How to match the home you buy to your pocketbook
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 Put down as much as you can 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 Understand interest rates 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 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.
This series of articles is brought to you by A. Mark Argentino and the Ontario Real Estate Association OREA as the source of information. |
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