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Personal financial planning > Chapter 7 > Flashcards

Chapter 7 Flashcards

1
Q

What is pre-approval certificate

A

A guideline on how large a mortgage you can afford with rate guarantee

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2
Q

Define the term Gross debt service (GDS) ratio

A

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 - 32% OR LESS

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3
Q

Define the term Total debt service (TDS) ratio

A

your mortgage-related debt payments plus all other consumer debt payments divided by your total monthly gross household income - 40% or less

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4
Q

How does the home buyers plan (HBP) help firt time home buyers reach their goal?

A

allows each home buyer to borrow up to 25k from their registered retirement savings pan (RRSP) interest-free with up to 15 years to pay back this “loan”

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5
Q

What are the effects of large mortgage payments

A

The larger the payments, the less you can add to savings/investments
the lower your liquidity
the greater your overall financial risk

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6
Q

List the critierias used to select a home

A
  • Price
  • convenient location
  • maintenance
  • school system
  • insurance
  • property tax
  • Resale value
  • personal preferences
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7
Q

What is Multiple listing service?

A
  • An info database of homes available for sale through realtors who are members of the service (online realtor service)
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8
Q

T OR F? When negotiating a price most sellers are willing to accept less than their asking price

A

TRUE

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9
Q

Define the term down payment?

A

Represents your equity investments in the home

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10
Q

what is conventional mortgage?

A

A mortgage where the down payment is at least 20% percent of the home’s appraised value

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11
Q

What is High ratio mortgage?

A

A mortgage where the down payment is less than 205 OF THE HOME’S APPRAISED VALUE

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12
Q

List sources for a traditional down payment

A
  • own savings
  • RRSP HBP withdrawal
  • Non-repayable gifts from a parent
  • Money from the sale of another property
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13
Q

List sources for a Non-traditional down payment

A
  • Borrowed money
  • Gifts
  • Lender cashback incentives
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14
Q

In a conventional mortgage, who bears the risk you may default on the loan?

A

Lender

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15
Q

In the event of default, why does a mortgage insurer insure a high ratio mortgage

A

In order to protect the lenders investment

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16
Q

What is Vendor take-back mortgage

A
  • A mortgage where the lender is the seller of the property
    • buyer makes mortgage payments directly to seller
    • alternative to a high ratio mortgage
17
Q

Mention the closing costs of purchasing a home

A 
- 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 
homeowners insurance 
loan protection life and disability insurance
18
Q

What is Amortization period?

A

the expected number of years it will take a borrower to pay off the entire mortgage loan balance (max is 25yrs or 300 months)

19
Q

what is mortgage term?

A

the period of time over which the mortgage interest rate and other terms of the mortgage contract will not change (6months and 1,2,3,4,5, and 10 years)

20
Q

what is payment frequency?

A

the frequency with which you make a mortgage payment

21
Q

What are the types of mortgage

A

Closed and open mortgage

22
Q

what is closed mortgage?

A

restricts your ability to pay off the mortgage balance during the mortgage term unless you are willing to pay a financial penalty

23
Q

Why is the closed mortgage more popular?

A

Becuase of lower interest rates

24
Q

What is open mortgage?

A

Allows you to pay off the mortgage balance at any time during the mortgage term

25
Q

What is a fixed rate mortgage

A
  • A mortgage in which a fixed interest rate is specified for the term of the mortgage
26
Q

list characteristics of a fixed-rate mortgage

A

Preferred during rising interest rates
Lenders are usually willing to negotiate below-posted rates
Large mortgage = larger mortgage monthly payment
Higher interest rate = l;larger mortgage payment
Longer amortization = lower payments but more interest payable in total

27
Q

An amortization schedule discloses the monthly payments you will make based on what?

A

A specific mortgage amount
A fixed interest rate
An amortization period

28
Q

What is a variable rate mortgage

A

The interest charged on the loan changes in response to movements in a specific market-determined interest rate (prime rate)
- could be open and closed

29
Q

__________ allows you renew your mortgage, before the end of the current mortgage term, without paying a penalty fee (‘LOCK IN” DURING rising rates)

A

Convertible Mortgage

30
Q

explain the interest rate index

A

The initial mortgage rate will be adjusted to stay in line with the prime rate of interest
- the rate is set at prime plus a certain number of percentage points

31
Q

What are the costs of renting a home

A

Monthly rent payment
opportunity cost of security deposit
renters insurance

32
Q

What are the costs of owning a home

A
  • down payment
  • monthly mortgage payments
    opportunity costs of the down payment
    closing costs
    maintenance and repair costs
    property taxes
    homeowners insurance
33
Q

What is mortgage refinancing

A

When you pay off an existing mortgage with a new mortgage that has a lower interest rate
you will incur closing costs again and prepayment penalties

34
Q

explain rate modification or “blend and extend”

A

fixed-rate mortgage is revised to reflect the prevailing mortgage rate
- avoids costs/penalties associated with mortgage refinancing

35
Q

When does refinancing tend to be most beneficial?

A

It tends to be most beneficial when a homeowner plans to own the home for a longer period

Personal financial planning (9 decks)

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