Home Ownership Flashcards
What is a mortgage
A loan typically received from a bank used to buy real estate, mainly a home
What is the policy interest rate
What commercial banks generally use to set their interest rates on loans and mortgages. An increase in the overnight rate means that the interest rates on loans from banks to individuals and businesses will likely increase. A decrease in the overnight rate means that the interest rates individuals and businesses are paying to banks on money borrowed will likely decrease.
Interest on Mortgages
Interest is the cost of borrowing money and with each mortgage payment you make, a portion repays the amount you borrowed and a portion pays interest to the lender.
Factors to consider when house shopping
Affordability (how expensive can the house be, what is your max cost)
Location (where do you want the house, quiet area, near transportation)
Size (too big too much maintenance, too small too crammed)
What is the Gross Debt Service Ratio and what is the formula?
Financial lenders use to assess the proportion of housing debt that a borrower is paying in comparison to their income, comparing homeownership costs relative to household income.
GDS = (Mortgage Payments + Property Taxes + Heating Costs) / Annual Income
What is the Total Debt Service Ratio and what is the formula?
Used to determine if too much of your income is spent on housing expenses and debt payments, comparing total homeownership costs and debt payments relative to household income.
TDS = (Mortgage Payments + Property Taxes + Heating Costs + Debts) / Annual Income
Why do lenders use these ratios?
Lenders use these ratios to determine the amount of money they would lend you for the purchase of a house, and the lower the ratios the better as it means you are more likely to receive more money from lenders
What is mortgage insurance and when can it be given
If making a down payment of less than 20% of the price of the home, the mortgage is considered a high ratio mortgage and mortgage insurance will be required
What is a Conventional and High Ratio Mortgage
Conventional mortgage: The down payment is at least 20% of the home’s appraised value. The lender bears the risk that you may default on the loan.
High-ratio mortgage: The down payment is less than 20% of the home’s appraised value. The lender will require your mortgage be insured thereby sharing the risk of default with the insurance company.
What is a Fixed Interest Rate vs Variable Intrest Rate
Fixed Interest Rate: Interest rate stays the same during the mortgage term.
Variable Interest Rate: Interest rate may change and vary over time during mortgage term
What is an open mortgage vs closed mortgage
Open mortgages:
Additional payments can be made over and above your required payments at any time without penalty.
Can help you pay off your mortgage faster and reduce the amount of interest you will pay.
Best suited to homeowners who are planning to sell in the near future or who expect to have the ability to make more frequent or large, lump-sum payments before maturity.
Closed mortgages:
Additional payments are not allowed or if made, are subject to a penalty.
Payments remain the same for the term of the mortgage.
Best suited to homeowners who have a strict budget and want to know what their required payments will be for the term of the loan or for those who don’t expect to have additional funds during the term to put towards the mortgage principal.
What is an amortization period
The length of time it takes to pay back the principal amount borrowed. Your mortgage payment is based on this amortization period. Common amortization periods are 20 - 25 years
What is the Debt to Income Ratio (DTI) and what is the formula
Compares a borrower’s total monthly debt payments to their total monthly income, and is commonly used to assess a borrower’s credit worthiness
DTI = Recurring Monthly Debt / Gross Monthly Income
Renting vs Buying Pros and Cons
Renting:
Pros: Flexibility, no maintenance costs, lower upfront costs, potential lower monthly expenses.
Cons: No equity building, limited control over the property, rent increases.
Buying:
Pros: Equity building, potential for property value appreciation, control over the property, stability.
Cons: Higher upfront costs, maintenance responsibilities, market fluctuations.
What are closing costs
Fees associated with finalizing the mortgage, such as appraisal, title search, and loan origination fees
