By Peter Boys CAFA The Financial Coach
Buying your first house is one of the biggest investments you will ever make. It’s important to plan ahead and make informed decisions from what you will need in a home and what you can afford.
Don’t skip the home inspection
When Canadians buy their first home, they often skip the home inspection. This can have very expensive consequences. The home inspection will look for problems that you may not see. Your offer can be accepted with the condition of a home inspection. This way, if there is something major and expensive wrong with the house, you can back out of the deal or negotiate a compromise with the owners.
Know your credit score
Your credit rating is the record of your credit history and current financial situation. A good credit rating can improve your ability to get loans. If your score is low, you may want to work on improving it before you apply for a mortgage.
Get pre-approved for your mortgage
Having a budget when purchasing a home signals that you’re a serious buyer. However, keep in mind that the amount for which you are approved is the maximum amount the lender feels you can afford based on your income and projected property expenses.
Not budgeting for the costs of home ownership
Becoming a homeowner brings a host of new expenses that your pre-approval doesn’t account for such as property taxes, higher insurance costs, renovations, regular upkeep and setting up an emergency fund for repairs.
Not researching down payment choices
Lenders typically require CMHC mortgage loan insurance if you make a down payment of less than 20 per cent. Premiums for CMHC can be as high as 3.25 per cent of the value of the loan. Under the Home Buyers’ Plan, first-time buyers can use up to $25,000 in RRSP savings ($50,000 for a couple) for a down payment. A higher down payment will save thousands of dollars in interest over the life of your mortgage.
Don’t focus too much on interest rates
Don’t rush into the market just because interest rates are low. While rates are important, other things have a greater bearing on the overall cost of home ownership, including the cost of the house, the type of mortgage, the amortization period and payment options.
Not choosing your own payment schedule
Paying off your mortgage sooner saves you interest costs. A longer amortization period reduces your regular payment and frees up cash flow. You can save thousands of dollars in interest by choosing a shorter amortization period, paying bi weekly instead of monthly, or increasing the amount of your payments by even a small amount. Use an online mortgage calculator to run the numbers and see the differences.
Taking creditor insurance
You do need life insurance in case something happens to you or your spouse. Research your life insurance options. Creditor life insurance may be easy to sign up for but may not makes sense. You may be better off to have private insurance that you own, not the bank. The bank’s coverage protects the bank with nothing left over to provide for your family.
Forgetting about closing costs
When you calculate closing costs, it’s safe to assume you will need an additional 1.5 per cent to 2.5 per cent of the purchase price to cover such things as the home inspection, legal fees, land transfer tax, property tax, property insurance, utility hook-ups and moving costs.
All seem overwhelming? Seek out a trusted financial professional and get their help to run your numbers and help you to set a budget ahead of house hunting.