Financial Literacy Series Home Ownership – The Dos and Don’ts · – First-time buyers may be...

Financial Literacy Series Home Ownership – The Dos and

Don’ts

April 11, 2019 Robert Turnquest, CFA, CAIA

www.cfasociety.org/bahamas

Agenda •  Pre-home ownership assessment •  Selection criteria •  Building vs. buying •  Financing your home •  Closing the deal •  Home construction and maintenance •  Q&A


Pre-home ownership assessment


Being prepared for home ownership Dos •  Read, read, read! •  List and visit

interesting properties •  Develop a long-term

plan •  Gather

documentation •  Save, save, save!

Don’ts •  Act impulsively •  Spend more than you

can afford


Selection criteria


Key determinants of a home purchase •  Price •  Location •  Topography •  Utilities •  Clean title

–  Attorney needed

•  Zoning


Building vs. Buying


Buying an existing home •  Dos

–  Use a real estate agent…

–  Buy early in the construction process if you can negotiate savings

–  Get an appraisal –  Inspect the building

•  Don’ts –  …without caving to

pressure –  Make deals with

contractors/sellers you do not trust


Building a home •  Dos

–  Choose a contractor wisely – get references!

–  Obtain building permits and insurance

–  Keep track of all expenses

–  Secure building materials

•  Don’ts –  Drag on the building

process for too long


Financing your home


Making sensible financing decisions Do’s •  Understand how a

mortgage works •  Determine what you

can afford •  Shop around

Don’ts •  Exceed a debt service

ratio of 40%


Fundamentals of mortgage financing

•  Key definitions –  Down payment –  Principal –  Interest

•  Types of mortgages –  Fixed rate: constant interest rate and periodic

payments throughout the life of the mortgage –  Adjustable rate mortgage: interest rate adjusts

depending on an index level


How much of a mortgage can I afford? •  Debt service ratio

– Monthly debt payment divided by monthly income

– Limit your debt service ratio to 40% – Example: if your monthly income is $3,000,

your mortgage should not be more than 1,200 •  Mortgage indemnity insurance may be

needed


How a mortgage works •  Example:

– House price: $300,000 – $50,000 saved toward a down payment –  Interest rate: 5% – Fixed rate mortgage – Term of the mortgage: 25 years – What will the monthly mortgage payment be?

•  Mortgage calculator


Where do I go to get a mortgage?


Closing the deal


Closing costs to consider •  Bank mortgage origination fee •  Legal fees

–  2-2.5% typically •  Stamp tax

–  May be split between buyer and seller

–  First-time buyers may be exempt

•  VAT –  May be split between buyer and

seller –  First-time buyers may be

exempt •  Mortgage indemnity insurance •  Real estate agent’s

commissions –  Ranges 5-10% –  Usually paid by seller

Amount Notes Purchase price

$300,000.00

Down payment

$50,000.00

Mortgage $250,000.00

Bank fees $2,500.00 1% of mortgage

Legal fees $6,000.00 2% Stamp tax $3,750.00 ½ of 2.5%

VAT $18,000.00 ½ of 12% MDI $3,000.00 1% RE agent commissions

$0.00 Paid by seller

Total closing

$33,250.00


Home construction and maintenance


Understanding home construction process •  Architectural plans

–  Approval from town planning •  Insurance •  Contractor outlines sequence of home construction

–  Excavation/ clearing of property –  Foundation –  Belt course –  Roof –  Windows/ doors –  Interior –  Septic tank/ waste disposal –  Finishing

•  Inspection by lender-approved Quantity Surveyor •  Issuance of Occupancy Certificate


Ongoing expenses to consider •  Repairs and maintenance

– Create a budget line item, e.g. 1% of value – E.g., plumbing, painting, roofing, appliances

•  Home insurance •  Real property tax

– First time home owners exempt up to $250,000.00

•  Home Owners Association fees •  Hurricane preparation


Q&A Thank you!


Endnotes •  https://activerain.com/blogsview/2563816/first-

time-buyers-in-harrisburg-pa--what-are-the-costs- •  https://bfsb-bahamas.com/providers/name/bank-

of-the-bahamas-international/ •  https://www.centralbankbahamas.com/download/

039835000.pdf •  https://www.cibc.com/fcib/pdf/cibc-firstcaribbean-

mistakes-home-buyers-should-avoid.pdf •  https://www.cibc.com/fcib/pdf/cibc-firstcaribbean-

mortgage-document-checklist.pdf •  https://www.bankrate.com/mortgages/arm-vs-

fixed-rate/ www.cfasociety.org/bahamas

Financial Literacy Series Home Ownership – The Dos and Don’ts · – First-time buyers may be...

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