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FNCE1125

Introduction to Finance

Mortgage Case

Winter 2018

Weight: 15%

Name: Marcelo, Borges Section (Required): A06


Thacia, Frank Section (Required): A06

Instructor: Berhane Elfu

Section Item Worth Earned


I Finding the House 1
II Down Payment and Mortgage Amount 2
III CMHC Premium 2
IV Mortgage Rate 1
V Prepayment Privileges 2
VI Calculating Your Monthly Mortgage Payment 3
VII Payment Frequencies 5
VIIII Calculating Annual Property Tax 3
IX Qualification 3
X Closing Costs 1
XI Mortgage Structure 5
XII Reflection 4
XIII Follow Directions, Spelling, Grammar 3
TOTAL 35
Purchasing and Financing a House

I. Finding the House (1)

1. You will need to find a home located in the City of Edmonton. Once you have found
your home, you MUST submit, along with this assignment, a sheet detailing the
important information about your home (square feet, number of bedrooms, etc.).

NOTE: Condominiums, townhouses, duplexes, and homes not located in the City of
Edmonton are not acceptable for this case.

Now that you have found your home, please indicate the list price in the box below.

$274,800.00

II. Down Payment and Mortgage Amount (2)

2. Assuming that you will be paying the list price for the house, what is the minimum
down payment, in dollars, that you will have to put down? Assume that you will
make a minimum down payment of 5%. Show your calculations. (1 mark)

DP = 274,800 * 0.05 = 13,740.00

3. Once you make your down payment, the remaining amount is your mortgage
amount. What is your mortgage amount? Show your calculations. (1 mark)

M = 274,800 – 13,740 = 261,060.00

III. CMHC Premium (2)

4. Since your down payment is less than 20%, you will incur a CMHC premium.
Based on your answer for Question 3, calculate your CMHC premium. Once you
calculate your premium, you will need to recalculate your mortgage amount.
What will be your new mortgage amount? Use the current CMHC premium
figures found on the CMHC website at http://www.cmhc-
schl.gc.ca/en/co/moloin/moloin_005.cfm. (2 marks)

2
CMHC premium = 4%

M(1) = 261,060 * 1.04 = 271,502.40

IV. Mortgage Rate (1)

5. In order to complete the following chart, you will need to go out and research
current mortgage rates for a five (5) year fixed rate mortgage term. The
mortgage rates you select must be from a major bank and/or credit union – not a
mortgage company. Once you have found your two rates, you must submit a
paper or digital copy of the resource you relied on for your information and
submit it as part of your assignment. (1 mark)

Financial Institution BMO CWB


Mortgage Rate (5-year fixed) 5.140% 4.700%

V. Prepayment Privileges (2)

6. Describe the prepayment privileges offered by EACH financial institution listed


in question 5. (2 marks)

BMO:
Interest is the same for the entire amortization period;
Interest is compounded half-yearly;
The payment schedule selected is maintained with no additional payments of skipped
payments;

CWB:
Interest rate compounded semi-annually, not in advance;
Interest rate may be changed, extended or withdrawn at any time without notice;
Residential mortgages offered by CWB are subject to its standard lending qualification
criteria;

VI. Calculating Your Monthly Mortgage Payment (3)

7. Based on your answers for questions 5 and 6, select which financial institution’s
mortgage rate (I/Y) you will use to complete the table below. You will also need
your mortgage amount from question 4 to complete the following table.
(3 marks)

3
Calculator 15 year amortization 20 year amortization 25 year amortization
P/Y = 12 12 12
C/Y = 2 2 2
N= 180 240 300
I/Y = 4.7% 4.7% 4.7%
PV = 271,502.40 271,502.40 271,502.40
PMT = 2,098.50 1,740.40 1,533.03
FV = 0 0 0
Analysis of what P1 = 1 P1 = 1 P1 = 1
happened over the
first five (5) years P2 = 60 P2 = 60 P2 = 60
BAL Outstanding = BAL Outstanding = BAL Outstanding =
201,033.08 225,172.70 239,151.50
Total PRN = Total PRN = Total PRN =
70,469.32 46,329.70 32,350.90
Total INT = Total INT = Total INT =
55,440,68 58,094.30 59,630.90

VII. Payment Frequencies (5)

8. Select a mortgage payment (PMT) from question 7 (i.e. the one you think you would
be comfortable in making if you were truly financing this home), and complete the
following chart by calculating the new mortgage payment and the new amortization
if you change the payment frequency. Use the formulas in Exhibit 7.4 on page 205 of
your text. (5 marks)

Mortgage Payment Frequency


Semi- Accelerated bi- Weekly Accelerated
Calculator Bi-weekly Weekly
monthly weekly
P/Y 24 26 26 52 52
C/Y 2 2 2 2 2
N 599 649 562 1,297 1123
I/Y 4.7% 4.7% 4.7% 4.7% 4.7%
PV 271,502.40 271,502.40 271,502.40 271,502.40 271,502.40
PMT 766.52 707.55 766.52 353.78 383.26
FV 0 0 0 0 0
AMORT (t) 24.96 24.96 21.62 24.94 21.60

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VIII. Calculating Annual Property Tax (3)

9. Go to the City of Edmonton website and determine the City of Edmonton’s assessed
value for your home for 2017 and write it in the space below. You must also print
off the information you found on the website and submit it along with this
assignment. (1)

City of Edmonton do not assess the property value. It is shown as “condominium”.

10. Using your value from Question 9, use the City of Edmonton’s property tax estimator
to determine your approximate annual and monthly property tax bill and write
these numbers in the space below. You must also submit the information you found
on the website by including it as part of your submission in drop box. (1)

Considering the announced price $274,800.00


Taxes (annually) = 2,331.13
Taxes (monthly) = 194.26

11. Assuming you took possession of this home on March 1st, what will the property
tax adjustment be (assume that the seller of the home pays their property taxes
annually)? (1)

Taxes(seller) = 2,331.13 * 2 / 12 = 388.52


Taxes (buyer) = 2331,13 * 10 / 12 = 1942.60

IX. Qualification (3)

NOTE: After completing the questions below, if you do not qualify for a
mortgage based on a GDS of 32% and TDS of 40%, you MUST make the
necessary adjustments to get under these numbers.

12. Using the monthly figures you have already determined (mortgage payment,
property tax) calculate your gross debt service ratio? Assume that the average
monthly cost of heating a home $250 and that your annual household income is
$130,000 (2 marks)

GDS = [(1,533.13 * 12) + 2331.13 + (250 * 12)] / 130,000 = 18.25%

5
13. Using the monthly figures you have already determined (mortgage payment,
property tax) and the figures provided in Question 12, calculate your total debt
service ratio? Assume that your monthly consumer debt is $500. (1 mark)

TDS = [(1,533.13 * 12) + 2331.13 + (250 * 12) + (500 * 12)] / 130,000 = 22.87%

X. Closing Costs (1)

14. Based on the house you have decided to purchase and what you have read in
chapter 7 and otherwise in the course, explain which closing costs you anticipate
you will need to incur and why?

Legal fees;
A real estate lawyer will facilitate the actual legal transaction of the home
purchase. He or she will initiate a title search and provide you with title insurance,
and will register important documents on your behalf, such as land title transfer
fees.

Adjustment costs;
In the case where any utility payments or property taxes were prepaid by the
seller beyond the closing date, you are responsible for reimbursing the seller
those amounts.

Moving expenses;
These include things like hiring professional movers, purchasing boxes and
moving supplies, renting storage space, professional carpet cleaning, and
installation or service charges for setting up your utilities

Home inspection;
A thorough home inspection helps give you peace of mind that the home you’ve
fallen for won’t fall apart anytime soon. For tips on finding a good home inspector,
check my previous blog.

Property appraisal;
Some lending institutions will insist you have a property appraised in order to get
an up-to-date, accurate valuation.

6
XI. Mortgage Structure (5)

15. If you were truly financing this home, how would you structure your mortgage
payment (i.e. term, amortization, payment frequency, fixed/variable,
open/closed)? Explain and support why you would structure your mortgage
this way.

5 years.
It is the longest possible term offered by CWB. Although the interest is
Term:
higher than the other terms, it assures that that it will be the same for the
next five years, not subject to changes according to the Bank interests.

20 years amortization.
Amortization:
The monthly payment would fit in my budget.

Payment Accelerated bi-weekly.


Frequency: Fastest way to get rid of the bank with almost the same amount monthly.

Fixed or Fixed.
Variable: Less risk,

Closed or Closed.
Open: Attractive interest rate.

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XII. Reflection (4)

16. After completing this assignment, what have you learned about purchasing and
financing a house? Marks will be awarded based on the clarity, logic, detail and
relevance of your answer to the case you just completed (i.e. simply stating that
buying a house is expensive will result in a minimal mark – explain why you think it
is expensive). NOTE: Take this as an opportunity to reflect on what you truly
learned and what you will be able to apply when you actually look for a house.
(4 marks)

Lessons Learned

Everything that is involved on buying a house.


1 From the search, assessed value, legal fees, other costs (home inspection, moving,
inspection) and all the mortgage structure.

The payment frequency makes a real difference to the total amount payed to the
bank.
2
By a small change on the frequency I will pay the same monthly, but will finish the
mortgage some years earlier.

That the City of Edmonton make easy the access to information about assessed value
3
of houses.

The need for search for the best interest rate, as every institution have they own
4
rates.

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