Financial Literacy Series Home Ownership – The Dos and Don’ts · – First-time buyers may be...
Transcript of Financial Literacy Series Home Ownership – The Dos and Don’ts · – First-time buyers may be...
Financial Literacy Series Home Ownership – The Dos and
Don’ts
April 11, 2019 Robert Turnquest, CFA, CAIA
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www.cfasociety.org/bahamas
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Agenda • Pre-home ownership assessment • Selection criteria • Building vs. buying • Financing your home • Closing the deal • Home construction and maintenance • Q&A
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Pre-home ownership assessment
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Being prepared for home ownership Dos • Read, read, read! • List and visit
interesting properties • Develop a long-term
plan • Gather
documentation • Save, save, save!
Don’ts • Act impulsively • Spend more than you
can afford
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Selection criteria
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Key determinants of a home purchase • Price • Location • Topography • Utilities • Clean title
– Attorney needed
• Zoning
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Building vs. Buying
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Buying an existing home • Dos
– Use a real estate agent…
– Buy early in the construction process if you can negotiate savings
– Get an appraisal – Inspect the building
• Don’ts – …without caving to
pressure – Make deals with
contractors/sellers you do not trust
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Building a home • Dos
– Choose a contractor wisely – get references!
– Obtain building permits and insurance
– Keep track of all expenses
– Secure building materials
• Don’ts – Drag on the building
process for too long
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Financing your home
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Making sensible financing decisions Do’s • Understand how a
mortgage works • Determine what you
can afford • Shop around
Don’ts • Exceed a debt service
ratio of 40%
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Fundamentals of mortgage financing
• Key definitions – Down payment – Principal – Interest
• Types of mortgages – Fixed rate: constant interest rate and periodic
payments throughout the life of the mortgage – Adjustable rate mortgage: interest rate adjusts
depending on an index level
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How much of a mortgage can I afford? • Debt service ratio
– Monthly debt payment divided by monthly income
– Limit your debt service ratio to 40% – Example: if your monthly income is $3,000,
your mortgage should not be more than 1,200 • Mortgage indemnity insurance may be
needed
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How a mortgage works • Example:
– House price: $300,000 – $50,000 saved toward a down payment – Interest rate: 5% – Fixed rate mortgage – Term of the mortgage: 25 years – What will the monthly mortgage payment be?
• Mortgage calculator
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Where do I go to get a mortgage?
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Closing the deal
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Closing costs to consider • Bank mortgage origination fee • Legal fees
– 2-2.5% typically • Stamp tax
– May be split between buyer and seller
– First-time buyers may be exempt
• VAT – May be split between buyer and
seller – First-time buyers may be
exempt • Mortgage indemnity insurance • Real estate agent’s
commissions – Ranges 5-10% – Usually paid by seller
Amount Notes Purchase price
$300,000.00
Down payment
$50,000.00
Mortgage $250,000.00
Bank fees $2,500.00 1% of mortgage
Legal fees $6,000.00 2% Stamp tax $3,750.00 ½ of 2.5%
VAT $18,000.00 ½ of 12% MDI $3,000.00 1% RE agent commissions
$0.00 Paid by seller
Total closing
$33,250.00
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Home construction and maintenance
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Understanding home construction process • Architectural plans
– Approval from town planning • Insurance • Contractor outlines sequence of home construction
– Excavation/ clearing of property – Foundation – Belt course – Roof – Windows/ doors – Interior – Septic tank/ waste disposal – Finishing
• Inspection by lender-approved Quantity Surveyor • Issuance of Occupancy Certificate
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Ongoing expenses to consider • Repairs and maintenance
– Create a budget line item, e.g. 1% of value – E.g., plumbing, painting, roofing, appliances
• Home insurance • Real property tax
– First time home owners exempt up to $250,000.00
• Home Owners Association fees • Hurricane preparation
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Q&A Thank you!
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Endnotes • https://activerain.com/blogsview/2563816/first-
time-buyers-in-harrisburg-pa--what-are-the-costs- • https://bfsb-bahamas.com/providers/name/bank-
of-the-bahamas-international/ • https://www.centralbankbahamas.com/download/
039835000.pdf • https://www.cibc.com/fcib/pdf/cibc-firstcaribbean-
mistakes-home-buyers-should-avoid.pdf • https://www.cibc.com/fcib/pdf/cibc-firstcaribbean-
mortgage-document-checklist.pdf • https://www.bankrate.com/mortgages/arm-vs-
fixed-rate/ www.cfasociety.org/bahamas