Reference no: EM132339315

Assignment - Home Financing Project

Objective - The purpose of this assignment is to familiarize students with the process of budgeting for the purchase and financing of a home, or other significant financed purchase, as well as building awareness of key factors not to be overlooked throughout this process.

Overview - This assignment is comprised of four parts:

1. Selecting a Property: this assignment requires you to select, and secure a copy of, a property listing which is representative of a real estate investment goal you may wish to pursue.

2. Saving for your Goal: students must perform several calculations to first determine the total transaction costs that will be required in order to purchase the home they have selected, and then create a savings plan in order to have the funds to cover the transactions costs of purchasing the home according to the timeline they have set for themselves. Variations on these calculations will explore the effects of making financial planning adjustments.

3. Selecting a Mortgage: once the down payment has been accounted for, students must examine the mortgages (including interest rates and conditions) that are advertised and available through various financial institutions in order to finance the remaining cost of the home; select a mortgage and record the necessary data as indicated. Various financing options must be explored.

4. Mortgage Payment Calculations: finally, applying the relevant data points collected, and incorporating some additional considerations, students must calculate the corresponding monthly mortgage payments necessary to finance their home, by using an online mortgage calculator. Variations on these calculations will explore the effects of making financial planning adjustments.

Step 1: Selecting a Property

This assignment requires you to select, and secure a copy of, a current property listing which is representative of a real estate investment goal you may wish to pursue.

Students must secure a copy of a real estate listing (screenshot, downloading/saving or copy/pasting into a saveable document). This copy must be easily legible and contain a minimum of the following details:

• Price of home
• Type of home
• Location of home
• Size of home
• Picture of home

Links or URLs are NOT an acceptable format for submitting the property listing as the listing may close before the assignment is complete and the listing information is then inaccessible.

Students are encouraged to select a property that aligns as closely as possible with their real life home financing goals and therefore the criteria for the home are quite flexible:

• The property can be anything from a house, to a condo, to a mobile home or even a piece of land for later development.
• There is no maximum or minimum price, but attainable and desirable for your lifestyle should be considered guidelines.
• The house may be located anywhere, so long as all information for the completion of the assignment can be obtained and submitted in English.

Step 2: Saving for Your Goal

Students must perform several calculations to first determine the total transaction costs that will be required in order to purchase the home they have selected, and then create a savings plan in order to have the funds to cover the transactions costs of purchasing the home according to the timeline they have set for themselves. Variations on these calculations will explore the effects of making financial planning adjustments.

A table has been provided which must be used in presenting all required data for Step 2.

Begin by noting the following information:

Cost of Home: total amount home is listed for

Down Payment: this is your equity towards the cost of the home. Please refer to the class slides & textbook for more details on the legal guidelines for a down payment as they must be observed here. You are asked to explore three down payment variations:

• Down Payment A = Minimum Legal Down Payment
• Down Payment B = 20% Conventional Mortgage OR is Down payment A is 20% then a discretionary option of your choice
• Down Payment C = Cost of Home x equity % of your choice (must differ from two above and abide legal guidelines)

Calculate the mortgage required for each down payment option accounting for mortgage insurance when necessary.

Mortgage Required: price of the house which remains to be financed after the down payment has been paid/deducted.

Mortgage Required = Cost of Home - Down Payment

Mortgage Insurance: mortgage insurance is required if your down payment is less than 20% of the cost of the home and this expense is added onto the mortgage. Each down payment option will have to be considered in light of the government regulations (noted in course slides) and mortgage insurance rate and cost calculated and incorporated if applicable.

Final Mortgage Required = Mortgage Required + Mortgage Insurance ( revision made only when required, according to % of down payment)

 

This amount will be required in step 4, but for now return to the other costs associated with the initial purchase of the home:

Closing Costs: additional transaction costs that must be paid around the point of purchase. These costs represent an additional expense that must be budgeted for and paid when purchasing a home but they are in addition to the cost of the home and separate from mortgage calculations. Although the relevant costs and types of fees vary, for the purpose of the assignment, closing costs will be budgeted for as follows:

• Home Inspection Fee = $350
• Appraisal Fee = $250
• Legal Fees and Disbursements = $1500
• Renovations/Improvements and Moving Costs = your discretionary choice!
• Emergency Fund (for additional unexpected expenses) = your discretionary choice!
• Land Transfer Tax (or registration fee) = calculated according to value of home, location of home as well as rebates offered. Both municipal and provincial taxes and rebates should be considered. If the home is in Canada, the link below will help you calculate the amounts for both taxes/fees and rebates that are applicable at the provincial level as well as for the GTA. If the property is outside of Canada you must research the applicable taxes/fees and provide a reference source for your estimate.

Total Transaction Costs: total costs you need at time of purchase. You will explore this for all three down payment options.

• Total Transaction Costs = Down Payment Option + Closing Costs

Finally, you will use an on-line financial calculator and apply your knowledge of time value calculations to determine the saving payment you must budget for to reach you goal of the necessary "total transaction costs" already determined in order to purchase your home.

You must decide and note:

How long from today (or the point that you begin saving) until you intend to make this purchase?

t = time in years until your date or purchase = discretionary

What is your desired saving schedule - would you prefer to put money into savings every day, week, month, year?

n = number of saving periods in a year = discretionary

What do you feel is a realistic interest rate to apply to your savings? Consider the interest rate from savings or high-interest savings accounts or rate of return on investment options

i = rate of growth on your savings while you continue to save = discretionary

Now, apply an annuity formula from class (ordinary or due - your choice) to determine the regular savings payments (PMT) required to reach your goal:

• For simplicity it's acceptable to assume that the compounding frequency is the same as your payment frequency, although if using an online calculator which allows you to differentiate you may choose to do so
• FV = Total Transaction Costs that you need to save in order to purchase the house (calculated above as total transaction costs)
• n, t and i according to your discretion as mentioned above
• PMT = amount of your regular savings payments which is the unknown you are seeking

Note the "working formula" (with numeric values in place of variables) must be shown.

This will require you the copy either of the annuity formulas (ordinary or due) into the box and then replace letters with numbers so that I can see how you applied your numbers to the formula. This will help me to offer feedback in the case that your calculations are incorrect.

Step 3: Selecting a Mortgage

Once the down payment has been accounted for, students must examine the mortgages (including interest rates and conditions) that are advertised and available through various financial institutions in order to finance the remaining cost of the home. Various financing options must be explored.

A table has been provided which must be used for the completion of Step 3.

The following data must be recorded for 10 different mortgage options with variations of options explored according to requirements noted below:

• Name of financial institution - minimum of two institutions explored.
• Mortgage term - minimum of two different terms lengths explored.
• Fixed or variable - one of each must be explored.
• Open or closed - one of each must be explored - if not noted then assume that it is closed as that is the default.
• Annual Percentage Rate (APR) - note that with variable mortgages this may be referred to as the initial rate.
• Link/URL or screen shot of web page of financial institution which advertises this mortgage.

Note:

• The first six rows have been pre-determined and you must seek out a mortgage which fits these exact conditions and note the remaining data.
• The final four rows are to your discretion and may explore any variation of conditions you prefer.

Consider investigating: Official websites of banks, brokers and other financial institutions.

Step 4: Calculating the Mortgage Payments

Finally, applying the relevant data points collected, and incorporating some additional considerations, students must calculate the corresponding monthly mortgage payments by using an online mortgage calculator. Variations on these calculations will explore the effects of making financial planning adjustments.

Once more a table has been provided which must be used for the completion on step 4.

Refer back to previous steps to select and/or note the following:

Select 1 Final Mortgage Required from step 2 (this is not affected by closing costs)

Select 1 Interest rate from options in step 3 (use initial rate if a variable mortgage)

Next, you must account for:

Amortization: this is the length of time you are spreading your debt re-payment over. One option has been selected for you, but the next two are your choice, although they must differ and adhere to legal guidelines (refer to class slides and textbook).

• Amortization A = 25 years
• Amortization B = discretionary
• Amortization C = discretionary

Payment Frequency: this is the frequency with this you will make your mortgage payments in order to pay down this debt. You are required to explore all of the following standard payment frequency options for each of the amortization periods:

• Monthly Payments
• Weekly Payments
• Accelerated Weekly Payments

Calculate your mortgage payments with the help of a Canadian mortgage calculator. Canadian mortgages are regulated to limit interest compounding to semi-annually, which will differ from payment frequency. Accounting for this difference adds a level of complication to the annuity formula that is beyond what we have studied in class, while mortgage calculators make easy work of this complex math and are a helpful, practical tool. Be careful not to use a non-Canadian mortgage calculator as other countries regulate compounding differently.

You will mix and match the 3 amortization options and the 3 possible payment frequencies to see what impact these factors have on the value of the mortgage payment and the amount of interest to be paid on the mortgage. For each variation you must record the following:

• Mortgage Payment for the period
• Total Paid to Lender (over the life of the amortized mortgage) - Total of ALL Payments
• Total Interest Paid (the total interest you would pay if the conditions of the mortgage were to be maintained for the full amortization period, not just the term)
• Total Interest Saved (found by subtracting 'Total Interest Paid' with monthly payment frequency from 'Total Interest Paid' with each of the other two options - no interest is saved with monthly payments)

This is a recommended mortgage calculator as it considers all listed factors and provides all required results.

Attachment:- Assignment Files - Home Financing Project.rar