan changes in response to movements in a specific market-determined interest rate Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Characteristics of a Variable-Rate Mortgage (cont’d) Initial Rate Relatively low initial mortgage rate over the first year or so The allocation of your mortgage payments to principal and interest will change if the VRM rate changes Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Characteristics of a Variable-Rate Mortgage (cont’d) Convertible mortgage: allows you to renew your mortgage, before the and of the current mortgage term, without paying a penalty Useful for individuals who feel that mortgage rates are about to increase Allows individuals to “lock in” their current mortgage interest rate for a longer term Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Characteristics of a Variable-Rate Mortgage (cont’d) Interest Rate Index Initial mortgage rate will be adjusted to stay in line with the prime rate of interest (i.e., the prime rate) Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Decision to Own versus Rent a Home Financial assessment of owning a home versus renting can be performed objectively Estimating the Total Cost of Renting and Owning Costs of Renting: Rent Tenant’s Insurance Opportunity Cost of Security Deposit Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Decision to Own versus Rent a Home (cont’d) Costs of Owning: Mortgage Payment Down Payment Opportunity Cost of the Down Payment Property Taxes Home Insurance Closing Costs Maintenance Costs Utilities Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Decision to Own versus Rent a Home (cont’d) Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb

Mortgage Refinancing Mortgage refinancing: paying off an existing mortgage with a new mortgage that has a lower interest rate Rate Modification Refinancing Analysis Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb