What First Time Homeowners (and First Time Mortgage Holders) Should Know
Making the leap into home ownership is simultaneously exciting and terrifying. Rest assured that the best way to calm a lot of these home ownership jitters is to arm yourself with knowledge. This holds particularly true when it comes to taking out a mortgage.
Assuming that you qualify well (good debt-to-income ratio, meaning that you owe much less than you earn, solid employment history and good credit history), lenders want your business. Keeping that in mind, make sure to shop around- not just for the best rate. Having a low rate is great, but the rules surrounding a mortgage are as important, and could impact you down the road.
Do all your mortgage due diligence well in advance, so that when you find your dream home, you can spring into action with all of your financial ducks already in a row. Many lenders will give you an extended rate guarantee. It also gives you time to accumulate for your down payment.
Speaking of down payment, how much do you plan to put down? How will you accumulate that?
Fun fact: In addition to regular savings, first time home buyers are allowed to withdraw up to $25,000 from their RRSP to use for down payment.
Familiarize yourself with CMHC insurance (loan insurance www.cmhc-schl.gc.ca). Premiums are determined on a sliding scale based on the amount of your down payment. Basically, the larger your down payment, the less you pay in premiums.
Term vs. Amortization
What’s the difference? The term is the length of time you lock in your interest rate for and is the basis for your mortgage payments, whereas the amortization applies to the entire length of the mortgage loan (often 25 years). The shorter the amortization, the higher the payments, but the quicker the mortgage will be paid off (and save you loads of money in interest).
Speed Should be an Option
When choosing a mortgage lender, ask about pre-payment and lump sum payment options. Should your financial situation change and you have additional money to throw down on that mortgage, you want to have the option to do so with no (or the least amount of) penalty. Lenders tend to have rules about that kind of thing.
By the same token, find out about skip-a-payment options. Some lenders give you the option to skip an additional payment without penalty (which is often very helpful when people go on paternity or maternity leave, for example, and there is a temporary change in income).
Do you go for a variable rate or a fixed rate? There are schools of thought that support both of these options as good choices, but much of it really depends on the individual, their risk tolerance and the rest of their financial picture.
If you are the type of person who will be awake at night worrying about interest rates going up, or if your financial picture leaves little room for fluctuation, than a variable rate is likely not a good choice for you.
One thing a fixed rate does is help with financial planning, because you can plan on a set payment for a set period of time.