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MORTGAGES 101

MORTGAGES 101. What is a Mortgage?. A mortgage is a loan used to buy a property. As with all loans, how much interest you pay depends on several factors: How much you borrow ( the principal ) The interest rate on the loan How long you take to pay it back (the amortization period ).

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MORTGAGES 101

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  1. MORTGAGES 101

  2. What is a Mortgage? A mortgage is a loan used to buy a property. As with all loans, how much interest you pay depends on several factors: • How much you borrow (the principal) • The interest rate on the loan • How long you take to pay it back (the amortization period).

  3. How to pay less interest: To pay less interest, • make your mortgage as small as possible. Your costs of borrowing will be lower if you pay at least 20% of the purchase price from your own savings. This cash payment is called your down payment. • If you can’t afford to pay down 20%, you can still buy a house – but you’ll need a high ratio mortgage. High ratio mortgages are riskier, because the lender has more to lose if you don’t pay back the loan and housing prices drop. For that reason, your lender will make you buy mortgage default insurance. (An extra cost).

  4. How to pay less interest See: http://www.getsmarteraboutmoney.ca/managing-your-money/investing/real-estate/Pages/video-how-to-get-the-lowest-mortgage-rate-possible.aspx Video

  5. Calculating a down payment: If Jesse and Jaydah are buying a home for $230 000 and wish to put a 20% down payment on the purchase price of the home. • How much will the down payment be? • How much will they borrow for the mortgage? Solutions: • .20 X 230 000 =46 000 • 230 000 – 46000= 184 000 Therefore, the down payment is $46 000 and the amount of the mortgage is $184 000.

  6. ADDITIONAL COSTS OF BUYING A HOME: When you buy a home there are a number of other POSSIBLE costs – usually these costs depend on the price of the home. They include: • Land-transfer tax: 0.75% • Mortgage Loan insurance premium: 2.75% • Building Inspection: 0.25% • Legal Fees: 1% Determine the total of these costs if a home sells for $130 000?

  7. Solution: Land Transfer: 1% of 130 000 = 0.01X130000 = 1300 Insurance: 2.75% of 130 000 = .0275 X 130000 = 3575 Inspection: 0.25% of 130 000 = .0025 X 130000 = 325 Legal Fees: 1% of 130 000 = 0.01 X 130000 = 1300 Total of fees: 1300 + 3575 + 325 + 1300 = $6500 This home could have extra fees of $6500.

  8. DEFINITIONS: Amortization period: The time that it takes to pay the mortgage back completely. Term: The amount of time that the mortgage rate is guaranteed for. Variable interest rate: changes over time as the bank of Canada rate changes Fixed rate: a rate guaranteed for a specific amount of time.

  9. FIXED OR VARIABLE RATES? Fixed or variable mortgage - which is better?  This is one of the most important choices you will make when you get a mortgage. Yet unless you have a crystal ball, there is no way to know for sure what interest rates will do in the future. Remember: no one can tell you for sure if a fixed or variable rate mortgage is a better deal. But here are some things to consider:

  10. FIXED RATES: You may prefer a fixed rate if: • you have no plans to sell your home early on in the mortgage term – or are not worried about possible penalties if you do • you think interest rates are going to go up soon • you aren’t comfortable letting your mortgage float with the market. You prefer the peace of mind of knowing your mortgage costs.

  11. VARIABLE RATES: You may prefer a variable rate if: • you may sell your home before the end of the term and are worried about penalties • you think interest rates are going to stay the same or drop • you can sleep at night without worrying about rising rates. If rates rise, you have a plan for how you will handle the bigger mortgage payments each month. Video found at: http://www.getsmarteraboutmoney.ca/managing-your-money/investing/real-estate/Pages/video-mortgage-trends-and-rates.aspx

  12. Understanding the Language: Tim and Linda are acquiring a mortgage for 3.4% with an amortization period of 25 years and a 5-year term. Explain this in your own words. Use an online mortgage calculator to determine Tim and Linda’s monthly payment. http://www.monstermortgage.ca/calculator/?_kk=home%20mortgage%20calculator&_kt=51431958-3e7b-43f6-902f-02e752b7dc47&gclid=CLyAsa6SyJ4CFQk75QodDA0Epw

  13. Most information in this presentation acquired at: http://www.getsmarteraboutmoney.ca/life-events/buying-a-house/pages/default.aspx Practice: p. 445 #1,2,3,5 Reflect : 1st bullet and 3rd bullet.

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