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Arranging your mortgage doesn't have to be a baffling experience

Buying a home today is an extremely attractive proposition. Interest rates are at their lowest in decades and the housing market is full of homes to suit just about any budget or family requirement. Still, you'll inevitably have to deal with financing and this will mean taking on a mortgage.

Sorting through the numerous mortgage options available to today's home buyers can be intimidating for everyone from first-time purchasers to long-time owners. The rules seem to change constantly and there's a smorgasbord of terminologies to learn.

Fear not--the basics are fairly simple and there are a host of real estate professionals more than willing to help, with your REALTOR and bank's mortgage specialist at the top of the list.

Nonetheless, you'll want to at least familiarize yourself with the mortgage process, how to arrange one and the different financing strategies involved.

First, it's necessary to know exactly which kinds of institutions will lend you money. Banks and trust companies lead the pack, but credit unions and private lenders also offer funds.

There's also an option to consult a mortgage broker. Brokers have access to a wide variety of lending sources, including domestic banks and trust companies, but they can also employ other alternatives such as pension funds, real estate syndicates and foreign banks.

You may also find yourself in a situation where you can 'assume' an existing mortgage held by the seller. Advantages of assuming a mortgage are that you can speed the buying process due to reduced paperwork and save money in lower legal fees and closing costs. A disadvantage is that the current lending rate may be less than that of the assumed mortgage.

Now that you have an idea who will lend you money, you'll need to know the different kinds of mortgages that are offered. The most common by far is the 'conventional mortgage.' Lenders will loan you up to 75 per cent of the appraised value or purchase price of the property (whichever is lower), and you must come up with the remaining 25 per cent yourself. Many people save specifically for this purpose, but in some cases, alternate or 'secondary' financing maybe available.

A 'high-ratio' mortgage is one alternative if you don't have the 25 per cent down payment. These are available for up to 95 per cent of the appraised value or purchase price of the property (whichever is lower) to a maximum set by government regulation. The proviso is that high-ratio mortgages must be insured, and the cost, from one to three percent of the mortgage amount, falls to you.

'Variable-rate' mortgages are usually offered for both conventional and high-ratio mortgages. Typically, your monthly payments remain fixed for the term, while the interest rate fluctuates with economic conditions. This means that if interest rates climb, you'll be paying more per month in interest. If rates drop, you'll then be paying more off your principal. Conversely, 'fixed rate' mortgages maintain the same rate of interest over the entire negotiated term.

There are some other concepts to become familiar with that will impact your mortgage and financial well-being.

Amortization refers to the time period in which the mortgage is assumed to be paid. A common amortization period is 25 years. This means interest and principal payments are set as if you were paying the amount borrowed over a 25 year payment schedule. Obviously, the shorter the amortization period, the less interest you will pay.

Prepayment privileges are very important for borrowers to consider. These arrangements allow you to pay money against the principal, reducing the total amount of interest you'll ultimately pay.

Open mortgages generally denote those that allow prepayment with few restrictions, while closed mortgages carry no prepayment options.

Don't be daunted by the many concepts and terms regarding mortgages. Arranging one isn't that difficult--all it takes is a little brushing up on your part and the experience and advice of a good REALTOR or mortgage professional.

For more information on buying or selling a home, contact the Ontario Real Estate Association at 1-800-563-HOME for a free copy of the How to Buy Your Home or How to Sell Your Home book.

source: Ontario Real Estate Association

Consider closing costs when buying a home

Buying your first home is an exciting process. You determined how much home you can afford, you saved your down payment, you and your REALTOR found the perfect home and your offer was accepted. While the purchase price of your home is the largest cost you will encounter, there are other costs to prepare for when buying a home.

It’s a good idea to budget some extra cash to cover the cost of obtaining a mortgage and “closing” your real estate transaction. Here are some of the extra cost items you should consider:

Appraisal fee
Mortgage lenders will usually loan a percentage of the home’s purchase price or the market appraisal of the property, whichever is lower. The appraisal is either done by someone on the lender’s staff or by an outside professional approved by the lender. The cost of the appraisal is most often the responsibility of the home buyer.

Application fee
Find out whether or not your lending institution charges to process your mortgage application. In many cases, if you are dealing with a bank that you have other accounts with, they will waive the application fee.

Land survey fee
Lenders require a plot plan or survey of the property you intend to buy. On properties located in subdivisions in urban areas, lenders will often accept an existing survey, depending on when it was done. However, if there is no existing survey, be prepared to pay a substantial fee for a new survey.

Home inspection fee
Many homebuyers choose to have a home inspection done prior to finalizing their offer to purchase. Some lenders require a professional home inspection as well.

Legal fees
You will need to pay your lawyer to arrange your mortgage as well as for “disbursements” such as title search, drawing up the title deed and preparing and registering the mortgage.

Land transfer tax
This tax is payable by anyone who purchases property in Ontario. A REALTOR or lawyer can help you calculate how much tax you will pay on your purchase.

GST
If you are buying a new home, you will be required to pay Goods and Services Tax of seven percent on the price of your home. GST does not apply to most resale homes.

Insurance
There are several types of insurance that may be required when buying your home. If you are arranging a “high-ratio” mortgage (less than 25% down payment) you will need to purchase mortgage insurance. Mortgage lenders require you to carry fire and extended coverage insurance that exceeds the amount of the outstanding balance of the buildings. Other insurance you may want to consider include title insurance and life insurance.

Other costs
You will likely have to make property tax adjustments and interest adjustments on utility bills, heating oil etc. Ask your REALTOR to explain these additional costs so you have no surprises on closing day.

Maintenance and utility costs
Finally, be sure to budget for heating, electricity, water and any immediate renovations you may have planned. It’s a good idea to put aside any spare cash and contribute regularly to a maintenance fund so you will be prepared for any repairs or upgrades you need to make along the way.

source: Ontario Real Estate Association

How to match the home you buy to your pocketbook

So, you’ve decided to take the big leap and purchase your first home. Most of us have a “dream home” tucked away at the back of our minds -- complete with six bedrooms, two fireplaces and a panoramic view. Before setting off to view properties you likely can’t afford, step back and take a reality check.

Your “dream home” can easily become a nightmare when most of your money goes to pay the mortgage and there’s little left over for anything else. Overextending yourself financially is the quickest way to destroy the excitement of home ownership and add stress to your life.

Smart home-buying means knowing what you can afford and being practical about it. Most first-time buyers, in particular, 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 known as a “starter home.” A starter home is just that -- 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 real estate representative. This 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 first-time buyers.

In the meantime, here are some ways to 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 comfortably carry. Typically, household expenses should not exceed 35 per cent of your gross income.

Put down as much as you can
The key to getting started for most first-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 five per cent down. But remember that the larger the down payment, the easier it will be to manage the other expenses (mortgage, utilities and property taxes).

An ideal down payment is 25 per cent 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 your maximum mortgage limit, a financial institution will determine the monthly payment you can afford by calculating your debt-service ratio. List all your loans (car, personal loans, monthly credit card balances). The sum of these and your mortgage payment, including principal, interest and taxes, should not exceed about 40 per cent of your gross income. The mortgage payment and taxes should not exceed about 30 per cent 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.

Look at other sources of funds
If you have been contributing regularly to a Registered Retirement Savings Plan (RRSP), you may have to look no further for your down payment. The federal government’s RRSP Home Buyers’ Plan allows eligible taxpayers to withdraw up to $20,000 per person ($40,000 per couple) tax free from their plan to buy a qualifying home. However, you have to pay back every year at least 1/15th of the amount taken out until it is all paid back, or there will be a tax penalty.

The Ontario Home Ownership Savings Plan (OHOSP) is a provincial program which provides tax credits on annual contributions to an Ontario resident earning less than $40,000 a year (or less than $80,000 per couple) who has never owned a home. While there is no limit to the amount you may deposit in an OHOSP, you can only receive tax credits on annual contributions of $2,000 ($4,000 per couple) or less. Depending on your annual income and the money you invest, you can earn up to $500 individually or $1,000 a couple in tax credits a year. The plan must be closed and a home purchased by the end of the seventh year.

The Canada Mortgage and Housing Corporation’s (CHMC) five per cent down mortgage program is available to both first-time buyers and those who have already owned a home. This benefits buyers who can afford the monthly payments, but would have trouble saving for a larger down payment. Under the program, CMHC may insure the mortgage on your home (against default in payments) for up to 95 per cent of the lending value. An insurance premium of about 3.75 per cent of the mortgage loan is charged. This amount can be added to the mortgage or paid on a monthly basis.

Other sources of funds you can tap into for a down payment include savings and investments and loans or gifts from your family or relatives. If you’re already a homeowner and moving up, you can use money that you get from the sale of your present home.

source: OntarioReal Estate Association

How to save for a down payment

Owning your own home has a lot of payoffs, especially these days when mortgage rates are still among the lowest in 30 years. There are also many housing options available in a wide range of prices.

Simply put, you can carry a home of your own for no more than what you would pay in rent. And, unlike renting, your payments go toward increasing the equity in your home.

So, what’s stopping you? For most people who have never owned a home before, it’s the initial down payment and the ability to keep up with the monthly financial obligations (mortgage payment, insurance, utilities, maintenance).

The effort to save for and buy a home may require you to make significant changes in your way of life. For most people, it means changing their spending and lifestyle habits to support the additional costs of saving for, paying for, and maintaining a home.

One of the best ways of saving for a down payment is to take advantage of government programs available to first-time home buyers. A real estate professional can help you understand how these programs work and ensure that you get the maximum benefit possible.

RRSP Home Buyers’ Plan
Contribute to a Registered Retirement Savings Plan (RRSP) regularly and to the maximum allowed. The federal government’s RRSP Home Buyers’ Plan enables eligible taxpayers to withdraw up to $20,000 tax free from their plan to buy or build a qualifying home. The amount of money withdrawn must be repaid within 15 years.

If you buy the qualifying home together with your spouse or other individuals, each person can withdraw up to $20,000 tax free. A government form must be completed for each withdrawal.

Generally, an RRSP holder can participate in the Home Buyers’ Plan only once in a lifetime. The pamphlet, Home Buyers’ Plan (HBP) - For 1998 Participants, is available from Revenue Canada and will help you determine if you are considered a first-time home buyer.

A qualifying home is a housing unit located in Canada. Those participating in 1998 have to buy or build a home before Oct. 1, 1999. You must also agree to occupy the home as your principle residence no later than one year after buying or building it. Once you occupy the home, there is no minimum period of time that you have to live there.

Ontario Home Ownership Savings Plan
(OHOSP) OHOSP is a provincial program where participants receive interest on the money they deposit and may receive a tax credit. If you earn less than $40,000 a year, or if you and your spouse have a combined income of less than $80,000, you can benefit from the program. To be eligible, you must be an Ontario resident over 18 years of age with a social insurance number and have never owned a home.

While there is no limit to the amount of money you may deposit in your OHOSP, you can only receive OHOSP tax credits on annual contributions of $2,000 ($4,000 per couple) or less. Depending on your annual income and the amount of money you invest, you can earn up to $500 individually or $1,000 a couple in OHOSP tax credits. Participants are eligible for tax credits for five consecutive years and must close the plan and use the funds to purchase a home by the end of the seventh year. Otherwise, OHOSP tax credits must be repaid with interest.

An OHOSP plan, with interest earned at competitive rates, may be opened at any participating financial institution. To qualify, a home must be located in Ontario and be suitable for year-round residential occupancy. In addition, you must live in the home for at least 30 consecutive days within two years of the date of purchase.

CMHC five per cent down
While Canada Mortgage and Housing Corporation’s (CMHC) five per cent down option program doesn’t help you save for the down payment, it sure eases the way to home ownership.

With as little as five per cent down, all home owners now have access to CMHC mortgage insurance. This means CMHC may insure the mortgage on your home (against default in payments) for up to 95 per cent of the lending value of the home. This helps make home ownership a reality for many Canadians who can afford monthly mortgage payments but would have trouble saving for a larger down payment.

Previously available only to first-time home buyers, the program was expanded earlier this year to include all home buyers. Eligible borrowers include anyone who buys a home in Canada and occupies it as a principle residence. The mortgage insurance premium in 1998 is about 3.75 per cent of the mortgage loan and can be added to the mortgage or paid on a monthly basis.

source: OntarioReal Estate Association

Pay down your mortgage faster

Buying a home is probably the best investment you will ever make. That’s because you can pay off your mortgage and build equity in your home over time. Renters on the other hand will continue to pay rent and will likely see their rent payments increase significantly as time goes by.

From the moment you make that first mortgage payment, you will probably be dreaming of the day when you can make your last one and be “mortgage-free.” For most people that day is pretty far off in the future, but it is possible to speed up the process.

Your REALTOR will be able to advise you on ways you can pay down your mortgage as quickly as possible. This information will be helpful when you are arranging financing on your home. Be sure to discuss various options with your financial institution before choosing a mortgage.

Amortization schedule
One of the best ways to pay off your mortgage faster is to shorten the “amortization period.” By choosing a shorter amortization, you will not only pay for your home in less time, but you will make substantial savings in interest too.

For example, the most common mortgage amortization is 25 years. By shortening that period to 15 years, you will erode the amount of money you owe much more quickly and make fewer interest payments. Shortening the amortization period is not for everyone as it does mean larger payments, but for many people the benefit of long term savings is worth it.

Usually each mortgage payment is blended and applied to both the principal and interest so at the beginning, the interest portion of the payment is extremely high. However, with each payment, more and more of is applied to the principal. Ask your REALTOR to give you examples of what your payments would be at the current interest rate amortized over 25 years as compared to 15 years.

Payment options
It used to be that most people made monthly mortgage payments, but weekly, bi-weekly and semi-monthly payments are more popular today. With these types of payment options you will reduce the amount of principal you owe faster because you make payments on a much more frequent basis and less interest is accrued. Many mortgages also offer homeowners the option of making an additional payment each year or increasing your payment each month. Making the equivalent of one extra payment a year can save you a considerable amount over time.

Anniversary date
Many mortgages allow you to make a lump sum payment on the anniversary date of your mortgage. Again this reduces the amount of money you pay interest on resulting in long term savings. It’s wise to find out what “pre-payment” privileges are available on the mortgage you choose.

Your REALTOR along with either your bank, trust company or mortgage broker can help you look at all the possibilities for financing your home and can tailor a mortgage that fits your income and your goals.

Shop around
Look for a mortgage that has as much flexibility as possible. Be sure you can make at least one extra payment a year and can choose the payment plan that works best for you. Your REALTOR is experienced and knowledgeable about the many mortgage options and the types of payment plans available and can act as your guide to help you become mortgage free sooner.

source: OntarioReal Estate Association

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