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

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


Chapter Objectives (cont’d)

• Show how to compare the costs of purchasing versus renting a home

• Explain the mortgage refinancing decision


Selecting a Home

• Single-family detached home• Semi-detached home• Duplex• Townhouse• Carriage Home• Manufactured/Mobile Home• Condominium Complex


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



• 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



• 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




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



• 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



• Criteria Used to Select a Home• Price

• Convenient location

• Maintenance

• School system (if applicable)

• Insurance

• Taxes

• Resale value

• Personal preferencesCopyright © 2012 Pearson Canada Inc.

Edited by Laura Lamb


• 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



• 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


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



• 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


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


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



• Vendor take-back mortgage: a mortgage where the lender is the seller of the property



• Closing Costs• Home Inspection Fee

• Appraisal Fee

• Real Property Report (Land Survey)

• Land Transfer Tax



• 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






Mortgage Options

• Amortization Period

• Amortization: the expected number of years it will take a borrower to pay off the entire mortgage loan balance


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


Mortgage Options (cont’d)• Payment Options

• Payment option: the frequency with which you make a mortgage payment







• 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


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


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





• 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



• 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


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


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



• 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



• Interest Rate Index• Initial mortgage rate will be adjusted to stay in

line with the prime rate of interest (i.e., the prime rate)


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


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


Decision to Own versus Rent a Home (cont’d)


Mortgage Refinancing

• Mortgage refinancing: paying off an existing mortgage with a new mortgage that has a lower interest rate

• Rate Modification

• Refinancing Analysis


Date post:	25-Dec-2015
Category:	Documents
Upload:	lindsay-marshall
View:	217 times
Download:	1 times

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

Documents