The ABC’s of Home Financing
The first step towards owning your own home is making sure you’ll be able to pay for it. Knowing how much house you can afford before you start your search can save you a lot of heartache. There’s nothing worse than finding a home for sale that you love only to find out you can’t afford to make the necessary payments. Besides once you have your heart set on a certain home letting go isn’t always that easy.
Having your ducks in a row before you make an offer on a home or condo is also beneficial. The vender will know you are a serious buyer when you begin negotiations. You’ll also have less paperwork to handle once your offer is accepted.
Getting a Pre-Approved Mortgage
You’ll need to decide whether you want to go through your bank or a mortgage broker. A mortgage broker may offer a better rate but you may prefer the familiarity of your personal bank. Either way it’s a good idea to shop around for the best rate.
Although a pre approved mortgage is not necessary it is highly recommended. Knowing your price range can help limit the number of homes for sale you consider. Realtors will often request that you get pre-approved before starting your search as well. A pre approved mortgage is a signal to all involved parties that you are really serious about purchasing a home or condominium.
Working with a lender in advance will also give you the opportunity to clear up any issues with your credit in advance. You may find out that you’ll get a much better rate if you decide to pay down some debt first.
Choosing the Right Mortgage
There are several options available when it comes to taking out a mortgage. Understanding the details and payment options of each one is important to choosing one that works for you.
A conventional mortgage is by far the most common and requires a down payment of at least 20% with the remaining balance financed. The other option is a high ratio mortgage which is any mortgage with a down payment of less than 20%. You will need mortgage loan insurance if you choose a high ratio mortgage which will increase your monthly payment amount.
The next thing you will need to consider is your mortgage term. Your mortgage term is the amount of time your contract remains the same. After your term is up you will need to renegotiate the details of your mortgage. A typical term lasts anywhere from 6 months to 5 years. The longer the term the longer your interest rate will be guaranteed. Your interest rate will either be fixed, variable or adjustable. A fixed rate remains the same throughout the term. Variable and adjustable rates change based on the market. Your lender can help you determine what type of rate is right for you.
You will also need to choose between an open or closed mortgage. Understanding the difference is very important. If you have a closed mortgage you will only be allowed to make the monthly payment each month and no more. This is a good option if you are looking for a fixed rate and don’t plan on selling your home during your mortgage term. An open mortgage will allow you to pay off the remainder of your loan at any time. This is a good choice if you plan on selling before your term is up however an open mortgage is usually subject to a variable or adjustable rate.
The amortization is the length of time you have to pay off your entire loan. This period is usually 25 years. The longer the period the lower your monthly payments but you will end up paying more in interest with a longer term.
Down Payment Options
If you do not have enough savings for a down payment you may want to look into the Home Buyers Plan which allows you to withdraw up to $20,000 from your Registered Retirement Savings Plan to purchase real estate in Canada. You will be required to repay whatever amount you withdraw within 15 years. Keep in mind that the more you are able put down on your home the better your interest rate will be resulting in lower payment amounts each month.
Finalizing Your Mortgage
After you find your home it will take as little as two weeks to obtain the mortgage if everything is in order. The cost is generally $600-$1000 and is due at the closing in most cases. You will need to provide proof of your income, down payment information and property details. You’ll also need to obtain the proper insurances and possibly an appraisal. Be careful not to do anything to damage your credit during the loan process as this could have a negative effect on your rate.
Understanding all of the details of your home mortgage can ensure that the process of buying a home is smooth and easy. It will also help ensure that you choose the mortgage that is right for your situation. Ask your mortgage broker to thoroughly explain every aspect of your mortgage to ensure that your home mortgage suits your situation.
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