Thursday, July 16, 2015

Thinking about Becoming a Home Owner?


Becoming a home owner may sound glorious; however owning a home comes with a cost. Quickly jumping into the deal simply because it seems like “the RIGHT thing to do” does not necessarily mean it is.  If you buy prematurely and discover the costs are overwhelming, you may not be able to sell and recoup your investment.  One way to be certain you are ready to become a home owner is to do your homework.    

The best information and worksheets are found at the Canadian Mortgage and Housing Corporation website.  Because a home is one of the biggest purchases you will make in a lifetime, taking time to research and understand the steps will be worth the effort.   CMHC’s booklet, “Home Buying Step by Step” is easily obtained in both print or download format.  Click here to receive a copy.

Knowing the different types of costs and expenses associated with owning a home is important.  There’s more to swapping a rent expense for a mortgage payment. Categorizing the costs into three separate compartments will help you determine the money required to finance the major purchase.  First are the upfront costs, the money required to secure the purchase.  Second will be the ongoing mortgage payments and utilities expenses.  Lastly, the cost of regular maintenance and the “renovations” which will turn the home into your dream castle need to be considered.   Using The Home Purchase Cost Estimate worksheet will safeguard you from excluding any important items.  

Another valuable tool is the word glossary to familiarize you with the terminology. Understanding the industry’s language maximizes your understanding of all aspects of your purchase.  Whether it is the difference between the mortgage term and amortization period or between a closed and open mortgage, the word glossary helps eliminate any confusion encountered in your research. Speaking from experience, getting tripped-up by terminology is easy.  You may think mortgage life insurance and mortgage loan insurance are one and the same but they’re not.  In your conversations with any professional, always ask for clarification if you are ever in doubt. 

When contemplating your home purchase, you will be working with experts from “start to finish”.  Another useful worksheet, Your Team of Professionals, will be invaluable.  Your team will consist of a lawyer, realtor, mortgage specialist, property insurance agent, life insurance broker and perhaps even a home inspector or appraiser.  Creating and maintaining an updated contact list will be convenient for you.   

In last week’s blog the discussion was about the benefits of a larger down payment. This week the focus now takes a peek at the big picture.  The concept of budgeting is always a part of the discussion when people are considering a home purchase. The final decision, whether to buy or not to buy, will depend on what you can afford in both the purchase price and mortgage payment.  Once the payment is known then the rest is in the math.  First, the payment calculation must align with the industry’s guidelines as explained in the blog, Borrowing Money is like Jumping Hurdles.   Second, a compromise may be required to determine which lifestyle expenses you are willing to give-up in order to take-on a mortgage payment. CMHC offers two specific worksheets, Current Household Budget and Household Budget As Homeowner to analyze your present and future spending.   Tallying the costs will answer the question of whether or not you can afford to buy a home at this time.

The recommendation I quite often make to clients is to “play house” to determine whether they can manage all the costs.   As children, we always loved to pretend.  You might like to pretend you are home owners before you assume the actual role.  Deposit the difference between your current household budget and the anticipated homeowner household budget into a separate savings account.   Since you will incur these expenses as a home owner, you are both practicing and preparing for the change.  If you are managing your finances effectively and avoiding any shortfall, you will have the proof needed to support your decision.  Becoming a home owner will then be a rewarding experience because you have adequately done your homework.    

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