The document discusses the costs and considerations for a family deciding whether to buy or rent a home. It provides details on mortgage rates and costs for buying a specific $125,000 home versus renting a comparable property for $875 per month. Calculations show that after 10 years of owning the home, the property value would reach $185,030 but renting costs would be $1,295 per month. The family would have $6,000 equity after buying and over $11,000 after 3 years of mortgage payments.

1. Mortgages: Should I Buy or Rent?
3D Realty Handshake by flickr user lumaxart

2. http://tinyurl.com/3gplx7
http://www.forbes.com/2008/02/29/resale-value-autos-cars-forbeslife_cx_jm_0229resale_slide_2.html?partner=yahooca

3. The Dirksons Additional Costs to Purchase Their Home
The Dirksons live in Brandon and bought a house in Portage.
They had the home appraised and paid $125.00 to have it done.
The bank required a survey, and the cost of the survay was
$300.00. the price of the home was $135 000.00, and since their
down payment of $20 000.00 was less than 25% of the total
price, they had to buy “High Ratio Mortgage Insurance” at a cost
of 1.25% of the mortgage. The home insurance premium was
$475.00 but they recieved a $150.00 rebate from the policy they
had on their home in Brandon. The property taxes for the year
had been paid by the previous owner, and so they owed 7
months of the total tax bill of $2 125.00. A dry-walling bill of
$650.00 was split equally between themselves and the former
owner. The Dirksons bought a used washer and dryer for
$920.00. Moving expenses were $320.00 and legal fees that
included the land transfer costs were $965.00.

4. The Dirksons Additional Costs to Purchase Their Home
The total additional costs are $5 957.08, or approximately $6 000.
If they do not have enough money set aside to cover these expenses,
they might be able to add these costs into their mortgage.

5. A group of rural students is planning to go to university. One of the members of
the group suggests that they purchase an older home rather than rent an apartment.
After a careful analysis of their finances, the group decides that their gross
monthly income would be around $3000.00. Monthly property taxes are estimated
to be $125.00. Heating bills are estimated to be $150.00. The group can arrange a
mortgage at a rate of 9%. The three members of the group are able to come up with
a down payment of $8000.00. Determine the maximum affordable purchase price
that can be considered if they take out a 25-year mortgage.
Total allowable monthly
expenses on house
0.32($3000) = $960
Heating & Taxes
$125 + $150 = $275
Maximum Affordable
Maximum Possible Purchase Price is
Monthly Mortgage PMT $90 731.73
$960 - $275 = $685

6. Canadian Mortgages
Most home buyers make monthly payments, but it is also possible to
make payments twice a month, every two weeks, or every week. The
amount of the payment is determined by the following:
• the principal of the mortgage (the size of the loan)
• the amortization term (the number of years you
have to repay the mortgage)
• the interest rate
It is important to use a loan calculator that calculates Canadian
mortgage payments, because for Canadian mortgages the
interest is compounded every six months, and this may not
be the case for mortgages in other countries.
The Mortgage Centre
http://www.mortgagecentre.com/index.cfm

7. The Jamison's Mortgage
The Jamison family has decided to buy a N=
house. they will require a $121 000.00 I%=
mortgage to help pay for the house. PV=
PMT=
• Bank A offers them a 25 year mortgage
FV=
at 7.25%. Determine the size of the P/Y=
monthly payment, the total amount paid for C/Y=
the mortgage, and the total amount of PMT: END BEGIN
interest paid when the mortgage is repaid.

8. • Bank B offers them a 20 year mortgage N=
at 7.25%. Determine the size of the I%=
monthly payment, the total amount paid for PV=
the mortgage, and the total amount of PMT=
interest paid when the mortgage is repaid if FV=
they repay the mortgage with monthly P/Y=
payments over 20 years. C/Y=
PMT: END BEGIN

9. The Jamison's Mortgage
• How much interest do they save by repaying the mortgage
in 20 years instead of 25 years?

10. The Jamison's Mortgage
• Bank C offers them a 25 year mortgage at N=
7.00%. Determine the size of the monthly I%=
payment, the total amount paid for the PV=
mortgage, and the total amount of interest PMT=
paid when the mortgage is repaid. FV=
P/Y=
C/Y=
PMT: END BEGIN

11. The Jamison's Mortgage
• How much interest do they save by paying the mortgage in 25
years at 7.00% instead of in 25 years at 7.25%. (i.e. how much
cheaper is Bank C than bank A?)

12. Buying vrs. Renting

13. The Petri Family: A Buy vrs. Rent Case Study
The Petri family needs to move, and so they are looking for another
home. They are considering buying or renting a home. The price of
a suitable home is $125 000. The cost of renting a similar home is
$875 per month. They have $21 000 invested in an account that is
growing by 7% per year, and they will use this for the down
payment and to cover the 'Additional Costs when Purchasing a
Home' if they buy. They have also checked with their bank about a
mortgage, and they can get a 25-year mortgage at 7.25% to pay for
the balance of the home. Other things to consider are:
• the 'Additional Costs when Purchasing a Home' are $6000.00,
and so they will have $15 000 for the down payment
• annual property taxes are about 1.5% of the value of the home
• the home is expected to appreciate at 4% per year
• rental payments are also expected to increase 4% per year
• they expect to receive 7% per year growth in their investment if
they do not use the $21 000 as a down payment for the home.

14. The Petri Family: A Buy vrs. Rent Case Study
1. What is the amount of the monthly mortgage payment?
$787.51
N= N=
I%= I%=
PV= PV=
PMT= PMT=
FV= FV=
P/Y= P/Y=
C/Y= C/Y=
PMT: END BEGIN PMT: END BEGIN

15. The Petri Family: A Buy vrs. Rent Case Study HOMEWORK
2. If the property taxes are 1.5% of the market value, how much
are property taxes the year they buy the home? $1 875.00
After they own the home for 10 years? $2 775.46

16. The Petri Family: A Buy vrs. Rent Case Study HOMEWORK
3. What percent of the first mortgage payment is used to pay interest?
∑Int(1,1) = -654.76 83.14%

17. The Petri Family: A Buy vrs. Rent Case Study HOMEWORK
4. (a) How much is left owing on the home after one year (i.e. 12
bal(12) = 108 353.83
payments)?
(b) What is the total amount they have paid in mortgage payments in
one year? 12 x $787.51 = $9 450.12
(c) How much was the mortgage reduced after 12 payments?
∑Prn(1,12) = -1646.17
(d) What percent of the money paid in the first year was used 17.42%
to reduce the principal of the mortgage?

18. The Petri Family: A Buy vrs. Rent Case Study HOMEWORK
5. If the market value of the home increases 4% per year, what is the
value of the home after 10 years? 10
$125 000 x 1.04 = $185 030.54

19. The Petri Family: A Buy vrs. Rent Case Study HOMEWORK
6. If they rented the home for one year at $875 per month, how much
$10 500.00
would they pay for the year?
How much would the annual rental charge be for the 10th year they
rent if rental rates increase 4% per year. $875 x 1.0410 = $1 295.21

20. The Petri Family: A Buy vrs. Rent Case Study HOMEWORK
7. If they rent the house and invest the $21 000 at 7% per year, how
$42 202.89
large would the investment be after 10 years?

21. The Petri Family: A Buy vrs. Rent Case Study HOMEWORK
Equity = Purchase Price(*) - Mortgage Principal Remaining
8. What equity does the Petri family have in the home immediately
after buying it? After 2 years? After 3 years?
$6 000.00
∑Prn(1,24) = -3413.87
$9 413.87 ∑Prn(1,36) = -5312.04
$11 312.04