Buying a home is an exciting investment in your future. While the journey to homeownership may feel daunting, the best thing you can do is research and plan so you can make an informed decision when it’s time to purchase your dream home. Here are 5 essential tips to get you started.
Most mortgages have the option to allow payments to be made on a weekly or bi-weekly basis. This option may be desirable for two reasons. The first is it can save you money as you can expect to pay off your mortgage about 4 years sooner. This can save you dramatically over the life of your mortgage. The other reason why these options are so popular is that if your employer pays you on a weekly or bi-weekly basis, you can simplify your budget by making the payments line up with the dates you are paid.
Making extra payments on your mortgage can save a lot on interest over time. When selecting a mortgage company, privilege payments options are something to look for. A 20% privilege payment will allow you to pay off up to $20,000 per year on a $100,000 mortgage. It is important that the privilege payment is flexible to allow you to make smaller payments on the mortgage as often as you wish. An extra $1000 periodically paid on a mortgage can help you become mortgage free faster.
When you require a mortgage for more than 80% of the purchase price of a property, that mortgage must be insured by Canada Mortgage and Housing (CMHC) or GE Mortgage Insurance. The premium charged by these companies decreases as the down payment increases. When you finance your property at 95%, a premium of 3.75% is added to the mortgage. By increasing the down payment to 10% of the purchase price the premium can be reduced to 2.5%. If you can put down 20%, you can avoid any additional insurance fee. Depending on your situation there are ways that you can structure this financing to avoid the CMHC or GE insurance premium.
As mentioned above, when you put a 20% down payment on your purchase you can avoid the CMHC premium. More importantly, the larger the down payment, the lower the amount of interest you will pay over the life of your mortgage. It is important to note that it may not be wise to stretch yourself to increase your down payment and end up borrowing on credit cards or a line of credit at a higher rate.
The options available for mortgages can be very confusing for most mortgage shoppers. Mortgage terms can range variable or fixed rate, with a 6-month term up to a 10-year term. Taking a variable or floating rate mortgage can save money on interest. Typically the shorter the term or guarantee of the rate, the lower the rate will be.
This does not always happen, depending on the marketplace and the economy, but history has shown that short-term rates tend to be lower than long-term rates. The upside of a variable rate is the strong potential for interest rate savings. The downside is the fact that you are accepting the interest rate risk without a guarantee. If you are considering a variable rate mortgage you need to look at your own risk tolerance, and your cash flow available to deal with a potentially increased payment.
Considering projections of rates and where we see interest rates heading can also be important in this decision. Make sure you talk to an expert when you are making this decision.
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