Evaluating Housing Alternatives

Evaluating Housing Alternatives

• Choice of residence reflects lifestyle, needs, desires, and attitudes.
• Traditional financial advice suggests spending 25-30% of take-home pay on housing or no more than 2.5 times annual income.
• Current economic and societal shifts are rendering these guidelines less definitive but financial guidelines are still needed.

Possible Housing Types by Life Situation

• Young singles often rent for mobility or purchase a home/condo for financial benefits.
• Single parents might rent for a secure environment for children or buy low-maintenance housing to meet family members' financial and social needs.
• Young couples without children often rent for convenience/flexibility or buy housing for financial gains and long-term security.
• Couples with young children might rent in family-oriented areas or purchase homes to meet financial and family needs of children.
• Couples without children at home may rent for convenience or buy housing that meets their lifestyle with minimal upkeep
• Retired people can rent for financial, social, & physical needs, or purchase housing for minimal maintenance, convenience, and necessary services.

Opportunity Costs

• Foregone interest earnings on money used for down payments
• Commuting time and expense
• Lost equity growth from renting.
• Time and money spent on home repairs and improvements
• Time and effort invested in building a personalized home
• Money spent on all housing upkeep

Renting

• At some point you will likely rent your place of residence
• Renting can be the choice when first living independently or later in life to avoid home maintenance

Renting Activities

• Search: Select area and rental amount, compare units, talk to residents.
• Before Signing A Lease: Start date, costs, facilities, and understand lease and note move-in unit conditions, and know all people on lease are responsible for full rent.
• Living in a Rental: Maintain facilities, report repairs, respect neighbors, get renter's insurance.
• End of Lease: Clean the apartment as it was when moving in, provide forwarding address for security deposit and document any deductions from security deposit.

Selecting an Apartment factors:

• Location: Schools, churches, shopping, transit, recreation
• Building Exterior: Condition of building and grounds, parking
• Building Interior: Exits, security, hallway maintenance, elevators, mailboxes
• Financial: Rent, lease length, deposit, utilities
• Layout & Facilities: Condition, size, appliances, heat, plumbing, storage, doors, windows

Renting Advantages vs. Disadvantages

• Advantages: Mobility, easier to move, fewer maintenance responsibilities, lower initial costs.
• Disadvantages: Few financial benefits, restricted lifestyle, legal lease concerns, security, renter's insurance.

Legal Details of Renting

• A lease is a legal document defining rental agreement terms.
• Leases should include tenant rights and landlord duties.
• Every province has their own Residential Tenancies Act (RTA).
• The Charter Rights and Freedoms protects the right to rent without discrimination.

Home-Buying Process: Step 1, Needs to Assessment

• Start by determining home ownership needs.
• Benefits of home ownership: pride, financial, flexibility.
• Drawbacks include financial uncertainty, limited mobility, high costs and taxes.

Types of Housing Available

• Single-family and multi-unit dwellings
• Manufactured and mobile homes
• Option to build a home.

Building a Home Considerations

• Contractor's experience and relationships with architect, suppliers, electricians, plumbers, carpenters
• Quality assurance
• Payment arrangements
• Acceptable delays
• Contractor licensing and insurance.

Forms of Home Ownership

• Sole ownership
• Condominium
• Co-operative housing

Down Payment Details

• A Larger down payment (20%) improves mortgage approval odds.
• Down payments originate from savings, pension funds, investments, and assistance from relatives.
• First-time buyers can use up to $35,000 from RRSP.
• In 2022 Canada introduced the tax-free First Home Savings Account (FHSA)
• Down payments less than 20% require CMHC insurance

Mortgages

• Defined as a personal loan to purchase property.
• Typically repaid over 15, 20, or 25 years.
• Offered by banks, credit unions, trusts, and mortgage brokers.
• Qualification depends on income, debt, down payment, loan length, and current rates.

Affordability Calculations

• Gross Debt Service Ratio (GDSR): (Monthly principal and interest payments + property taxes + heating costs) / Monthly gross income; lenders suggest spending no more than 32% of gross income on shelter costs.
• Total Debt Service Ratio (TDSR): (Monthly principal and interest payments + property taxes + heating costs + all other debt payments) / Monthly Gross Income; lenders suggest spending no more than 40% of gross income on shelter and non-shelter costs.

Home-Buying Process: Step 2, Evaluate Property

• Selecting a location: base based on alignment with values and lifestyle, zoning laws, and school system quality.
• Enlist a real estate agent to present offer, negotiate, assist with financing, and provide representation at the closing.
• Conducting a home inspection and obtaining an appraisal are useful

Home-Buying Process: Step 3, Property Pricing

• Determine the price by considering recent home sales, market demand, time on market, features, and condition.
• Negotiate the purchase price and know that accepted offers constitute a binding contract
• A counteroffer indicates willingness to negotiate
• Earnest money shows deposit evidence of good faith
• Contingency clauses allow the buyer to obtain financing, make the purchase sale contingent on the sale of the buyer's current home

Finances of Home Buying: Step 4, Obtain Financing

• This entails meeting to review the application, furnish proof of information and ensure a credit report is done.
• Mortgage approval or denial is based on credit/financial history, home evaluation, and maximum qualifying amount.

Types of Mortgages

• Fixed-rate Mortgages: lock in an interest rate during for a set time, the amortization reduces loan balance through payments, penalties apply to pre-payments, Canada commonly uses a 25-year amortization period.
• Closed mortgages penalize pre-payment.
• Open mortgages allow payoff without penalty at any time.
• Variable Rate Mortgages: Have interest rates that can change during mortgage term due to market fluctuations, payment amount remains fixed with interest fluctuations affecting the distribution between principal and interest, can have a rate cap.
• Split or multi-rate mortgage: Divides mortgage into separate parts, each with different maturity dates and interest rates.

Options to Pay Back a Mortgage

Accelerated payment, increased monthly payment, lump sum deposits, or missing an occasional payment.

Other Financing Methods

• Second mortgage
• Home equity loan
• Reverse mortgage
• Parent-backed mortgage
• DIY mortgages

Finances of Home Buying: Closing

• Closing costs are fees and charges paid when completing a transaction.
• Closing Costs
• Tax and utility adjustments
• Moving expenses
• Title insurance and search fee
• Attorney and appraisers fees
• Property survey
• Land transfer taxes
• Mortgage insurance
• Home Insurance

Important Closing Considerations:

• Title Insurance: Protects Owners against financial loss from any defects in the deed, during the entire term for a specified amount.
• Deed or Title: A document that transfers the ownership of the property, from one party to another
• Earnest Money Deposit: A deposit required to bind the deal with a deadline for settlement of the deal
• Escrow Account: Money deposited with lending institution for payment of property taxes and homeowners insurance.

Additional Costs Associated with Home Purchases

• Appraisal: Determines the value of a property; may be covered by the lender and typically costs between $400-$600.
• Home Inspection: Assesses the condition of a home, estimates repairs, and can cost from $400 to $600.
• Property Survey: A documented home description (usually required by lenders) typically costs from $900 to $1200.
• Home Insurance: Costs $1000-$2500 and adequately insures investment.
• Land Transfer Tax: Typically 1-3% of the home price when transferring.
• Interest Adjustment: Pay interest for owning home but before beginning mortgage cycle, which typically ranges from $100-$1000
• Legal Fees: Costs for conducting searches, drafting deeds, and preparing mortgages typically $500-$5000
• Moving Expenses: Typically $500-$5000 depending on hiring movers or doing it yourself
• Service Charges: Could potentially costs $150-$500 for potential installation charge for gas, water, phone, etc.

Selling Your Home

• Prepare for showing.
• Determine price via appraisal for current market value.
• Sell by owner or list with an agent.