Chapter 8 Purchasing and Financing a Home Copyright © 2012 Pearson Canada Inc. 8-1

Selecting a Home Single-family detached home A free-standing home that is situated on its own lot Usually occupied by one family Semi-detached home A home that has a common wall with another home Relatively less expensive to maintain Copyright © 2012 Pearson Canada Inc. 8-2

Selecting a Home (cont’d) Duplex Consist of one house that contains two distinct family homes-one on top of the other Townhouse Consists of many single family homes with each attached to the next by a common wall Copyright © 2012 Pearson Canada Inc. 8-3

Selecting a Home (cont’d) Carriage Home Consists of houses that are joined by garages or car ports Manufactured/Mobile Home A home that is built in a factory and then placed on a lot Copyright © 2012 Pearson Canada Inc. 8-4

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. 8-5

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 Also provides a mortgage interest rate guarantee that is valid for 60 to 120 days Mortgage approval is not guaranteed Copyright © 2012 Pearson Canada Inc. 8-6

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. 8-7

Selecting a Home (cont’d) Mortgage loan repayments must be calculated using the greater of the mortgage interest rate agreed to in the mortgage contract and the current five-year fixed mortgage interest rate Total debt service (TDS) ratio: your mortgage-related debt payments plus all other consumer debt payments divided by your total monthly gross household income Copyright © 2012 Pearson Canada Inc. 8-8

Selecting a Home (cont’d) Copyright © 2012 Pearson Canada Inc. 8-9

Selecting a Home (cont’d) Affordable Down Payment What is the market value of the assets you will use to make your down payment? Maintain some funds for liquidity purposes to cover unanticipated bills and closing costs The Home Buyer’s Plan (HBP) can help first-time home buyers reach their goals Allows each home buyer to “borrow” up to $ from their Registered Retirement Savings Pan (RRSP), interest-free You have up to 15 years to pay back this “loan” Copyright © 2012 Pearson Canada Inc. 8-10

Selecting a Home (cont’d) Affordable Monthly Mortgage Payments Refer to your cash flow statement Your mortgage payment may replace a rent payment but there are other expenses to consider 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. 8-11

Selecting a Home (cont’d) Criteria Used to Select a Home Price Stay within your budget Convenient location Maintenance Newer homes tend to have fewer and less costly repairs A home with a large yard may require more maintenance School system Copyright © 2012 Pearson Canada Inc. 8-12

Selecting a Home (cont’d) Insurance Higher for more expensive homes and homes in high-risk areas Taxes Resale value Location, location, location! Very dependent on economic and market conditions Personal preferences Copyright © 2012 Pearson Canada Inc. 8-13

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 Copyright © 2012 Pearson Canada Inc. 8-14

Selecting a Home (cont’d) Home seller is responsible for paying a realtor commission Traditionally, 7% of the selling price on the first $ and 3% on the remaining price Flat fees structures (fixed percentage or dollar amount) are becoming more common Copyright © 2012 Pearson Canada Inc. 8-15

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 A marketing service Administered and operated by the local real estate board Copyright © 2012 Pearson Canada Inc. 8-16

Selecting a Home (cont’d) Other online services allow sellers to list their homes in a database without providing real estate-related services (e.g. ComFree) Charges low, or no, commissions Copyright © 2012 Pearson Canada Inc. 8-17

Selecting a Home (cont’d) Negotiating a Price Most sellers are willing to accept less than their original asking 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. 8-18

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. 8-19

Transaction Costs of Purchasing a Home Down Payment Represents your equity investment in the home Conventional mortgage: a mortgage where the down payment is at least 20 percent of the home’s appraised value Lender bears the risk that you may default on the loan Down payment provides a cushion in situations where the lender has to repossess the home and sell it Copyright © 2012 Pearson Canada Inc. 8-20

Transaction Costs of Purchasing a Home (cont’d) High ratio mortgage: a mortgage where the down payment is less than 20 percent of the home’s appraised value Cushion provided by the down payment is lower Lender will require that your mortgage be insured In the event of default, a mortgage insurer insures a high ratio mortgage, thereby protecting the lender’s investment Mortgage loan insurance premium may be paid immediately by the borrower, or add to the mortgage Copyright © 2012 Pearson Canada Inc. 8-21

Transaction Costs of Purchasing a Home (cont’d) Copyright © 2012 Pearson Canada Inc. 8-22

Transaction Costs of Purchasing a Home (cont’d) Sources for a traditional 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. 8-23

Transaction Costs of Purchasing a Home (cont’d) Sources for a non-traditional down payment: Borrowed money Gifts Lender cashback incentives Copyright © 2012 Pearson Canada Inc. 8-24

Transaction Costs of Purchasing a Home (cont’d) Copyright © 2012 Pearson Canada Inc. 8-25

Transaction Costs of Purchasing a Home (cont’d) Copyright © 2012 Pearson Canada Inc. 8-26

Transaction Costs of Purchasing a Home (cont’d) Closing Costs Home Inspection Fee Home inspection fee: a report on the condition of the home If the home requires any major repairs, you can re- evaluate your decision to purchase Appraisal Fee Used to estimate the value of the home and thus protects the financial institution’s interests Copyright © 2012 Pearson Canada Inc. 8-27

Transaction Costs of Purchasing a Home (cont’d) Real Property Report (Land Survey) Illustrates the location of significant visible approved improvements relative to property boundaries Land Transfer Tax A tax levied in some provinces when property is sold Levied in Ontario, B.C., Manitoba, Nova Scotia, & Quebec Copyright © 2012 Pearson Canada Inc. 8-28

Transaction Costs of Purchasing a Home (cont’d) Legal Fees and Disbursements Purchase of a home should be completed using the services of a legal office Lawyer completes a worksheet that displays how funds will be disbursed GST/HST Paid on the purchase of a brand new home Title Insurance Protects the insured if it turns out that the real property report is inaccurate Copyright © 2012 Pearson Canada Inc. 8-29

Transaction Costs of Purchasing a Home (cont’d) Copyright © 2012 Pearson Canada Inc. 8-30

Transaction Costs of Purchasing a Home (cont’d) Interest Adjustment Interest adjustment: occurs when there is a difference between the date you take possession of your home and the date from which your lender calculates your first mortgage payment Prepaid Property Tax and Utility Adjustments The buyer must reimburse the seller for any prepaid bills Copyright © 2012 Pearson Canada Inc. 8-31

Transaction Costs of Purchasing a Home (cont’d) Homeowner’s Insurance The lender will request proof that the buyer has purchased homeowner’s insurance before mortgage proceed are advanced to the lawyer Loan Protection Life and Disability Insurance Protects the lender against financial loss as a result of injury, illness, or death of the borrower Commonly referred to as creditor insurance Copyright © 2012 Pearson Canada Inc. 8-32

Transaction Costs of Purchasing a Home (cont’d) Copyright © 2012 Pearson Canada Inc. 8-33

Mortgage Options Amortization Period Amortization: the expected number of years it will take a borrower to pay off the entire mortgage loan balance Maximum amortization period is 30 years, or 360 months Copyright © 2012 Pearson Canada Inc. 8-34

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. 8-35

Mortgage Options (cont’d) Payment Options Payment option: the frequency with which you make a mortgage payment In general, the more annual payments you make, the quicker you pay off your mortgage and the less interest you pay Copyright © 2012 Pearson Canada Inc. 8-36

Mortgage Options (cont’d) Copyright © 2012 Pearson Canada Inc. 8-37

Mortgage Options (cont’d) Copyright © 2012 Pearson Canada Inc. 8-38

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. 8-39

Mortgage Options (cont’d) Closed mortgages are more popular: Offer a lower interest rate Accelerated payment features Increase monthly mortgage payment, and/or Pay off a lump sum of the original mortgage balance Copyright © 2012 Pearson Canada Inc. 8-40

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 When homeowners expect interest rates to rise, they tend to prefer fixed-rate mortgages Lenders are usually willing to negotiate their posted rates Copyright © 2012 Pearson Canada Inc. 8-41

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. 8-42

Characteristics of a Fixed-Rate Mortgage (cont’d) Copyright © 2012 Pearson Canada Inc. 8-43

Characteristics of a Fixed-Rate Mortgage (cont’d) Copyright © 2012 Pearson Canada Inc. 8-44

Characteristics of a Fixed-Rate Mortgage (cont’d) Copyright © 2012 Pearson Canada Inc. 8-45

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. 8-46

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. 8-47

Decision to Own versus Rent a Home (cont’d) Copyright © 2012 Pearson Canada Inc. 8-48

Decision to Own versus Rent a Home (cont’d) Copyright © 2012 Pearson Canada Inc. 8-49

Decision to Own versus Rent a Home (cont’d) Copyright © 2012 Pearson Canada Inc. 8-50

Decision to Own versus Rent a Home (cont’d) Copyright © 2012 Pearson Canada Inc. 8-51