Becoming a homeowner is an immense responsibility that will dictate your entire financial future and whether you’re successful or not at managing your finances. With an abundance of money lenders fighting for your business, it is important to understand what all your available options are to make an informed decision.
Step 1 – Get Pre-Approved
You can do this by going through a broker or through the financial institution of your choice. Because the nature of brokers is to have access to a variety of different lenders, you probably are going to get a more competitive amount and interest rate than a bank will provide. This is especially true if the investor doesn’t have perfect credit. A preapproval, for the first time home buyer, will provide a guideline of the limit you have to spend on the purchase of a new home. Preapprovals are not obligatory and will expire usually after 90 – 120 days.
Step 2 – Understand the Basics
If you have been preapproved and found a home you want to put an offer on, you will now need to go forward with the mortgage financing. Let’s look at the two main categories of mortgages, the conventional mortgage and the high ratio mortgage. The conventional mortgage assumes that you will have acquired a 25% down payment, while the high ratio mortgage usually assumes less than a 20% down payment. High ratio mortgage will need to be insured by the Canadian Mortgage and Housing Corporation (CMHC) and a lump sum fee is added to the total mortgage.
Step 3 – Fixed vs. Variable
The next factor to determining the right type of mortgage for you is to choose between a fixed rate and variable rate mortgage. A fixed rate mortgage works by locking in your current available rate for a fixed term (usually from 3 – 5 years) so that your monthly payments (principal + interest) stay the same for duration of the term. This option is usually chosen to help investors have peace of mind. A variable rate mortgage is calculated monthly depending on the current interest rates (usually the Bank of Canada’s prime plus or minus a small percent) and is historically shown to be the best choice. However, that being said, a variable rate mortgage is best suited for people who have the mindset towards investing already as the monthly fluctuations can be somewhat anxious.
Step 4 – Amortization
Amortization refers to the total length of time in which the mortgage will be repaid. The norm is considered to be 25 years, but in recent years this has pushed to 35 years. The key is that the shorter the amortization period, the less interest you will have to pay over the life of the mortgage. The only problem with a shorter amortization is that the monthly payments will be more expensive.
Step 5 – Closed vs. Open
Be specific when you agree to the mortgage terms. A closed mortgage means that you will be unable to payoff, renegotiate, or refinance the existing mortgage until the end of the term without having to pay any penalties. An open mortgage means that the mortgage may be repaid in full or in part at any time without any penalties.