- Buying a House
Terms:
- Principal- how much you borrowed from a bank (found by subtracting, the down payment form the selling price)
-Down payment- your money that you use to help pay for the house. This is becomes your equity.
-Mortgage- a loan secured by property
-Equity-share of the value of the house
Example: if you owe $100,000 on a $300,000 home, you have $200,000 of equity on the day you move into the house your down payment is your equity.
-Interest- the amount you pay the bank to borrow their money. It also called "the cost of borrowing"
-Mortgage payment- a regular payment to the bank that pays for the interest and pays down the unpaid balance. (monthly, semi-monthly, biweekly, weekly)
-Amortization period- how long will it take to pay off the mortgage, often 25 years
-Term- the length of time a mortgage agreement is good for. Anywhere from 6 months to 10 years. When the term is over, a new agreement must be reached with a new interest rate.
Initial Cost of Buying a House:
- Appraisal fees - When borrowing money the lender (e.g., bank) must determine the value of the property. A certified appraiser will determine the value of the property.
- Inspection costs- An inspection of the property is not absolutely necessary, but it will let you know if any repairs are required or if the house has any structural problems.
- Property survey- This will supply information on how buildings, fences, and the like are situated on the property. If there are any easements on your property, it is a good idea to know about this before making the purchase. Easements are rights of way by the town, city, or utility company to access your land for specific purposes such as digging up telephone wires. Anencroachment is an intrusion onto your land by a neighbour's structure, or possibly an encroachment on your neighbour's land by something on your property. In either case, you would certainly want to know about this before purchasing this property. If a recent survey is available to you, a property survey may not be necessary.
- Insurance costs for high ratio mortgages - You must pay additional insurance costs if you have a high ratio mortgage. A high ratio mortgage is a house loan where less than 25% of the original cost of the home is paid with the down payment. The cost for this insurance is usually about 1.25% -3% of the total mortgage, depending upon the amount of your down payment.
- Home insurance - As soon as you purchase a home, it is wise to purchase home insurance.
- Land transfer tax- Some provinces levy a tax on any property that changes hands. As the buyer, you are responsible for this cost. It is usually a small percentage of the purchase price.
0-$30,000 nothing
$30,000-$90,000 0.5%
$90,000-$150,000 1.0%
over $150,000 1.5%
- Interest adjustments- The buyer is responsible for any interest payable between the closing date (the date of possession) and the first mortgage payment.
- Prepaid property taxes and utilities- You will have to reimburse the seller for any utilities or taxes paid for the period of time you own the home.
month/12*annual amount
- Legal fees - It is normally a good idea to hire a lawyer you trust to look after all legal transactions.
- Sales tax- GST may be charged when buying a new home in Manitoba.
- Moving expenses - You may need to pay professional movers, rent a truck, or hire helpers when you move. Driving expenses, meals, and motel bills may also be part of the cost of moving.
- Service charges- Hookup fees for telephone, TV, and utilities will likely be added to your first bills.
- Immediate repairs- Some of these may be necessary prior to your moving in. You may want to negotiate the cost of these repairs with the seller.
- Appliances - You may need to buy appliances such as a fridge, stove, washer, dryer, and/or dishwasher when you move in.
- Decorating cost- You may want to do some painting, wallpapering, carpeting,before you come in.
- Gross Debt Service Ratio (GDSR)
Your GDSR should not exceed 32%-highest amount you should spend
GDSR= (monthly mortgage+ monthly taxes+ monthly heat)/gross pay*100%
- TVM Solver
N=total number of payment to the account
I%=annual interest rate as a percent
PV=present value of the account
PMT=payments made to the account
FV=future value of the account
P/Y=number of payments made per year
C/Y=number of compounding periods per year
- Buying vs Leasing a New Car
1. Buying a car
When calculating the price of a new car, we first have to subtract the value of any trade-ins. Then we add the GST (5%) and PST (7%) to the difference to find out how much we have to pay.
Example：Steve wants to buy a new Ford truck worth $22,000 and he is offered $3000 for a trade-in value on his old truck.How much does he pay?
$22,000-$3000=$19,000
$19,000*(1+0.05+0.07)=$21,280
2. Leasing a car
When you lease a car you are only paying for the depreciation of the car during the lease. This means you are paying for the lost value of the car. You also must pay the PST and GST on the depreciation and include the taxed in your monthly payment.
At the end of the lease, the value of the car is now called the residual value. The residual value is a percentage of the original price.
- Net Worth
Net worth- defined as the difference between your total assets and liabilities.
- Assets- what you own, include cash, bank accounts, stocks, mutual funds...
- Liabilities- what you owe. It includes mortgage, car loan, personal loans, line of credit...
3 types of Assets
- Liquid Asset- anything that can be converted to cash quickly.
For example, cash, Canada saving bonds...
- Semi-liquid Asset- longer term investments meant for the future
For example, bonds, stocks, real estate, mutual funds...
- Non-liquid Asset- investments for long term and enjoyment and include things like home, vacation property, cars, boats...
2 types of Liabilities
- Short term debt- anything to be paid off in the next 12 months
-include credit card, personal loans, consumer loan
- Long term debt- anything that takes a long time to pay off
- car loan, mortgage
Debt Equity Ratio (DER)- this is a measure of debt burden. You should try to keep your DER under 50%.
DER=(total liabilities - mortgage)/ net worth*100%
Net worth= total assets- total liabilities
We want to improve DER by keeping our liabilities small and increasing our net worth.
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