| Thinking about purchasing a home of your own? Keep these critical considerations in mind:
How long you plan to live in the home.
If you purchase a home and get a job transfer or decide to move after only a short time, you may end up paying money in order to sell it. The value of your home may not have appreciated enough to cover the costs that you paid to buy the home and the costs that it would take you to sell your home.
 The length of time that it will take to cover those costs depends on various economic factors in the area of the home. Most parts of the country have an average of 5% appreciation per year. In this case, you should plan to stay in your home at least 3-4 years to cover buying and selling costs. If the area you buy your home in experiences an economic up turn, the length of the time to cover these costs could be shortened, and the opposite is also true.
How long the home will meet your needs.
What features do you require in a home to satisfy your lifestyle now? Five years from now? Depending on how long you plan to stay in your home, you'll need to ensure that the home has the amenities that you'll need. For example, a two-bedroom dwelling may be perfect for a young couple with no children. However, if they start a family, they could quickly outgrow the space. Therefore, they should consider a home with room to grow. Could the basement be turned into a den and extra bedrooms? Could the attic be turned into a master suite? Having an idea of what you'll need will help you find a home that will satisfy you for years to come.
Your financial health - your credit and home affordability.
Is now the right time financially for you to buy a home? Would you rate your financial picture as healthy? Is your credit good? While you can always find a lender to lend you money, solid lenders are more skeptical if your credit history is not good. Generally, a couple of blemishes on a credit report will make you a good credit risk and could qualify you for the lowest interest rates. If you have more than a couple of blemishes on your report, lenders like Quicken Loans may still provide you with a loan, but you may just have to pay a higher interest rate and fees.
Some say that you should refrain from borrowing as much as you qualify for because it is wiser not to stretch your financial boundaries. The other school of thought says you should stretch to buy as much home as you can afford, because with regular pay raises and increased earning potential, the big payment today will seem like less of a payment tomorrow. This is a decision only you can make. Are you in a position where you expect to make more money soon? Would you rather be conservative and fairly certain that you can make your payment without stretching financially? Make sure that whatever you do, it's within your comfort zone.
To determine how much home you can afford, talk to a lender or go online and use a "home affordability" calculator. Good calculators will give you a range of what you may qualify for. Then call a lender. While some may say that the "28/36" rule applies, in today's home mortgage market, lenders are making loans customized to a particular person's situation. The "28/36" rule means that your monthly housing costs can't exceed 28 percent of your income and your total debt load can't exceed 36 percent of your total monthly income. Depending on your assets, credit history, job potential and other factors, lenders can push the ratios up to 40-60% or higher. While we're not advocating you purchase a home utilizing the higher ratios, its important for you to know your options.
Where the money for the transaction will come from.
Typically homebuyers will need some money for a down payment and closing costs. However, with today's broad range of loan options, having a lot of money saved for a down payment is not always necessary - if you can prove that you are a good financial risk to a lender. If your credit isn't stellar but you have managed to save 10-20% for a down payment, you will still appear to be a very good financial risk to a lender.
The ongoing costs of home ownership.
Maintenance, improvements, taxes and insurance are all costs that are added to a monthly house payment. If you buy a condominium, townhouse or in certain communities, a monthly homeowner's association fee might be required. If these additional costs are a concern, you can make choices to lower or avoid these fees. Be sure to make your realtor and your lender aware of your desire to limit these costs.
If you are still unsure if you should buy a home after making these considerations, you may want to consult with an accountant or financial planner to help you assess how a home purchase fits into your overall financial goals.
First time homebuyers,
Did You Know.... You can now get over 30-year mortgages?
That puts your first home within reach!
Read this Scenario,
Let’s call them Pat and Cathy. Recently married, they’re still struggling to pay off student loans and the new car they’ve just purchased. Pat and Cathy have moved into a nicer apartment, but are watching their rent money go out the window while their more established friends enjoy the rise in the value of their homes. Interest rates are enticingly low, but Pat and Cathy still aren’t sure they can handle mortgage payments, even though they feel that they’re missing out on a great opportunity in today’s market, and they do want their own place to decorate and enjoy.
There's good news for Pat and Cathy. Homebuyers can now stretch mortgage amortizations - the length of time calculated to payoff a mortgage - to 30, 35 and 40 years. Not too long ago, it was almost impossible to get a mortgage amortization for more than 25 years. In 2005, the Canadian Mortgage and Housing Corporation (CMHC) announced that they would insure 30 year mortgages with only 5% down in a special pilot project. The move was calculated to help Canadians like Pat and Cathy get into their own home. Canadians went house shopping and took advantage of the oppurtunity, causing CMHC to make the 30-year mortgage part of their ongoing product offering and even extending amortizations to 35 years. In the spring of 2006, a 40-year amortization mortgage was introduced to the marketplace.
The rationale behind longer amortizations is simple; they help bring down the cost of monthly payments and bring home ownership within reach for young couples, new immigrants, self-employed Canadians, or prospective homebuyers with less-than-perfect credit. They are also good news for homebuyers who are struggling in an area where real estate prices are rising rapidly, or need a solution to help them through a tough financial period.
What kind of difference can homebuyers expect? Well, Pat and Cathy hope to take out a mortgage of $250,000. At a rate of 6%, they would need to find $1600 per month to service the mortgage on a 25-year amortization. But they need only $1487 for a 30-year amortization or $1413 for a 35-year: similar to what they are currently paying for rent. Their mortgage planner can help them factor in any additional costs, but these longer amortization mortgages put mortgage payments within reach. They do increase the amount of overall interest paid, which is why they shouldn’t be considered to simply reduce your monthly payment if you can afford a shorter amortization period.
So why would anyone want to spend over 30 years paying for a home and pay more interest in the long run? With good mortgage planning, it doesn’t have to work out that way. The long amortization period helps new homebuyers get into the housing market at a lower threshold. As Pat and Cathy finish paying off their loans, and as their income increases, they’ll be able to shorten their amortization period and support a larger monthly payment. But until then, they’ll have an early advantage that allows them to enjoy their new home now and begin building home equity; otherwise they’d be watching their monthly rent payment work for their landlord rather than for them.
And that -says Pat and Cathy-, is a great start to invest in our future.
Lisa Tollis, Sales Representative Royal LePage State Realty, Brokerage, brings this Scenario to you. For more Information or to speak to one of Lisa’s mortgage planners, Call Lisa Tollis @ 905-574-4600 or e-mail, lisatollis@royallepage.ca / www.LisaTollis.ca
Glossary of Real Estate Terms
These are some of the words or terms used in a real estate transaction in Canada.
Amortization: Paying off a debt, such as a mortgage, by installments. The conventional amortization period for a mortgage is anywhere between 15 and 25 years. The shorter the amortization period, the less interest you have to pay.
Appraisal: An estimate of a property's value.
Asking (or list) price: The price placed on the property for sale by the seller.
Blended payments: Payments consisting of principal and interest components, paid during the amortization period of a mortgage.
Broker: A person licensed by the provincial or territorial government to trade in real estate. Real estate Brokers may form companies or offices which appoint sales representatives to provide services to the seller or buyer, or they may provide the same services themselves. In parts of Canada, Brokers are referred to as agents.
Buyer's Agent (also known as "Buyer's Broker" or "Purchaser's Agent"): A person or firm representing the buyer. A Buyer's Agent's primary allegiance is to the buyer. The buyer is the Buyer Agent's client.
Buyer Brokerage Agreement: A written agreement between the buyer and the buyer's agent, outlining the agency relationship between the two parties and the manner in which the buyer's agent will be compensated. In some provinces, a buyer agency relationship evolves automatically, without a written agreement.
Client: The person being represented by an agent. The agent owes the client the duties of utmost care, integrity, confidentiality and loyalty.
Closing: The day the legal title to the property changes hands.
CMHC: Canada Mortgage and Housing Corporation. A Crown corporation providing information services and mortgage loan insurance.
Commission: An amount agreed to by the seller and the real estate Broker/agent and stated in the listing agreement. It is payable to the Broker/agent on closing and shared, if applicable, among those salespeople involved in the sale.
Customer: A person who receives valuable information and assistance from a real estate Broker or salesperson, but is not represented by that individual.
Debt-Service Ratio: The measurement of debt payments to gross household income which may include, in addition to the main wage earner's salary, salaries of other wage earners, commissions, bonuses, overtime, etc.
Dual Agent: A real estate Broker or salesperson who acts as agent for both the seller and the buyer in the same transaction. Both buyer and seller are the agent's clients.
Equity:The difference between the value of the property and the amount owing (if any) on the mortgage.
Financial Institutions: Banks, credit unions, insurance or trust companies.
GE Capital Mortgage Insurance Company: GE Capital Mortgage Insurance Company is the only private sector source of mortgage insurance to lenders in Canada.
Gross Debt Service: The amount of money needed to pay principal, interest, taxes and sometimes, energy costs. If the dwelling unit is a condominium, all or a portion of common fees are included, depending on what expenses are covered.
Gross Debt Service Ratio: Gross debt service divided by household income. A rule of thumb is that GDS should not exceed 30%. It is also referred to as PIT (Principal, Interest and Taxes) over income. Sometimes energy costs are added to the formula, producing PITE, which moves the rule of thumb GDS to 32%.
Listing Agreement: The legal agreement between the listing Broker and the seller, setting out the services to be rendered, describing the property for sale and stating the terms of payment. A commission is generally payable to the Broker upon closing.
MLS®, Multiple Listing Service®: These are trademarks owned by The Canadian Real Estate Association. They are used in conjunction with a real estate database service, operated by local real estate boards, under which properties may be listed, purchased or sold. An MLS® listing means REALTORS® have agreed to work together for the marketing of a listing.
Mortgage: A contract providing security for the repayment of a loan, registered against the property, with stated rights and remedies in the event of default. Lenders consider both the property (security) and the financial worth of the borrower (covenant) in deciding on a mortgage loan.
Mortgage Broker: A person or company having contacts with financial institutions or individuals wishing to invest in mortgages. The mortgagor pays the Broker a fee for arranging the mortgage. Appraisal and legal services may or may not be included in the fee.
Mortgage Insurer: In Canada, high-ratio mortgages (those representing greater than 75% of the property value) must be insured against default by either CMHC or private insurers. The borrower must arrange and pay for the insurance, which protects the lender against default.
Mortgagee: The person or financial institution lending the money, secured by a mortgage.
Mortgagor: The property owner borrowing the money, secured by a mortgage.
Offer of Purchase and Sale: The document through which the prospective buyer sets out the price and conditions under which he or she will buy the property.
Real Estate Board: A non-profit organization representing local real estate Brokers/agents, salespeople, which provides services to its members and maintains and operates a MLS® system in the community.
REALTOR ® : Trademark identifying real estate professionals in Canada who are members of The Canadian Real Estate Association, and as such, subscribe to a high standard of professional service and to a strict Code of Ethics.
Term: The actual life of a mortgage contract-- from six months to ten years -- at the end of which the mortgage becomes due and payable unless the lender renews the mortgage for another term (See Amortization).
Seller's Agent: The Seller's Agent represents the seller -- either as a Listing Agent under the listing agreement with the seller or by cooperating as a Sub-Agent, typically through the MLS® system. In dealing with prospective buyers -- customers-- the Seller's Agent can provide a variety of information and services to assist the buyer in his/her decision-making. The Seller's Agent does not represent the buyer.
Variable-rate Mortgage: A mortgage in which payments are fixed, but the interest rate moves in response to trends. If interest rates go up, a larger portion of your payment goes to the interest; if rates go down, more goes to cover the principal.
Not intended to solicit properties currently listed for sale or individuals currently under contract with a Brokerage.
Information is deemed to be correct but not guaranteed.
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