One of the first things you’ll figure out about mortgages is that you know almost nothing about them. Many people don’t - even once they’ve signed the papers. In fact, a Yale Law Journal study found that one-third of respondents didn’t fully understand their mortgage terms. Another unrelated study by Zillow concluded with similar findings.
One possible reason: The wide spectrum of mortgages available may have some consumers’ heads spinning. But you can save yourself the runaround by getting to know how mortgages work and carving your game plan around the ones that best suit your needs.
Here’s a cheat sheet to help you along...
Your 5-step guide to mortgages
- Step 1: Deciding on the type of property you want
Looking for all new and custom everything? Builder or new construction mortgages are designed to help you get into a newly built home, whether you plan to do the labor yourself or not. You might hire a builder, seek out a subdivision style of home in a new development, or dig in and build it from the ground up with your own bare hands. If you build it, they will fund (hopefully).
But wait, what’s that? You want to buy the kind of home that already has four walls and a roof? Oh, you fancy huh? In that case, it’s time to start thinking about whether you want to go with a house or a condo, which leads us to...
- Step 2: Thinking about the pros and cons of condo fees
One considerationof condominium ownership is the additional condo fees you’ll be paying on top of your mortgage and property taxes. But it will also mean less maintenance and some potential lifestyle perks (gym time and a lap in the pool, anyone?). In some cases, the fees might also cover utility bills,such asheat and water. With residential houses, you typically only have property taxes (beyond your monthly utilities and mortgage payment). But if those four walls or the roof come tumbling down one piece at a time, that will be a great big cost out of your pocket.
- Step 3: Setting a smart price point
As important as where your home lies on a map is where your price point lies on paper. Find out how much you’ll owe toward your home each month, including the mortgage payment, utility bills, property taxes, regular upkeep - everything. If your current rent exceeds that amount, you'll likely do just fine. If the amount exceeds your current rent, put the difference away into a savings account for six months to see how comfortable you are with the additional expense. If you’re finding it difficult to manage, look for a more affordable home, or continue to rent until you're in a more stable financial situation.
Hint: Ask a homeowner friend in the area what they pay each month to get a rough idea of what to expect.
- Step 4: Exploring the down payment (and other costly dues)
Should you put 5 percent, 10 percent, or 20 percent down on a mortgage? Of course, more is better, but there is no universal answer; it depends on your individual situation. If you have 20 percent saved up toward a down payment, you can shirk the high insurance premiums added to mortgages acquired with less than 20 percent. You’ll alsosee less of a spike in future payments should rates rise. Most importantly,you’ll save thousands in interest.
But with market prices increasing ever rapidly, your efforts to save enough for this type of mortgage might be outpaced by the rising cost of housing. Even if you have the extra money,you might decide you need it for ahome renovation project.Or for all the extra fees that occur when you buy a home (remember: those lawyer fees, land transfer tax, and other home-buying expenses can’t be covered by the mortgage; they must be paid out in cash - and can run you thousands deep).
- Step 5: Saving, strategizing, and sticking to it
Impulsive behavior has no place in a mortgage broker’s office. Earning an approval requires arduous planning and preparation - so you might as well start saving and improving your credit score now. In some cases, first-time home buyers can pull the down payment from their RRSP and repay it over 15 years, under the Home Buyers' Plan(HBP). It doesn’t make sense for everyone - your advisor can help you figure that out. Set up a planning appointment now, well before you’re ready to make an offer on that lovely home.
The key tosecuring your mortgage
Stay up to date with mortgage and market news, correct your spending habits early, and talk to a mortgage or financialadvisor - even if you don’t foresee buying a home anytime soon. Saving earlyis the greatest key to opening the doors to your dream home.
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