First-time home buyers have a lot to learn when it comes to buying a house, specifically how a mortgage works and what they will need to budget for monthly.
There are many things that go along with a mortgage, such as interest rates and amortization periods. But before we get to that, let’s break the process down first.
What Is A Mortgage?
When you purchase a house, you are making monthly payments to pay it off. You borrow money from a bank in order to pay for the mortgage and are paying the bank back. An interest rate is charged with your mortgage since you are borrowing money from them. The smaller the amount you borrow, the lower your interest charge will be.
Before You Begin Looking For A House
Before you start looking for your home, it is wise to get pre-approved for a mortgage loan first. This is a helpful step as it will help you understand what you can afford. In order to be pre-approved by a lender (the bank), you will need to prove you have a reliable source of income, do not have other debts, and can make a down payment and pay for closing costs. Once they see you are reliable and can for sure make your payments, they will approve you for the amount that is within your range.
What Is A Down Payment And Closing Costs?
Once you choose the home you have been waiting for so long to finally buy, you have to make a down payment to secure the deal and officially call it your home. The down payment, in Ontario, is 5% of the purchase price if it is less than $500,000. If you purchase a condo, sometimes they require a 10% down payment. If anything is more than $500,000, you are putting a payment of 5% down on the first $500,000, and 10% on the remaining amount.
- If you purchase a $300,000 home or condo, 5% would be $15,000. 10% would be $30,000.
- If your home or condo is $400,000, 5% would be $20,000, 10% would be $40,000.
- If you purchase a home that is $650,000, 5% on the first $500,000 would be $32,500, and 10% on the remaining $150,000 is $15,000. Therefore, your total down payment is $47,500.
Closing costs are an additional cost to make the home finally yours. Typically, closing costs will consist of things like:
- A home inspection - they make sure everything is okay with your home and if you cannot budget for all the issues, you can walk away and move onto a home that better suits you.
- A property appraisal - an appraisal on the property your lender may ask for.
- Lawyer fees – your lawyer will help you understand all the problems that could arise and how to deal with them and will also help you close the deal to your new home.
- Title insurance - your lawyer will encourage you to purchase should any issues arise with your lender or property.
- Land transfer taxes - what the government charges you when you buy a property. The amount will depend on the property value. When the deed to your home is now put under your name, you will pay this. First-time buyers can apply for a refund of all, or some of, the amount they paid in transfer taxes if you have never owned a house before. If you bought a house with your partner, they cannot have owned a house before either and you both must be 18 years or older.
- And other costs that may vary depending on if the home is newly built or not, if condo fees apply to you, moving expenses, etc.
Choosing A Mortgage Option
Once you have been pre-approved for a mortgage and paid your down payment, you have to choose which mortgage option will work best for you. As a first-time home buyer, it may seem overwhelming to understand how they all work, but the nice thing is you can customize your mortgage.
Your amortization period is how long you will pay your mortgage for. The maximum term is 30 years, but you can choose anywhere from six months and up. The most common period in Canada is 25. Depending on how short or long of a term you choose will depend on your monthly mortgage payments. Your bank can break down the exact numbers for you, as well as the interest charge.
There are certain mortgages you can choose that will make it easier to pay off your mortgage quicker, if you so choose. An open mortgage will allow you to make any payment you want, on top of your monthly charges, without any fees. If you want to change your monthly payments to bi-weekly, you can do that too. A variable rate mortgage is when the interest charge reflects the market and can increase or decrease without warning. Because of this, the initial rate they first charge you is lower, as well as your monthly payments, which is why this mortgage interests’ people. But because you are paying lower monthly charges, you are taking the risk of high interest charges in the future.
If you pay your mortgage off sooner than the term and do not have an open mortgage, you will be charged a penalty fee. The total will depend on how much time you have left in the term.
Your mortgage can be transferred to another home, if and when you decide to move. There will be a fee involved, but keeping your current mortgage is a better option if you do not want to pay the penalty to exit your current one. You may also have a good interest charge and will be saved from more current higher rates. But it is completely your choice. If you wish to exit and pay the penalty fee, you may be able to find a better offer and or maybe you want to deal with another lender instead.
Do not get overwhelmed. There are many experts to help you through your house-hunting and mortgage process and help you learn step-by-step. Once you have been in your new home for a while, you will easily fall into a routine and understand your monthly budget.