You are about to enter into one of the largest purchases of your life. So it's important to understand the ABCs of buying a home.
Understand mortgage basics
Understanding the differences between all the types and terms of mortgages can help you determine the right mortgage for your lifestyle. Do your homework to better understand key terms like variable and fixed rate mortgages, amortization, conventional and high ratio mortgages, debt service ratios and payout penalties. The internet and your mortgage broker can be a great source of information, and can help provide the questions you may have as it pertains to your personal circumstances. Does this home fit your lifestyle?
When purchasing a home, here's a few things to consider:
Does this home fit into your long term goals?
How long are you planning on living in your home? For example, are you just starting out in the workforce or closer to retirement? Do you anticipate having to move because of a change in job or careers in the future?
Do you have children or plan on having children? Do you want to pay down your mortgage as quickly as possible? Or do you want a more flexible monthly cash flow? Keep in mind you may have to hold on to the property for a minimum of five years to break even on resale when you factor in all closing costs and equity growth. It's important to review all these factors with your mortgage broker before purchasing your home. These factors, and more, are important to consider in both selecting the right mortgage and the right home for your needs. Know your renovation limit
Many first time buyers opt for houses needing a little TLC because they can seem like a better financial deal.
While buying a fixer-upper can be a great strategy, it is important to remember that do it yourself renovations takes time and money. While renovating can be rewarding for some, others discover it's like a part time job.
Here are a few things to consider:
Is the TLC required cosmetic? Or are there structural things that need to be done before you can safely live in the home?
How long will the renovations take? And would you be comfortable if the timeline was extended?
Do you have the time required to do a good job? What skills do you need to complete the renovations? If you don't have these skills, do you know the cost of hiring a contractor? Do you know what permits are required?
What are the cost of materials? Before buying that fixer-upper, take a realistic look at how handy you really are and determine if this is the right home for you.
Have extra for the extras
There is more to buying a house than a mortgage. There are additional costs immediately associated with purchasing a home such as down-payment deposits, appraisal fees, mortgage insurance premiums, legal fees and life and property insurance. Add to that moving day costs (moving trucks, utility hook ups, cleaning supplies, etc). People are often surprised at how expensive the first year of home ownership is and wish they were better prepared.
Factor in simple purchases such as the cost of new furniture, paint and things like lawn mowers and snow shovels required to maintain your property. It is important to have a realistic idea of the cost of all these potential expenses and a plan as to how you are going to pay for them.
It's also important to have funds set aside for larger repairs and purchases including appliances, plumbing and heating systems. Remember-these costs are all in addition to "emergency savings" you should have to cover your mortgage payments and basic expenses in the event you lose your job or otherwise experience a life changing event. It is recommended that you have savings that cover up to six months of your basic living expenses.
Current interest rates vs. future rates
When choosing a mortgage, you should review the benefits of a variable rate mortgage, a fixed rate short term or a fixed rate long term mortgage. What best fits your long term goals? If interest rates rise and you are in a variable or short term mortgage, can you afford the new payments? For example, you might love your 900 square foot condo at $1,000 a month. But would you love it as much if your new interest rate meant you were paying $1,200 a month? The good news is that if you lock into a fixed rate long term mortgage, your monthly payments will remain the same for the full term. This will provide a firm base when budgeting for future purchases.
Know your credit score
It's recommended that potential homebuyers review their credit to ensure good standing before applying for a mortgage so there are no surprises. And if there are, you have the time to deal with them without jeopardizing your purchase. Here are a few things to consider when checking your credit rating:
What is your score? Why does it matter? Is your credit score correct? How it is calculated?
Do you need to improve it? How can you improve it? Checking your credit frequently is also a first line of defence in combating identity theft. You can check your rating online at Equifax Consumer Services Canada or Transunion.
Know the neighbourhood. Research neighbourhoods before you buy. Things to look for are:
Transportation: If you were to purchase a home in the area, how long would it take to get to work, shopping centres and other activities? How are the homes in the area cared for?
If possible, research neighbourhoods both in the winter and warmer seasons to get a true feel for the area and the people who live there to ensure it is a good fit with your lifestyle
Compare the neighbourhood activity at various times (daytime, evenings, weekends) to get an idea of traffic, noise and resident activities.
Schools-even if you don't currently have children, the quality of parks and schools in the area can affect resale values down the road (particularly for those considering a house or townhouse purchase)
Sustainability is becoming important to many homebuyers who look at a neighbourhood that meets their needs in terms of certain aspects of affordability, liveability and the environment. CMHC offers an online comparison report to help consumers.
Both Edmonton and Calgary Police provide online Neighbourhood Crime Maps.
Don't fall in love with perks
Buying your first home is exciting. However some first time buyers fall into the trap of selecting a house for the wrong reasons.
Don't make a purchase decision based on perks that do not add true value to the home (IE: swimming pool, cool light fixtures, built-in wet bar or designer furniture offered with the home). While these items can be fun to have, they can incur additional costs and may not add value to your home at resale time.
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