It always starts as an idea; “Let’s buy a house.”There are many reasons for this; maybe it is because the family is young and the parents want a stable life close to schools.Perhaps it is for an appreciating investment, or simply they are tired of apartment living.The reasons are unimportant and if considered realistically, hold no valid weight in the decision making process.Nobody cares about your reasons, but they do care about your ability to meet your commitments.
Renting does have advantages in that you are virtually maintenance free and able to pick up and go at any time.It means you are not paying direct tax to the municipality or in many cases, direct utility costs.It means you have a very stable cost of living that is largely unaffected by shifts in the economy and so, provides a great deal of security in budgeting.Budgeting is the key word here and the one that everyone looks at when buying.
Purchasing a home is expensive, make no mistake of that.There are real estate and legal fees to be paid.There are increased utility costs and additional tax burdens.There is maintenance that will be ongoing even in a so called maintenance free home.None of it comes cheap but it does require some realistic thinking and financial planning.No we are not talking about buying RRSP’s but budgeting for both the short and long term.This is where most first time buyers get caught.
Everyone knows someone in the business.“My aunt’s best friend’s son works for the bank and he can get me a great mortgage deal.”Don’t believe it for a second.You are on your own here and you need to stand on your own because nobody is going to give you a “great deal” unless it is to their distinct advantage.This is all about money and who you know is not going to help you.What you know will so getting properly educated about personal finance is the first step you should make before even considering contacting a real estate agent.You need to make sure you can afford it, not just now but later under adverse circumstances when only a single income exists or perhaps if you are disabled and unable to work.This is absolutely the worst scenario but one that needs to be carefully considered.
Renting is less expensive than purchasing, there is no question of that.Even in an upscale rental, your costs might equal the cost of your monthly mortgage but that does not cover all the incidentals you are sure to encounter as a home owner.
In evaluating your finances, you need to realistically assess what the minimum income you could have and from that, base your budgeting costs.Perhaps that income is from an employment insurance plan.Can you meet your most basic cost of living?This is probably the single most common mistake of new buyers.If not, and most people cannot, then you need to ensure you have liquid assets at your disposal.These might be cash or investments or even RRSP’s that you can turn into cash so that you can carry your obligations forward for a minimum of six months.
In days past, unemployment meant that one might be out of a job for three months or so.Today that is more likely to be six months to a year.The one thing the home owner doesn’t want is to lose any equity in their home because of bad financial times and they are guaranteed to happen at some time in your life.Accounting for this in your budgeting is crucial to supporting yourself and your family.Mortgagers don’t care if you are out of work, they want their money and they have the legal means to recover it so you need to make sure that doesn’t happen.
Next you need to asses your ability to meet your payments.As discussed in earlier articles, it is usually best for first time buyers to “lock in” on a fixed rate and fixed term mortgage.This will provide stability to the payments even if it is going to be slightly more expensive.As you build equity and wages increase so that any fluctuations in the financial markets are unlikely to have a major impact on your monthly budget, adjustable rate mortgages or HELOC’s are probably not a good idea.In the beginning, you need as much stability as possible as you change from renting to buying.
Next you need to evaluate your ability to pay based on the single higher most wage earner in the family.The stability of that wage also has to be assured.For instance if it is your partner and perhaps pregnancy is in the picture, it would not be good to count on that wage unless the commitment to maintaining it at any cost is established.This also adds the extra burden of day care that can be very costly and does need to be considered.
When calculating your ability to pay, don’t be fooled by lenders who will offer long term and lower cost mortgages.They are actually more expensive.Try to make your payment schedule so that your full term mortgage is complete in your early fifties.This will allow you to make significant investment for retirement.However, most people can pay off their homes early which adds to this.
While on the subject, do not ignore the “Pay yourself” rule.This means you have to commit a percentage of your net income to a solid long term savings program.Never allow yourself to get caught living hand to mouth.You need this plan to cover those hard times or for retirement planning.Regardless it is liquid asset that can be used if needed.
Repayment costs or monthly costs of your mortgage are best calculated at 35% (give or take) of your net monthly income.Many lenders are stretching this but it really is to your disadvantage.This debt service allows you money for food and utilities that in the end should never exceed 60% of your net income.The balance is for other necessities plus your savings.
If you can't meet these figures on that single salary you probably should reconsider your buying either to a lower value home or even to wait until the finances are such that you can afford them.Never be in a rush to buy; you may find yourself in a rush to get out.
Now you must also figure in additional up front costs for appliances that you suddenly remember you didn’t buy as a renter.These can be expensive but never overlook the possibility of buying used ones; good deals that save a lot of money can be had.Look for scratch and dent sales as well.
Get solid estimates on utility costs and shop around for the best deals but don’t forget to look at the fine print.Finally, manage your credit wisely.Avoid unnecessary use of credit at all costs; it can cripple you financially.
Finally and most importantly is the down payment.Never ever “go for the minimum”.Always exceed that and put as much down as you can.This is your equity in your purchase and that is the money that will grow as the property appreciates in value.That is money in your pocket.