First Time Buyers

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An Offer No One Can Refuse

Mortgages can be bewildering to the uninitiated. There are many options to consider. Because mortgages are long term commitments, making the right decision in the beginning can save tens of thousands of dollars over the life of the mortgage.

Crystal introduces some of the key factors in selecting the right mortgage as well as some valuable tips on preparing the best offer to ensure you get the house you want at the best price possible.

Mortgage Primer

A mortgage is nothing more than a loan that uses your house as collateral, or security, that you will repay the loan. Most mortgages are obtained through lending institutions such as banks and credit unions.

Private lenders also offer mortgages. These are customarily offered for a three or five year term. To obtain a mortgage from a private lender, you must have a good credit crediting. You will usually be charged an administration fee of three % of the transaction value. No approval is required from Canadian Mortgage Home Corporation.

Every Mortgage is made up of two parts: principal and interest. Principal refers to the amount that you borrow. This amount decreases as you make payments to the lending institution. Interest is the cost of borrowing and is part of your regular(usually monthly) payment. Depending on the amount of your down payment(the cash you were able to contribute when you obtained the mortgage), you may also need mortgage insurance. If you do, the fee for that insurance is usually part of your regular payment. Alternatively, you can choose to pre-pay the insurance so that it isn't added to the mortgage.

Mortgages come in two basic varieties: conventional and high ratio. With a conventional mortgage, the lender will loan you as much as 75% of the market value of the house, or its purchase price, whichever is lower. The remaining 25% is the amount of cash you will need as a down payment. If you have only 15% for your down payment, some lenders may loan you the other 10% so that you can qualify for a conventional mortgage. A high ratio mortgage, on the other hand, is used by buyers who do not have 25% of the purchase price. The federal government, through an agency called the Canadian Mortgage Home Corporation (CMHC), requires mortgage insurance on high ratio loans.

The CMHC fee is calculated as follows:

Loan-to-Value Ratio% of Loan
(Single Advance)% of Loan
(More than One Advance)
Up to and including 65% 0.501.00
Up to and including 75% 0.751.25
Up to and including 80% 1.251.75
Up to and including 85% 2.002.50
Up to and including 90% 2.503.00
Up to and including 95% 3.754.25

Regular mortgage payments once meant monthly payments, many options are now available. For example, you can choose to make 13 payments each year instead of 12. This doesn't sound like much of a difference, but the result - over a 25 year amortization period - is tremendous savings in interest, which would mean you'd be mortgage free much sooner. Be sure to ask your lending institution about all payment options, as well as potential opportunities to make lump sum payments to reduce your principal. Mortgages can be open or closed. An open mortgage allows you to repay the loan at any time without penalty. In exchange for this flexibility, you will pay a higher rate of interest. Consider a short term open mortgage when interest rates are high and then moved to a longer term mortgage as rates decline. Closed mortgages, on the other hand, have a set term and set interest rate; a good option when rates are low. Closed Mortgages also give you the comfort of predictable payments for years to come.

If you're buying a used home, you may also assume a mortgage. This means that the property you wish to buy already has a mortgage and you can take that over, on the existing terms. Assumable mortgages can be a real bonus: you don't have to arrange new financing and the mortgage interest rate may actually be lower than those currently available. In Alberta, all mortgages may be assumed without qualifying.

Equity, a concept you will soon come to appreciate, is the difference between the outstanding amount of your mortgage and the value of your home at any given time. In other words, equity is the cash remaining once you sell your house and repay the balance of the mortgage.

Timing is Everything

Owning a home is always better than paying someone else's mortgage as you rent! That said, when it comes to investing in a home, knowing when to buy is almost as important as knowing what to buy. Even if you have already saved a substantial down payment, it may be a poor time to buy. Mortgage rates fluctuate greatly. You'll want to obtain your mortgage at the lowest possible interest rate and then 'lock' it in for the longest term possible.

But how can you know when rates have hit the bottom of the spectrum, or what mortgage terms to accept? Mortgage officers at any bank can tell you what the trend in rates has been during the past year and where they expect rates to go over the six months to a year. The same information is available at most banking and investment websites. Rates may not be at the bottom of their cycle when you buy, but if the trend shows that they have been and are continuing to climb, it may be the right time for you to buy. Assuming, of course, that you can handle the monthly payments.

As a first time buyer, you also want to be in what is called a buyers market rather than in a sellers market. A buyer's market is when the supply of available housing exceeds the demand and keeps housing prices lower. In a community with a stable but fairly sedate economy, this may not be much of a concern as inflationary pressures are low, but in a booming place like Calgary, delaying your purchase for a year usually means a higher price.

Finally, you should keep in mind the long term resale potential of the home and neighborhood you're considering. This is your first home and you will likely want to buy another down the road as your income increases or your family grows. Thus, you should give some thought to what it will be worth in years to come. While you can't predict future property values, you can influence the value of your particular home.

If you're considering an older home, for example, you can increase its value by investing in improvements such as a new roof or furnace. If you want to buy in anew district, take a moment to learn about plans to provide local amenities such as recreational facilities, stores, schools and churches: more is better, in this instance. Consider the length of the daily commute to work; not everyone will be willing to buy a home far from the city core. And consider plans for the community as a whole. Are the planned homes comparable in size and character, or is there a real mix being built? Property values in an estate community, for example, always tend to rise faster than those in a neighborhood of detached homes, apartments and mobile home parks.

Arranging a Pre approved mortgage

One of the best things you can do for yourself as you hunt for a home is be certain of your finances. As a rule of thumb, your housing costs should not exceed 32% of your gross monthly income, or 40% annually. Arranging a pre-approved mortgage takes all the guesswork out of what you can and cannot afford. There is typically no cost to you for this service. Once pre approved, your search for a new home will focus on properties within your financial reach and you can proceed with an offer on one of them knowing that the bank will probably support your decision.(In many cases, the lender will require a property appraisal before proceeding with the loan.) What;s more, lending institutions will often guarantee the rate of the pre approved mortgage while you hunt for a home. A 90 day guarantee is typical and this can be a real advantage in a booming market. Don't forget that Realtor®s have contacts at banks and can assist you in securing a mortgage rate often better that the one you'd be offered directly.