Chapter 7 Flashcards
What is pre-approval certificate
A guideline on how large a mortgage you can afford with rate guarantee
Define the term 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 - 32% OR LESS
Define the term Total debt service (TDS) ratio
your mortgage-related debt payments plus all other consumer debt payments divided by your total monthly gross household income - 40% or less
How does the home buyers plan (HBP) help firt time home buyers reach their goal?
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”
What are the effects of large mortgage payments
The larger the payments, the less you can add to savings/investments
the lower your liquidity
the greater your overall financial risk
List the critierias used to select a home
- Price
- convenient location
- maintenance
- school system
- insurance
- property tax
- Resale value
- personal preferences
What is Multiple listing service?
- An info database of homes available for sale through realtors who are members of the service (online realtor service)
T OR F? When negotiating a price most sellers are willing to accept less than their asking price
TRUE
Define the term down payment?
Represents your equity investments in the home
what is conventional mortgage?
A mortgage where the down payment is at least 20% percent of the home’s appraised value
What is High ratio mortgage?
A mortgage where the down payment is less than 205 OF THE HOME’S APPRAISED VALUE
List sources for a traditional down payment
- own savings
- RRSP HBP withdrawal
- Non-repayable gifts from a parent
- Money from the sale of another property
List sources for a Non-traditional down payment
- Borrowed money
- Gifts
- Lender cashback incentives
In a conventional mortgage, who bears the risk you may default on the loan?
Lender
In the event of default, why does a mortgage insurer insure a high ratio mortgage
In order to protect the lenders investment
What is Vendor take-back mortgage
- A mortgage where the lender is the seller of the property
- buyer makes mortgage payments directly to seller
- alternative to a high ratio mortgage
Mention the closing costs of purchasing a home
- 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
What is Amortization period?
the expected number of years it will take a borrower to pay off the entire mortgage loan balance (max is 25yrs or 300 months)
what is mortgage term?
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)
what is payment frequency?
the frequency with which you make a mortgage payment
What are the types of mortgage
Closed and open mortgage
what is closed mortgage?
restricts your ability to pay off the mortgage balance during the mortgage term unless you are willing to pay a financial penalty
Why is the closed mortgage more popular?
Becuase of lower interest rates
What is open mortgage?
Allows you to pay off the mortgage balance at any time during the mortgage term
What is a fixed rate mortgage
- A mortgage in which a fixed interest rate is specified for the term of the mortgage
list characteristics of a fixed-rate mortgage
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
An amortization schedule discloses the monthly payments you will make based on what?
A specific mortgage amount
A fixed interest rate
An amortization period
What is a variable rate mortgage
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
__________ allows you renew your mortgage, before the end of the current mortgage term, without paying a penalty fee (‘LOCK IN” DURING rising rates)
Convertible Mortgage
explain the interest rate index
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
What are the costs of renting a home
Monthly rent payment
opportunity cost of security deposit
renters insurance
What are the costs of owning a home
- down payment
- monthly mortgage payments
opportunity costs of the down payment
closing costs
maintenance and repair costs
property taxes
homeowners insurance
What is mortgage refinancing
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
explain rate modification or “blend and extend”
fixed-rate mortgage is revised to reflect the prevailing mortgage rate
- avoids costs/penalties associated with mortgage refinancing
When does refinancing tend to be most beneficial?
It tends to be most beneficial when a homeowner plans to own the home for a longer period
