# Selling a house, building a new one and general money questions



## bananachiki (Mar 14, 2013)

Hi all, I have a few questions that I would love to hear your ideas/advice on. First the story: we are about to list our first home for sale and anticipate making $130-$140K on the sale (based on realtors and appraisal value) minus the $7000 commission (builder is covering 1/2 the commission cost) the new home is $512000 with a 3.25% interest rate for 5 years. I have a government student loan of $30K at 6-8% interest with monthly payments of $400 for 9.5 years. We also have 3 years left of car payments at 2.9% interest and $600/mth. Other than that, no debt or credit cards. We bring home about $7500/mth (I don't know if this is relevant or not) after taxes and we have no children.

Questions are:
-Should we put all of the money from the sale of our home towards the new house?
-Should we only put down 20% and use the rest for the car/student loan?
-Why does the CMHC calculator still say we will have a 1% fee even with a 20% payment? 
-Should we pay ALL of the debt off and use the remainder for the down payment? (this would allow us to contribute extra money each year towards the mortgage).
-What exactly are CMHC fees?
-Mortgage insurance vs personal life insurance (we both have 1X our salary through work plans at no cost)?

I'm sure there's more and I apologize if this is in the wrong forum, thank you all so much for your wise advice!


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## none (Jan 15, 2013)

1) No. Pay off those high interest loans!
2) Put 20% down to avoid cmhc costs. Anything more is debateable - it may be a better strategy to max out your TFSA and invest in a diversified portfolio. Also, perhaps put cash in your RRSPs rather than the house. I don't think beating 2.79% per year (more on this later) is a huge risk.
3) I think some is needed but not my area

4) That interest rate sucks. I've seen them as low as 2.79%


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## Danny (Oct 17, 2012)

Have you shopped around for mortgage rate. Like None said that seems high..


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## MoneyGal (Apr 24, 2009)

1. Should we put all of the money from the sale of our home towards the new house?

No. 

2. Should we only put down 20% and use the rest for the car/student loan?

Put at least 20% down. Pay the car and student loan. How much is left? See what none wrote above. 

3. Why does the CMHC calculator still say we will have a 1% fee even with a 20% payment? 

No idea. 

4. Should we pay ALL of the debt off and use the remainder for the down payment? (this would allow us to contribute extra money each year towards the mortgage).

Probably not. See response to question 2. It's probably worth having some liquid funds in a TFSA plus investment accounts. 

5. What exactly are CMHC fees?

Insurance premiums paid by you to cover the risk of default. Total sunk cost on your end. 

6. Mortgage insurance vs personal life insurance (we both have 1X our salary through work plans at no cost)?

NO MORTGAGE INSURANCE. If you need more life insurance, buy term life insurance. Don't buy mortgage life insurance; it is a "bad deal" on several counts.


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## none (Jan 15, 2013)

I'm going to also suggest don't buy a new house. Rents suggest that prices will decline by a good chunk in edmonton.


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## bananachiki (Mar 14, 2013)

none said:


> 1) No. Pay off those high interest loans!
> 2) Put 20% down to avoid cmhc costs. Anything more is debateable - it may be a better strategy to max out your TFSA and invest in a diversified portfolio. Also, perhaps put cash in your RRSPs rather than the house. I don't think beating 2.79% per year (more on this later) is a huge risk.
> 3) I think some is needed but not my area
> 
> 4) That interest rate sucks. I've seen them as low as 2.79%


So should I put 20% down ($104200) and invest the remainder or pay off a portion of my student loan? Because there isn't enough $$ after the 20% down to do both....I should note that the interest on my student loan is a tax deduction, and we both contribute 5% of our wage to rrsps.

Also, no we haven't really shopped around for mortgage rates, ATB told us we qualified for a $750000 mortgage and then TD told us we were denied a $450000 mortgage. It was a very tedious process applying for a mortgage with a bank that we currently do not have a mortgage with, but I would be willing to shop around if you guys really thought we could get that low of a rate.

To the poster who suggested that we don't buy, it's a little too late for that, our house is being framed as we speak and I personally don't feel it's wise to flush the $10000 we've already invested down the drain.


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## none (Jan 15, 2013)

Well the 10K is a small fraction of the ~150K+ I expect you to lose if the graph I linked to is to be believed. Anyway, I'm extremely bearish on real estate so of course take my opinion with a cowlick (which unfortunately is based on historial trends and evidence of similar areas). 

The good news is that the potential loss on this house pretty much baances out your gains on the old house so no harm no foul ammiright?

Best of luck to you.

At the bare minimum get a better mortgage rate. If not, you're just giving a bunch of douche bag bankers your cash for nothing.


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## fergusonsd (Dec 30, 2012)

You must pay down your high interest student loans first! There's no use paying down a 3% mortgage when you have an
8% sitting out there, it doesn't matter how much each is for. I would then put the remainder towards your down payment, hopefully this will minimize your monthly payments and allow you to use that money elsewhere.

CMHC fees is insurance incase you default, if you do CMHC will pay out the bank. If you have less then 20% you are more of a risk for default so you are required to take out this insurance. As for mortgage insurance vs life, decline mortgage insurance!!!!!! Get yourself a good life insurance plan that pays out if you or your wife pass away in an amount that at the very least will pay our your house. Mortgage life insurance is the biggest money maker for lenders and therefore, just like when you go to futureshop and get offered their replacement insurance, this is the lenders version. It benefits them more than you because when your mortgage is nearly paid off, you will pay the same and when it is paid, you will be left with nothing! Keep that money for yourself.

Hope this helps. If you need anymore information getting setup in your new home please visit my site:

www.fergusonfinancial.ca

Thanks.

Devon


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## Spudd (Oct 11, 2011)

bananachiki said:


> So should I put 20% down ($104200) and invest the remainder or pay off a portion of my student loan? Because there isn't enough $$ after the 20% down to do both....I should note that the interest on my student loan is a tax deduction


I would put down 20% and then use the rest to pay off as much of the student loan as possible. Even though the interest on the student loan is a tax deduction, you only get back 15% of the amount of interest paid, so it's still in your best interest not to pay that interest. 

Call a mortgage broker to have them shop around for you for rates. If you were denied by TD you may not be able to do better than you have right now, but it doesn't hurt to ask. Even a fraction of a percent on such a large loan makes a difference.


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## lifeliver (Aug 30, 2010)

I went on the ATB Financial webpage and they are posting the 5 year rate at 3.04%. With the mortgage balance which you are looking for you should easily be able to get ATB to give you 2.89%. This is the going rate in all banks at the moment for mortgages above 300k. Some banks offer even lower then the 2.89% but its on exception. 

To get this rate, all you need to do is call ATB or walk in and let them know that you have been shopping around for rates and this is what you have approved from TD, or whatever else you would like to say. Let them know that unless they match the rate you will leave them. Trust me they dont want to loose your business over an interest rate. Business is slow this year so they will bend over backwards to keep you. 

I know this because I work in the industry.


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## MoneyGal (Apr 24, 2009)

bananachiki said:


> So should I put 20% down ($104200) and invest the remainder or pay off a portion of my student loan? Because there isn't enough $$ after the 20% down to do both*....I should note that the interest on my student loan is a tax deduction*, and we both contribute 5% of our wage to rrsps.


It isn't. Your federal tax bill is reduced by 15% of the interest you pay on your loans. On a $30K loan amortized over 9.5 years at 7% (you said you're paying between 6-8%), you will pay about $2300 in interest in year 1 of 12 monthly payments. Your tax bill is reduced by 15% of that amount, so about $350. 

1. Your effective rate is still very close to 7%. 

2. You are paying $2300 to save $350. 

Make a 20% downpayment and put the rest on the student loan.


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## kcowan (Jul 1, 2010)

All good advice so far. Especially the mortgage broker. They will get you the best rate. It will be from an organization that has no bricks and mortar in Edmonton, a significant savings. If ATB matches that quote, then you are good to go. But let the broker have a chance to improve on the rate. Every half point means megabucks savings.

Insurance: if you are both healthy, it will be financially attractive to self-insure. Do the math. Can either of you sustain the mortgage and other expenses? If not, then get term insurance to cover the capital shortfall only.

Good luck. I lived in Edmonton for 8 years. Great place to raise a family. Where is the new house located?


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## Berubeland (Sep 6, 2009)

It may be counterintuitive but CMHC insurance at any percent if you can avoid it is a very bad deal. They charge a percentage plus fees but it's one of those "you never see it fees" because they just slop it on mortgage when you're all giddy from getting a house. 

Because we don't know how much your student loans are it's impossible to figure out which way would be better for you.


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## fergusonsd (Dec 30, 2012)

Better yet, visit a mortgage broker. They will be able to get you that rate and most likely, a better one. Check them out, I'm sure you can find a good one in your area.

Devon 

www.fergusonfinancial.ca


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## bananachiki (Mar 14, 2013)

Berubeland said:


> It may be counterintuitive but CMHC insurance at any percent if you can avoid it is a very bad deal. They charge a percentage plus fees but it's one of those "you never see it fees" because they just slop it on mortgage when you're all giddy from getting a house.
> 
> *Because we don't know how much your student loans are it's impossible to figure out which way would be better for you*.


My student loan is $30k, sorry I should have said that in the original post.

We're trying to make all the right decisions, my husband bought our current house from his parents so basically we're both first time home buyers AND sellers, and I am in the first year of my career, AND we just got married so it's been a lot of big life decisions lately. Thank you all so much for your advice, I will be phoning for a mortgage broker Monday morning!


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## bananachiki (Mar 14, 2013)

kcowan said:


> All good advice so far. Especially the mortgage broker. They will get you the best rate. It will be from an organization that has no bricks and mortar in Edmonton, a significant savings. If ATB matches that quote, then you are good to go. But let the broker have a chance to improve on the rate. Every half point means megabucks savings.
> 
> *Insurance: if you are both healthy, it will be financially attractive to self-insure. Do the math. Can either of you sustain the mortgage and other expenses? If not, then get term insurance to cover the capital shortfall only.
> *
> Good luck. I lived in Edmonton for 8 years. Great place to raise a family. Where is the new house located?


Thanks for the advice, could you explain this a bit better? I don't know what self insurance is, and yes either one of us could swing the mortgage (provided there was no other debt payments) but once children are involved it would be too tight. By capital shortfall do you mean the value of the home? 

W're building on the west end, by the River Cree casino.


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## Spudd (Oct 11, 2011)

Self insurance is where you don't buy insurance, and instead you depend on your own reserves to carry you through times of hardship. An example of this would be I have 2 cats, but I never bought them health insurance, because I have enough money to pay their vet bills and I don't believe I would end up ahead of the game by buying the insurance.

Since you say that once children are in the picture it will be too tight, then you should buy term insurance that covers the amount of the mortgage. Once the children have actually arrived, you may want to increase this term insurance through until they are self-sufficient. If one parent died, the other would be left struggling to support the family if you did not have sufficient insurance.


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## kcowan (Jul 1, 2010)

Yes Spudd explained it very well. Term insurance to provide the income you will absolutely need and not a penny more. If childbearing means the loss of one income for a period of time plus daycare costs, then income replacement is for just those costs, not the total mortgage. But total mortgage might make sense to cover the untimely death of one partner.

You self insure by playing the long odds that such a death is unlikely but the term insurance costs also reflect those long odds. So it is cheap.


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## MoneyGal (Apr 24, 2009)

bananachiki said:


> My student loan is $30k, *sorry I should have said that in the original post.*


You did put that in your first post; where do you think I got my math from? 

You should put down at least the minimum required to avoid CMCH insurance, and then the remainder on the student loans. Here's why:

- the CMCH insurance is a one-time deal and added to your mortgage upfront. This means that even if you paid down a substantial amount on your mortgage in the next few years, you'd still have paid the CMCH fees. 

- this is different from your student loans. Although the rate you are paying on those loans is high, if you pay down the loans more quickly than the amortization period, you will save on interest costs - unlike with the CMCH fees. 

IMO the best course of action for you is:

1. Put 20% down on your mortgage to avoid CMCH fees. 
2. Put remainder on your student loans to reduce that bill as much as possible. 
3. Pay down (any remaining balance of) student loans aggressively (double or triple remaining monthly payments).

I am leaving aside the whole "build up an emergency fund" discussion for right now. NOT having $400/month student loan payments is like having $400/month free cash flow.


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## none (Jan 15, 2013)

As for an emergency fund simple negotiate a secured line of credit and forget about the holding a true 'emergency fund'.


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## MoneyGal (Apr 24, 2009)

^ That. Get a HELOC set up when you get the mortgage on the new place and you will save on the legal fees (that you'd otherwise incur setting up a HELOC).


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## bananachiki (Mar 14, 2013)

We already have a HELOC, so that's good. Thank you all so much, this has been really helpful!


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