So you have decided to take the big leap and purchase your first home. CONGRATULATIONS!!
Most of us have a "dream home" tucked away at the back of our minds - something with four bedrooms, two fireplaces and a panoramic view. How about a little reality check before you go looking for that dream??
What if all the money you had went into the purchase and mortgage payments for that wonderful home, so there was nothing left over for little repairs, a night out, vacations, new furniture or any of the little things that go wrong from time to time? When that happens, your dream suddenly becomes a nightmare; being over-extended financially is the quickest way to destroy the excitement of home ownership and adds stress to your life.
Smart home-buying means knowing what you can afford and being practical about it. Most first time buyers lack the funds needed to buy a home without assistance from a bank or financial institution. Buying a home means combining savings with money borrowed through a special arrangement called a mortgage.
To keep mortgage payments within their means, most first time buyers purchase what is commonly called a "starter home." It is just what it says - a way of getting started in long-term real estate investment.
To match the home you buy to your pocketbook you have to realistically assess your needs, determine what you can afford and - usually - lower your expectations. Begin by enlisting the services of a REALTOR. This knowlegeable individual will help you target your home ownership dreams and provide valuable information on mortgage options, interest rates and incentives such as government programs for the first-time buyer.
In the meantime, here are some ways to help you determine how much you can afford.
SET A MAXIMUM PRICE RANGE
To determine your "affordability" price range, you must calculate two amounts; the amount of cash you can afford to put towards the purchase (down payment) and the maximum amount of loan (mortgage) you can afford to carry. Typically, household expenses should not exceed 35 percent of your gross income.
PUT DOWN AS MUCH AS YOU CAN
The key to getting started for most firt-time buyers is the initial down payment. This is the part of the purchase price you have to put down as cash. You may be able to buy a home for as little as 5 % down, but remember that the larger the down payment, the easier it will be to manage the other expenses such as mortgage payments, utilities and taxes.
An Ideal down payment is 25 % of the purchase price. Keep some cash in reserve though for unexpected expenses related to a home purchase and typical expenses such as land transfer tax, legal fees and moving expenses.
KNOW HOW MUCH TO BORROW
To establish the maximum mortgage limit for you, a financial institution will determine the monthly payments you can afford by calculating your debt-service ratio. List all your loans (car, personal, credit cards etc). The sum of these and your mortgage payment (including principle, interest and taxes) should not exceed about 40% of your gross income. The mortgage payment and taxes should not exceed about 30% of your gross income.
UNDERSTAND INTEREST RATES
The size of the mortgage you can arrange, based on payments you can afford, depends on interest rates. The lower the rates, the larger the possible mortgage and the more affordable home-buying will be.
However, there are other variables to consider. How open is the mortgage? Is it portable? Would prepayment be allowed? Discuss your mortgage options with your REALTOR, banker or financial advisor. Decide what's best for you, establish a limit and stick to it.