September 7, 2012
Questions to Ask When Thinking About Buying
Can you really afford a mortgage?
Access your cost of renting vs. owning by using an online calculator that compares your monthly expenditures. As a renter, you may be avoiding certain costs such as: utilities, taxes, home insurance, etc. but you could be building equity. You may also want to calculate how much your future property would need to appreciate over the time period of expected ownership versus what you would be saving with paying rent to figure out at what price point it would be advantageous to buy. If you feel that you are ready to carry a mortgage, it may be a good idea to calculate how much extra your monthly home payments will be and start saving the difference in order to get used to spending that amount of money. For example, if you currently pay $1000 on rent and your home ownership cost will be $1400 – put aside $400 a month and evaluate how spending that extra amount will effect your lifestyle. An added bonus is that you are saving extra money each month towards a down payment.
How of a down payment can you afford?
Yes you can put down less than 20% for a down payment as a first-time home buyer, take advantage of being able to withdraw from your RRSP penalty free and apply for the $5000 First-Time Home Buyer tax credit. But will this eat up all of your savings and make you house poor? Consider the advantages of putting down 20% versus a lower amount with this calculator to see how much you would save on interest. Remember that if you do put less than 20% down, you will need to also pay mortgage default insurance (sometimes known as CMHC fees) and remember in certain provinces, there are taxes on top of the premium payments.
Can you get pre-approval?
Keeping track of your credit rating is always a good idea, whether you plan on buying sooner or later. A friend of mine, who is a real estate agent, recently told me that he had a client who applied for a pre-approved mortgage, only to find out his credit score was terrible because he was a victim of identity theft! It took a few months to resolve but thankfully he had found out soon enough that it did not affect his buying plans. Another friend recently was pre-approved for $700,000 so now she knows what the maximum range is for her home search. Get a copy of your credit score to see what type of rating you have as it will affect the type of mortgage financing you can expect. Then, consider talking to a mortgage broker or specialist about pre-approval – which is typically valid for a longer period of time such as 6 months.
Are you prepared for extra costs?
Often times when one thinks of buying a home, it’s mainly just the down payment and future mortgage payments that come to mind. However, one needs to save 3-6% on top of the home sale price to cover associated and closing costs such as: legal fees, land transfer tax, moving expenses, home inspections, etc. Always research all potential costs and factor that into your calculations.