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 upgrade