Chapter 7 - Purchasing and Financing a Home Flashcards
What are the main costs of owning your own home?
A Down Payment
Mortgage Payment
Closing Costs
Property Taxes
Insurance
Maintenance / Repair
What are the main costs of renting for a home?
Monthly Rent Payment
Security Deposit
Tenant Insurance
What is mortgage refinancing?
Paying off an existing mortgage with a new mortgage that has a lower interest rate.
Note: You will incur closing costs again, as well as any existing early closing costs
What is rate modification?
Converting an existing fixed-term rate to a lower, better rate - at a fee.
What are key factors in selecting a home?
- Price
- Convenient Location
- Maintenance
- School System
- Insurance
- Taxes
- Resale Value
- Personal Preference
What tools do lenders use to determine the size of mortgage you can afford?
- Mortgage Stress Test
- Gross Debt-Service (GDS) Ratio <32%
- Total Debt-Service (TDS) Ratio <40%
- Personal Characteristics (Income, Empolyement History, Credit History, Down Payment, etc.)
What tools can you use to determine an affordable monthly payment?
- Budget / Savings Tracker
- Info from Mortgage Pre-approval Certificate
Is a mortgage Pre-Approval Certificate binding?
No, but some may offer an interest guarantee for X amount of days.
What is a Real Property Report?
Land survey, a legal document to state the location of significant visible improvements (relative to property boundaries).
What is an Estoppel Certificate?
For condos, a document that tells you if all condo fees have been paid and when they’re due.
What is Title Insurance?
For the event that there are losses resulting from a title defects/defects that would have shown up on a Real Property Report.
What is a Closed Mortgage?
A mortgage with a payment scheme that can only pay the standard payment, and no additional balance.
Typically has lower interest rates.
What is an Open Mortgage?
A mortgage with a payment scheme that can pay off additional balance at any time, on top of the standard payment.
Typically has higher interest rates.
What is the Gross Debt-Service (GDS) Ratio? How is the Total Debt-Service Ratio (TDS) different?
GDS Equation:
(Pricipal+Interest+Taxes+Heat) / Gross Annual Income (before tax).
TDS: Same as GDS, but includes other debt obligations in the numeratior.
The GDS must be below 32%, and the TDS must be below 40%.
What are the biggest benefits of the First Home Savings Account (FHSA) account?
- Have all the same investment opportunities of TFSA/RRSP.
- Contributions to the account are tax deductible.
- After 15 years, unused / unneeded money can be dropped into RRSP without the need for contribution room.
- Per individual basis - can combine with partner’s FHSA.
What are the FHSA’s contribution limits?
$8,000 Annually / $40,000 Lifetime
What commitments are made when an FHSA is opened?
- You must be a first time buyer/builder of a home.
- Must be used within 15 years of opening / the year you turn 71.
- Have a HBP balance of $0.
- Tax-free withdrawls must be used to purchase a home.
What is a mortgage?
A loan taken out against your income, secured with a home.
What are the 4 key decisions in the purchasing process of a home?
- Fixed vs. Variable Term Interest
- Length of Term
- Amortization Period
- Repayment Frequency
True or False:
There is no cost to using a professionals services when buying a home.
Real Estate Agents: Billed to seller, commission tied into home price.
Mortgage Brokers: The bank pays for them.
Insurance Broker: Insurance company pays.
Generally True
True or False:
A home will/should be your largest investment.
False, any gains made are in addition to owning a home, not the purpose of one.
A diversified portfolio will likely be your largest wealth generator.
Also stocks are no work, home ownership is tons of work.
True or False:
Paying off a mortgage early is always the best move.
False. Opportunity cost, lack of asset diversification, and reduced liquidity suggest otherwise.
There are scenarios where it can be true, generally it is not.
What is the Home Buyers Plan (HBP)?
A loan “borrowed” from your RRSP by first-time/recently divorced/non-owner for 4 years can use towards a home - up to $60,000.
Not taxed on withdrawl, if paid back within 15 years.
Missed payments lead to the loss of contribution room.
Risky! + Opportunity Cost
