Buying a home can be the largest and most important financial decision one can make so it is important to be aware of all the factors that go into making a responsible purchasing decision.
"The first step is figuring out how much you can afford to spend on homeownership which means an honest assessment of the household balance sheet" says Kevin Christopher Head of Mortgages Sales BMO Harris Bank. "Once you have a clear idea of where you stand financially you can then make a responsible decision of what you can afford including your down payment monthly mortgage costs and other expenses like utility costs property insurance and taxes."
Here are tips for first timers:
Making an affordability assessment
Christopher noted that there are two rules of thumb first time homebuyers can use to determine what they can afford.
"First of all housing costs including mortgage payments property insurance and taxes should not take up more than one-third of your income. In addition to this servicing your overall debt including loans utilities credit card payments and lines of credit should not account for more than 40 percent. If you can land safely within these parameters then homeownership is an affordable and realistic option."
Many banks offer free online tools to help you wade through the home lending process.
Coming up with the down payment
In general the bigger the down payment you come up with the less interest you'll pay over the life of your mortgage. Financial institutions may offer special accounts designed to help you save for that first home. Consider opening a savings account specifically to fund your down payment. One easy way to save is to set up an automatic monthly deposit from your checking account to your savings account allowing you to build the balance over time.
Choosing the right mortgage for you
Your mortgage needs to fit in with the rest of your financial priorities -- which could mean increased flexibility or security. Consider the following when choosing your mortgage:
Choose a shorter amortization period - In general the shorter the life of the mortgage the lower the overall interest cost. Consider choosing a 20-year amortization rather than a 30-year amortization to save you money on interest costs and help you become debt-free sooner.
Fixed vs. variable - Variable-rate mortgages have been a winning strategy over the long term but fixed rate mortgages (currently at historic lows) provide cost certainty and peace of mind.
Stress-test your mortgage payments - Use a mortgage payment based on a higher rate to stress-test your budget; total housing costs (mortgage payments property taxes and insurance etc.) should not consume more than one-third of household income.
Applying for pre-approval
A pre-approval establishes the amount you can reasonably afford to borrow towards the purchase of your first home. Consider the following benefits to getting pre-approved:
Have a good idea of your finances - You will receive a better idea of how much you are qualified to borrow saving time looking at homes that meet your affordability range. Your term and amortization as well as estimated monthly payments are provided at approval so you can use these figures when planning your overall budget.
Moving quickly - If you are pre-approved for a mortgage you'll be able to move quickly to make an offer when you finally find the perfect home for you.
Source: BMO Harris Bank