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Annuities – An Independent Study Name: Learning Goals At the end of this unit you should be able to: Explain what an annuity is and give examples of common annuities such as car payments, mortgages and payment plans.Calculate total interest and monthly payments for annuities.Explain the effect that down payments and interest rates have on the total interest. Explain the language surrounding mortgages and other loans. Such as term, amortization, payment frequencies etc…ISU OutlineWe only have 3 classes to complete this project so it is limited to the three topics I think will be most important for you. Buying a House.Buying a Car. Buying Items from Easy Home. Other things that we could include would be Student Loans and Retirement savings. Your Glossary There is a whole new language surrounding annuities and personal finance. As you come across words you don’t know add them with their definitions to your glossary. Your text book will have good definitions you can use. You will be handing in your glossary with your project, it should have at least 10 relevant terms and definitions. (10)Completion and Submission This project is to be done on the computer and submitted electronically in the MCF folder on your desktop. Answer all the questions in this document, choose an easy to read colour to use for all your responses. Hand in:This completed Package. Your Glossary Topic 1- Buying a HouseIntro Buying a house can be one of the most difficult decisions to make. It is a very big commitment that can have huge rewards and equally huge problems. It is important as a first time home buyer that you are as knowledgeable as possible about the terminology, fees and how mortgages work. Task 1- Is Home Buying Right for You?Read over this page on the CMHC website. Watch the video at the bottom of the page if you can. To rent or to buy that is the question… There are pros and cons to each option, list 2 pros and 2 cons for each renting and buying. (4)Describe a situation when renting is obviously the best option. (2)Describe a situation when buying is obviously the best option. (2) Task 2-The Buying Process Read this page on the CMHC website. The page describes a step by step process for buying a house. Create a timeline below with the most important events that need to happen starting from “Finding a House” to “Moving Day”. (6)Task 3- Setting Up a MortgageFor most of us mortgages are a fact of life. They are complicated and require lawyers, bankers and two parties to work together. Because we are short on time we are going to focus on what happens between you and the bank. Before you go further, add these terms to your glossary: amortization, fixed-rate, variable-rate, mortgage and term.Most banks make billions of dollars off of mortgages every year. So it is worth it for them to have informative easy to use websites to help potential clients choose their bank. If you have a bank you normally deal with go to their website and see what mortgages options they are advertising. List one below: (5)Required Down payment:Term: Rate: Amortization Period: Fixed or Variable: Task 4: Mortgage CalculatorWhat is the minimum down payment you can make on a house in Canada? (1)What is the shortest amortization period you can have in Canada (1)What is “Payment Frequency”? What Payment frequency options are there? (4)Almost all banks have some kind of mortgage calculator. Mortgage calculators are used to find what your regular payments will be given a certain rate, amortization period, payment frequency and loan amount. Open this one at RBC. Complete this table for a house worth $200 000 assume a fixed interest rate, 5 year term and bi-weekly payments. (18)Down PMTMortgage AmountRate Amortization PaymentsTotal Interest5%5%25 Years10%5%25 Years15%5%25 Years5%3%25 Years5%4%25 Years5%5%25 Years5%5%30 Years5%5%20 Years5%5%15 YearsExplain the effect down payment, the interest rate and the amortization period have on the total interest you have to pay and your payments. (6) Task 4- How to Save MoneyMany people think that the best way to set up a mortgage is to get the lowest interest rate and to have the lowest monthly payment possible by extending the amortization period. Getting a lower interest rate is ALLWAYS a good idea. But the longer it takes for you to pay off your mortgage the more you have to pay. Take a look at the last three lines of the chart a 30 year mortgage costs you an extra $100 000 compared to a 15 year mortgage!Take a look at TD Bank’s 10 tips on “Saving Money on your Mortgage”. Which of the 10 tips would be the most effective in reducing the total cost of the mortgage? Why is it the most effective and How does it reduce your cost? (4)Let’s say you won’t have much extra money for the next few years. Which would be the best ‘tip’ to try? How does it help reduce the total cost? (4)What are “Pre-Payment Privileges”? Why would it be a good idea to take advantage of them whenever you can? (4)Topic 2-Buying a CarIntro A car is probably the first major purchase you will make. It is also an exciting purchase! There is much to think about when choosing a vehicle, new or used, car or truck, cash or financing. We are going to think about a few different options and what the financial costs are. But First a Question…Buying a house can usually be thought of as an investment, since in general property values tend to increase over time. How is buying a car different? (2) Task 1- Vehicle OptionsOption 1- New vs UsedRead this article on that outlines the pros and cons of each option.What are the top two reasons to buy a new car? (2)What are the top two reasons to buy a used car? (2)Cars lose about 20% of their value each year. Say you bought a new car for $25 000, how much value would it loose each year for the first 5 years? What is it worth after 5 years? (4)Many dealerships offer 0% financing as an incentive to sell new vehicles. It would not be hard for dealerships to hide charges in 0% financing offers. Do they? Do some quick internet research to find out. Check out this article to start with. (6)Task 2- Financing CalculationsThe cheapest way to buy a vehicle is with cash. However most of the time this is not possible because most people don’t have enough money saved up to buy a vehicle outright. Another option is to role a vehicle purchase into your mortgage, but you can usually only do that when your mortgage term is over. So, most people get financing through a car dealership. Car financing usually requires a monthly payment and is usually compounded monthly with regular payments. There is an exponential formula you can use but it is more fun to use the TVM solver to find our monthly payments. Joe buys a car for $12 000 from a dealership offering 4.9% financing for 48 months 10% down. Use the TVM solver to find his monthly payments. (4)How much does Joe have to pay in interest? (4)Sally is trying to decide between two similar vehicles at two different dealerships. Dealership A: $15 000 at 4.1% over 5 years with 10% down.Dealership B: $14 500 at 6% over 5 years with 10 % down. Which dealership should she choose to minimize her total cost? Explain your reasoning using actual numbers. (6) Topic 3- Buying From Easy HomeMany people buy items they could not otherwise afford, using a payment plan. This is not really ‘bad’, but items do end up cost much more than if you just bought items you could afford. The goal of this last topic is to show you how much interest you actually end up paying on these types of purchases so you can make informed choices. Check out this add for an LCD TV on Easy Home’s web site. The monthly payments are $32 for 156 weeks at 29.9%. Use the TVM solver to find PV, this is how much it costs without any interest.(2)How much interest do you end up paying if you buy the TV this way? (2)Easy Home is selling an Acer tablet for $12 per week for 104 weeks @ 29.9%. How much would you end up paying in interest in this payment plan? (4)Why are payment plans like this so popular? (4)ConclusionDescribe 3 things you learned during this unit. (6) ................
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