Applied 40S May 14, 2009

3D Realty Handshake by flickr user lumaxart

Mortgages: Should I Buy or Rent?

Banks and other lending institutions have developed a formula that allows you to calculate the maximum price of a home you can afford. This formula is known as the Gross Debt Service Ratio, or GDSR. According to this formula, anyone buying a home should spend no more than 32% of gross income on household or accommodation expenses, including mortgage payments, property taxes, heating and condo/strata fees. The formula may be written as:

"How Much Can I Afford to Pay for a Home?"

Find your maximum mortgage amount and monthly payment

http://is.gd/zxayhttp://is.gd/zxd5

Looking for a house?

Lucy Brown wants to buy a condo, but does not know how much money she should spend based on her income. She earns $44 000 per year, and has saved $9000 for a down payment. The property taxes for the condo she likes are $1500 per year, and the heating costs average $90 per month. The condo/strata fees are $180 per month. The bank will give her a 25-year mortgage at an interest rate of 7.5%. What is the maximum price she can afford for a condo, based on spending no more than 32% of her gross income on household and accommodation expenses? HOMEWORK

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Max GDSR = 0.32

Gross Monthly Income: $44 000 ÷ 12 = $3 666.67Monthly Property Tax: $1 500 ÷ 12 = $125.00Monthly Heating Bill: $90.0050% of Condo Fees: 0.5 * 180 = $90.00

0.32(3666.67) = Monthly Mortgage PMT + 3050.32(3666.67) - 305 = Monthly Mortgage PMT

$868.33 = Monthly Mortgage PMT

0.32 = Monthly Mortgage PMT + 305 3666.67

Down PMT: $9 000

25 Year Mortgage at 7.5%

Maximum Possible Mortgage$9 000.00 + $118696.49 = $127 696.49

A group of rural students is planning to go to university. One of the members of the group suggests that they purchase an older home rather than rent an apartment. After a careful analysis of their finances, the group decides that their gross monthly income would be around $3000.00. Monthly property taxes are estimated to be $125.00. Heating bills are estimated to be $150.00. The group can arrange a mortgage at a rate of 9%. The three members of the group are able to come up with a down payment of $8000.00. Determine the maximum affordable purchase price that can be considered if they take out a 25-year mortgage.

Your turn ...

Total allowable monthly expenses on house0.32($3000) = $960Heating & Taxes$125 + $150 = $275

Maximum Possible Monthly Mortgage PMT$960 - $275 = $685

Maximum Affordable Purchase Price is$90 731.73

A group of rural students is planning to go to university. One of the members of the group suggests that they purchase an older home rather than rent an apartment. After a careful analysis of their finances, the group decides that their gross monthly income would be around $3000.00. Monthly property taxes are estimated to be $125.00. Heating bills are estimated to be $150.00. The group can arrange a mortgage at a rate of 9%. The three members of the group are able to come up with a down payment of $8000.00. Determine the maximum affordable purchase price that can be considered if they take out a 25-year mortgage.

Are there other costs involved in buying a home?

Additional Costs When Purchasing a Home1. Appraisal fees


2. Inspection costs


2. Inspection costs

3. Property survey


2. Inspection costs

3. Property survey

4. Insurance costs for high ratio mortgages


2. Inspection costs

3. Property survey


5. Home insurance


2. Inspection costs

3. Property survey


5. Home insurance

6. Land transfer tax


2. Inspection costs

3. Property survey


5. Home insurance


7. Interest adjustments


2. Inspection costs

3. Property survey


5. Home insurance



8. Prepaid property taxes and utilities


2. Inspection costs

3. Property survey


5. Home insurance




9. Legal fees


2. Inspection costs

3. Property survey


5. Home insurance




9. Legal fees

10. Sales tax (GST on new homes)


2. Inspection costs

3. Property survey


5. Home insurance




9. Legal fees


11. Moving expenses


2. Inspection costs

3. Property survey


5. Home insurance




9. Legal fees


11. Moving expenses

12. Service charges


2. Inspection costs

3. Property survey


5. Home insurance




9. Legal fees


11. Moving expenses

12. Service charges

13. Immediate repairs


2. Inspection costs

3. Property survey


5. Home insurance




9. Legal fees


11. Moving expenses

12. Service charges


14. Appliances


2. Inspection costs

3. Property survey


5. Home insurance


15. Decorating cost7. Interest adjustments


9. Legal fees


11. Moving expenses

12. Service charges


14. Appliances

Most home buyers make monthly payments, but it is also possible to make payments twice a month, every two weeks, or every week. The amount of the payment is determined by the following:

• the principal of the mortgage (the size of the loan)

• the amortization term (the number of years you have to repay the mortgage)

• the interest rate

Canadian Mortgages

It is important to use a loan calculator that calculates Canadian mortgage payments, because for Canadian mortgages the interest is compounded every six months, and this may not be the case for mortgages in other countries.

The Mortgage Centrehttp://www.mortgagecentre.com/index.cfm

The Dirksons Additional Costs to Purchase Their Home

The Dirksons live in Brandon and bought a house in Portage. They had the home appraised and paid $125.00 to have it done. The bank required a survey, and the cost of the survay was $300.00. the price of the home was $135 000.00, and since their down payment of $20 000.00 was less than 25% of the total price, they had to buy “High Ratio Mortgage Insurance” at a cost of 1.25% of the mortgage. The home insurance premium was $475.00 but they recieved a $150.00 rebate from the policy they had on their home in Brandon. The property taxes for the year had been paid by the previous owner, and so they owed 7 months of the total tax bill of $2 125.00. A dry-walling bill of $650.00 was split equally between themselves and the former owner. The Dirksons bought a used washer and dryer for $920.00. Moving expenses were $320.00 and legal fees that included the land transfer costs were $965.00.

HOMEWORK

The Dirksons live in Brandon and bought a house in Portage. They had the home appraised and paid $125.00 to have it done. The bank required a survey, and the cost of the survay was $300.00. the price of the home was $135 000.00, and since their down payment of $20 000.00 was less than 25% of the total price, they had to buy “High Ratio Mortgage Insurance” at a cost of 1.25% of the mortgage. The home insurance premium was $475.00 but they recieved a $150.00 rebate from the policy they had on their home in Brandon. The property taxes for the year had been paid by the previous owner, and so they owed 7 months of the total tax bill of $2 125.00. A dry-walling bill of $650.00 was split equally between themselves and the former owner.

The Jamison's MortgageThe Jamison family has decided to buy a house. they will require a $121 000.00 mortgage to help pay for the house.• Bank A offers them a 25 year mortgage at 7.25%. Determine the size of the monthly payment, the total amount paid for the mortgage, and the total amount of interest paid when the mortgage is repaid.• Bank B offers them a 20 year mortgage at 7.25%. Determine the size of the monthly payment, the total amount paid for the mortgage, and the total amount of interest paid when the mortgage is repaid if they repay the mortgage with monthly payments over 20 years.• How much interest do they save by repaying the mortgage in 20 years instead of 25 years?• Bank C offers them a 25 year mortgage at 7.00%. Determine the size of the monthly payment, the total amount paid for the mortgage, and the total amount of interest paid when the mortgage is repaid.

• How much interest do they save by paying the mortgage in 25 years at 7.00% instead of in 25 years at 7.25%. (i.e. how much cheaper is Bank C than bank A?)

HOMEWORK

Applied 40S May 14, 2009

Education

Transcript of Applied 40S May 14, 2009