The mortgage process is a daunting one, especially for first-time homebuyers. Here are some important facts you need to know about mortgages.
This post was written by Charlotte Ottaway, originally published in The Reply.
Experts suggest home ownership is the best investment you can make. But for many millennials, the thought of purchasing a home still feels like a distant goal. Whether or not you are in the market to buy a house, it's important to start planning early. This means educating yourself on housing costs in your area, saving for a down payment and understanding what goes into securing a mortgage.
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The Reply recently interviewed Sarah Colucci, a mortgage expert with Dominion Lending, about common questions and misconceptions this generation often has when securing a mortgage. With Colucci's practical advice, millennials can pay off their mortgage quickly and free up equity to focus on establishing financial freedom.
Here are six things you should know about the mortgage process:
1. You can qualify for mortgage financing with a 5 percent down payment.
"People are unsure about how much of a down payment they actually need to purchase a house," Colucci says. "Today you only need 5 percent of a purchase price to qualify for mortgage financing."
There is a catch, however. Any mortgage with a down payment of less than 20 percent is considered a high ratio mortgage, meaning it will require mortgage insurance, which is provided through one of Canada's three default insurers: Canada Mortgage and Housing Corporation (CMHC), Genworth Financial or Canada Guarantee. This insurance is used to protect the lender in the event of default.
If the premium is amortized over 25 years, you wouldn't really feel it.
If you're putting down less than 20 percent, you have to pay a premium, which can be added on to the mortgage and amortized over the length of the mortgage. If the premium is amortized over 25 years, for example, you wouldn't really feel it, Colucci points out. The option for a high ratio mortgage opens the housing market to many young buyers, allowing them to purchase a better quality home early on.
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2. Go farther and buy lower to build more equity.
"For the newer generation buying in these more established neighbourhoods where the equity has already increased substantially, it is very difficult to come up with even 5 percent," says Colucci. "You don't want to be what people call 'house poor,' where all of your money is going into a house you can't afford. You want to be comfortable."
It might mean a longer commute to work, but buying lower will give you more room to grow financially.
To avoid putting this kind of strain on your financial situation, Colucci suggests looking to buy in neighbourhoods that are just starting to build up and are therefore much more affordable. It might mean a longer commute to work, but buying lower will give you more room to grow financially. "If you start low, the chances of building a lot of equity and having your mortgage paid are a lot better than if you start out really high," she says.
3. Your credit score matters.
Mortgage lenders are going to look at your credit history, and they want to see that you have some solid savings in the bank and good repayment habits. "You want to make sure you have a good credit score because that will make sure that not only do you get a very competitive interest rate on your mortgage, but you get placed in a good mortgage [in regards to] the terms and repayment options," says Colucci.
Ensure all of your credit cards and loans are kept below the limit.
She suggests following up with your credit on a regular basis. You can retrieve a copy of your credit report for free through sites like Equifax or TransUnion. Even the smallest missed payment on your cell phone bill can bring down your credit score.
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Ensure all of your credit cards and loans are kept below the limit, Colucci advises. And don't apply for new credit if you're planning on applying for a mortgage. "Lenders like to see old credit that is paid on time and kept well below the limit," she says. "Treat your credit and your personal finances like a side business. Make sure they're all up to par, and everything's accurate."
4. Know your exit strategy.
One of the biggest questions for young homebuyers is whether to go with a fixed or variable rate mortgage. The answer really depends on your personal situation, as there are pros and cons to each option. However, it's important to know your exit strategy, Colucci says.
Prepayment penalties can be quite high if you break earlier than five years on a fixed rate.
"I think banks do try to pressure you to go to the five-year [term], especially if you're on a fixed rate mortgage. That will guarantee them your business for five years," she says. But it's difficult for many millennials to establish a secure five-year plan as it is. Life happens. You might change jobs, or face unexpected changes in your relationship status, which could mean you find yourself looking to refinance or sell your home. Prepayment penalties can be quite high if you break earlier than five years on a fixed rate.
"You have to evaluate your situation," says Colucci. If there's a chance you'll be looking to refinance or renovate, it may make more sense to go with the variable rate mortgage because it only costs three months in interest to break it. "They calculate the prepayment penalties a little differently, so variable mortgages are cheap to exit."
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5. You can pay more than the monthly amount.
Too often, people adhere to the set monthly payments and don't look for opportunities to pay off their mortgage faster, which can free up equity for other financial goals.
Consult a mortgage broker to find out how you can contribute more each month.
"There are terms in the mortgage that allow you to pay more than just the monthly amount," says Colucci. "If you can throw some extra money on that mortgage every month, you'll see you can become mortgage free a lot sooner."
Consult a mortgage broker to find out how you can contribute more each month, or even double up payments periodically, to reduce your amortization period. "People have used their homes as leverage to do many things and actually build empires for themselves. And it all starts with having that base free and clear of any encumbrance, which is the mortgage."
6. The best decision is an informed one.
Walking into a bank to secure a mortgage on a home is intimidating. The process is overwhelming, especially for first-time homebuyers. Make sure you are dealing with someone who is experienced with first-time buyers and will ensure you are well taken care of, Colucci advises.
When you're securing a conventional mortgage through a lender, there is no fee for working with a broker.
Too often people just sign on the dotted line without asking about what they're agreeing to, she says. Look to consult an outside voice. When you're securing a conventional mortgage through a lender, there is no fee for working with a broker. But doing so will ensure you are exploring all of your options and making the right decision for yourself.
"Our job is to save you money and get you mortgage free sooner, so you can use that money for other things," says Colucci. "A home is your home, but it could be used to actually get you a little more financially independent, which I think is what everyone wants."
Do you have any advice for millennials looking to secure a mortgage? How about tips to help us become mortgage free sooner? Share your thoughts in the comments below!
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