Arranging your mortgage doesn't have to be a baffling experience

Buying a home today is an extremely attractive proposition. Interest rates are at their lowest in decades and the housing market is full of homes to suit just about any budget or family requirement. Still, you'll inevitably have to deal with financing and this will mean taking on a mortgage.

Sorting through the numerous mortgage options available to today's home buyers can be intimidating for everyone from first-time purchasers to long-time owners. The rules seem to change constantly and there's a smorgasbord of terminologies to learn.

Fear not--the basics are fairly simple and there are a host of real estate professionals more than willing to help, with your Realtor and bank's mortgage specialist at the top of the list.

Nonetheless, you'll want to at least familiarize yourself with the mortgage process, how to arrange one and the different financing strategies involved.

First, it's necessary to know exactly which kinds of institutions will lend you money. Banks and trust companies lead the pack, but credit unions and private lenders also offer funds.

There's also an option to consult a mortgage broker. Brokers have access to a wide variety of lending sources, including domestic banks and trust companies, but they can also employ other alternatives such as pension funds, real estate syndicates and foreign banks.

You may also find yourself in a situation where you can 'assume' an existing mortgage held by the seller. Advantages of assuming a mortgage are that you can speed the buying process due to reduced paperwork and save money in lower legal fees and closing costs. A disadvantage is that the current lending rate may be less than that of the assumed mortgage.

Now that you have an idea who will lend you money, you'll need to know the different kinds of mortgages that are offered. The most common by far is the 'conventional mortgage.' Lenders will loan you up to 75 per cent of the appraised value or purchase price of the property (whichever is lower), and you must come up with the remaining 25 per cent yourself. Many people save specifically for this purpose, but in some cases, alternate or 'secondary' financing maybe available.

A 'high-ratio' mortgage is one alternative if you don't have the 25 per cent down payment. These are available for up to 95 per cent of the appraised value or purchase price of the property (whichever is lower) to a maximum set by government regulation. The proviso is that high-ratio mortgages must be insured, and the cost, from one to three percent of the mortgage amount, falls to you.

'Variable-rate' mortgages are usually offered for both conventional and high-ratio mortgages. Typically, your monthly payments remain fixed for the term, while the interest rate fluctuates with economic conditions. This means that if interest rates climb, you'll be paying more per month in interest. If rates drop, you'll then be paying more off your principal. Conversely, 'fixed rate' mortgages maintain the same rate of interest over the entire negotiated term.

There are some other concepts to become familiar with that will impact your mortgage and financial well-being.

Amortization refers to the time period in which the mortgage is assumed to be paid. A common amortization period is 25 years. This means interest and principal payments are set as if you were paying the amount borrowed over a 25 year payment schedule. Obviously, the shorter the amortization period, the less interest you will pay.

Prepayment privileges are very important for borrowers to consider. These arrangements allow you to pay money against the principal, reducing the total amount of interest you'll ultimately pay.

Open mortgages generally denote those that allow prepayment with few restrictions, while closed mortgages carry no prepayment options.

Don't be daunted by the many concepts and terms regarding mortgages. Arranging one isn't that difficult--all it takes is a little brushing up on your part and the experience and advice of a good Realtor or mortgage professional.

Article Provided by: David Pusey Personal Real Estate Corporation

Source: OREA

With today's low interest rates, deciding to buy a home is one of the best decisions anyone can make. Financing such a big purchase, however, often means combining savings with money borrowed through a financial arrangement, commonly referred to as a mortgage.

Mortgages allow you to pay back the principal, or amount borrowed, plus interest, in regular installments. The taxes on your home can also be added to the mortgage payments. Most mortgages are amortized over 25 years - that's the length of time it takes for you to pay the debt off in full.

For most home buyers, paying off the mortgage is a long-term commitment. That's why it's important to begin looking at options before buying, or before renegotiating your existing mortgage. When home buying, your Realtor can help you calculate how much mortgage you can afford and provide advice on the many options available.

But even if you find yourself locked into a long-term mortgage you can afford, there may still be ways to pay it down and be mortgage-free sooner.

Pre-payment options

Most financial institutions now offer generous pre-payment options. Although many limit how often you can use an option, it is well checking into them and comparing what one lender offers over another. Many lenders now permit an annual lump sum payment on your mortgage with the amount going directly to reducing your principal. A lump sum payment of $2,000 a year on an $80,000 mortgage, for example, can significantly cut years off your mortgage.

Other pre-payment privileges include doubling up payments whenever you have extra cash. Some lenders allow additional payments against the mortgage balance up to the equivalent of a full monthly payment on every payment date or several times throughout the year. Accelerating payments by paying every two weeks instead of monthly, for example, can also result in substantial savings over the life of a mortgage.

While taking advantage of pre-payment privileges can save you thousands of dollars in interest costs over the life of your mortgage, it also pays to consider all your options. You may be reducing the principal, but you are not reducing your existing payment obligations. You still must make your regular payments.

Pre-payment critics also say that if your interest rate is reasonably low, you may be able to put the extra money to better use. When you pre-pay $2,000 a year, you reduce your principal, but you get no tax benefit. Put the same amount of money into a registered retirement plan and you get a tax break. If you invest this amount in a mutual fund at 10 per cent and your mortgage rate is seven per cent, you're making three per cent more on your investment.

Lower your amortization period

The average mortgage must be paid off in 25 years. By selecting a shorter amortization period you can cut years off your mortgage. The shorter the period, the larger the payments, but the more you save on interest and the long-term cost of the loan. Shortening the amortization period is a great idea when interest rates are low and you can afford the larger monthly payments.

Re-finance your mortgage

This is only a good idea if you have a fixed, long-term mortgage and rates have fallen more than two per cent. But the cost of refinancing a loan to get a better rate can be very high. To have your closed mortgage discharged, you will usually have to pay either a three-month interest penalty or an "interest differential", which can cost considerably more.

You can reduce the penalty, which is based on the outstanding principal, by exercising a prepayment privilege and reducing the principal first. This can be done using your own money or by arranging with another lender to borrow enough to discharge your mortgage and pay the discharge penalty. Whatever you decide, seek expert advice before re-financing, or you may end up paying more than if you stayed the course.

Article Provided by: David Pusey Personal Real Estate Corporation

Source: OREA

Don't forget closing costs when buying a home

Despite the low cost of carrying a mortgage these days, you should keep in mind "closing costs" in addition to your down payment for that dream home.

These various charges can add up, and for the most part they are all legally required payments in buying a property. Here is a list of most of your major "closing costs."

• Legal fees: Since a lawyer is an essential part of your home-buying team, the work provided involves fees. Most legal fees include searching the title of the property, arranging a mortgage if necessary and handling other disbursements as required.
• Mortgage insurance and application fee: For any high ratio mortgage, which is any mortgage in which 75 or more per cent of the house's purchase price is covered by the mortgage, the lender requires mortgage insurance.
• Home Inspections: A Home/Property inspection is highly recommended for any purchase. This information may be critical in negotiations for items such as heating, electrical, roofing or moren that may result from the inspection not to mention piece of mind. Waiving this option is a big risk. Also some banks and lending institutions may require it.  the cost for such is in the 400-600 range for an average home and may be higher for larger homes and acreages as well as commercial properties.
• Surveys: A Survey is highly recommended and will tell you what the property boundaries are  insure you know what you are buying and where fences, pools, hedges, driveways, right-of-ways, easments etc are located. Without a survey of the property, it's anyone's guess where things are.
• Appraisal: A 3rd party Appraisal may be required by the lender and can cost anywhere from $300-600 for a basic home and go up from there. Make sure you ask your lender what the fee is and if it is included in the Mortgage for free or if there is a charge for it. Also some Buyers may find it a good idea to obtain one prior to removing Subjects as a confirmation of value.
• Mortgage broker's fee: A mortgage broker may charge a fee to set up a mortgage for you. In some cases the fee may be included with the legal fees if your lawyer arranges the mortgage, or included in the lender's fees if you deal directly with a lender such as a bank.
• Property insurance: This insurance covers the replacement value of your home and its contents. Most mortgage lenders will require proof that you have this insurance before processing a mortgage.
• Land transfer tax: Anyone buying property in BC must pay a land transfer tax called property Purcahe Tax or PPT. It usually runs at 1% of the first $200,000 and 2% for evey dollar thereafter, depending on that price.
• GST: GST  may be payable on the purchase price of properties, although  in many cases a resale residential home may be exempt from GST. Various other closing fees, however, do involve payment of GST and as we are not accountants or experts, we insist that you get tax advice from an accountant before you make any decisions to move forward on the purchase of a property.
• Extra charges: You may also be required to pay the costs of such things as heating oil in the tank, septic pump0-out or other costs incurred by the seller, but included with the house, prior to the closing day.
• Hook-ups: There may be hook-up charges required for appliances and services such as telephone, TV cable, hydro and other utilities.
• Moving costs: Don't forget the basic costs involved in moving from your old place into your new home, particularly if you use a professional moving company.

A Realtor can explain further details on closing costs. Just remember to add them to your financial plan when saving to buy a home.

Article Provided by: David Pusey Personal Real Estate Corporation

Source: OREA

How to match the home you buy to your pocketbook

So, you've decided to take the big leap and purchase your first home. Most of us have a "dream home" tucked away at the back of our minds -- complete with six bedrooms, two fireplaces and a panoramic view. Before setting off to view properties you likely can't afford, step back and take a reality check.

Your "dream home" can easily become a nightmare when most of your money goes to pay the mortgage and there's little left over for anything else. Overextending yourself financially is the quickest way to destroy the excitement of home ownership and add stress to your life.

Smart home-buying means knowing what you can afford and being practical about it. Most first-time buyers, in particular, lack the funds needed to buy a home without assistance from a bank or financial institution. Buying a home means combining savings with money borrowed through a special arrangement called a mortgage.

To keep mortgage payments within their means, most first-time buyers purchase what is commonly known as a "starter home." A starter home is just that -- a way of getting started in long-term real estate investment.

To match the home you buy to your pocketbook you have to realistically assess your needs, determine what you can afford and, usually, lower your expectations. Begin by enlisting the services of a real estate representative. This individual will help you target your home ownership dreams and provide valuable information on mortgage options, interest rates and incentives, such as government programs, for first-time buyers.

In the meantime, here are some ways to determine how much you can afford.

Set a maximum price range

To determine your "affordability" price range, you must calculate two amounts: the amount of cash you can afford to put towards the purchase (down payment) and the maximum amount of loan (mortgage) you can comfortably carry. Typically, household expenses should not exceed 35 per cent of your gross income.

Put down as much as you can

The key to getting started for most first-time buyers is the initial down payment. This is the part of the purchase price you have to put down as cash. You may be able to buy a home for as little as five per cent down. But remember that the larger the down payment, the easier it will be to manage the other expenses (mortgage, utilities and property taxes).

An ideal down payment is 25 per cent of the purchase price. Keep some cash in reserve though for unexpected expenses related to a home purchase and typical expenses such as land transfer tax, legal fees and moving expenses.

Know how much to borrow

To establish your maximum mortgage limit, a financial institution will determine the monthly payment you can afford by calculating your debt-service ratio. List all your loans (car, personal loans, monthly credit card balances). The sum of these and your mortgage payment, including principal, interest and taxes, should not exceed about 40 per cent of your gross income. The mortgage payment and taxes should not exceed about 30 per cent of your gross income.

Understand interest rates

The size of the mortgage you can arrange, based on payments you can afford, depends on interest rates. The lower the rates, the larger the possible mortgage and the more affordable home-buying will be.

However, there are other variables to consider: How open is the mortgage? Is it portable? Would prepayment be allowed? Discuss your mortgage options with your Realtor, banker or financial advisor. Decide what's best for you, establish a limit and stick to it.

Look at other sources of funds

If you have been contributing regularly to a Registered Retirement Savings Plan (RRSP), you may have to look no further for your down payment. The federal government's RRSP Home Buyers' Plan allows eligible taxpayers to withdraw up to $20,000 per person ($40,000 per couple) tax free from their plan to buy a qualifying home. However, you have to pay back every year at least 1/15th of the amount taken out until it is all paid back, or there will be a tax penalty.

The BC Government may have a provincial program which provides tax credits on annual contributions to a resident who has never owned a home.

The Canada Mortgage and Housing Corporation's (CHMC) five per cent down mortgage program is available to both first-time buyers and those who have already owned a home. This benefits buyers who can afford the monthly payments, but would have trouble saving for a larger down payment. Under the program, CMHC may insure the mortgage on your home (against default in payments) for up to 95 per cent of the lending value. An insurance premium of about 3.75 per cent of the mortgage loan is charged. This amount can be added to the mortgage or paid on a monthly basis.

Other sources of funds you can tap into for a down payment include savings and investments and loans or gifts from your family or relatives. If you're already a homeowner and moving up, you can use money that you get from the sale of your present home.

Article Provided by: David Pusey Personal Real Estate Corporation

Source: OREA

Owning your own home has a lot of payoffs, especially these days when mortgage rates are still among the lowest in 30 years. There are also many housing options available in a wide range of prices.

Simply put, you can carry a home of your own for no more than what you would pay in rent. And, unlike renting, your payments go toward increasing the equity in your home.

So, what's stopping you? For most people who have never owned a home before, it's the initial down payment and the ability to keep up with the monthly financial obligations (mortgage payment, insurance, utilities, maintenance).

The effort to save for and buy a home may require you to make significant changes in your way of life. For most people, it means changing their spending and lifestyle habits to support the additional costs of saving for, paying for, and maintaining a home.

One of the best ways of saving for a down payment is to take advantage of government programs available to first-time home buyers. A real estate professional can help you understand how these programs work and ensure that you get the maximum benefit possible.

RRSP Home Buyers' Plan

Contribute to a Registered Retirement Savings Plan (RRSP) regularly and to the maximum allowed. The federal government's RRSP Home Buyers' Plan enables eligible taxpayers to withdraw up to $20,000 tax free from their plan to buy or build a qualifying home. The amount of money withdrawn must be repaid within 15 years.

If you buy the qualifying home together with your spouse or other individuals, each person can withdraw up to $20,000 tax free. A government form must be completed for each withdrawal.

Generally, an RRSP holder can participate in the Home Buyers' Plan only once in a lifetime. The pamphlet, Home Buyers' Plan (HBP) - For 1998 Participants, is available from Revenue Canada and will help you determine if you are considered a first-time home buyer.

A qualifying home is a housing unit located in Canada. Those participating in 1998 have to buy or build a home before Oct. 1, 1999. You must also agree to occupy the home as your principle residence no later than one year after buying or building it. Once you occupy the home, there is no minimum period of time that you have to live there.

Ontario Home Ownership Savings Plan

(OHOSP) OHOSP is a provincial program where participants receive interest on the money they deposit and may receive a tax credit. If you earn less than $40,000 a year, or if you and your spouse have a combined income of less than $80,000, you can benefit from the program. To be eligible, you must be an Ontario resident over 18 years of age with a social insurance number and have never owned a home.

While there is no limit to the amount of money you may deposit in your OHOSP, you can only receive OHOSP tax credits on annual contributions of $2,000 ($4,000 per couple) or less. Depending on your annual income and the amount of money you invest, you can earn up to $500 individually or $1,000 a couple in OHOSP tax credits. Participants are eligible for tax credits for five consecutive years and must close the plan and use the funds to purchase a home by the end of the seventh year. Otherwise, OHOSP tax credits must be repaid with interest.

An OHOSP plan, with interest earned at competitive rates, may be opened at any participating financial institution. To qualify, a home must be located in Ontario and be suitable for year-round residential occupancy. In addition, you must live in the home for at least 30 consecutive days within two years of the date of purchase.

CMHC five per cent down

While Canada Mortgage and Housing Corporation's (CMHC) five per cent down option program doesn't help you save for the down payment, it sure eases the way to home ownership.

With as little as five per cent down, all home owners now have access to CMHC mortgage insurance. This means CMHC may insure the mortgage on your home (against default in payments) for up to 95 per cent of the lending value of the home. This helps make home ownership a reality for many Canadians who can afford monthly mortgage payments but would have trouble saving for a larger down payment.

Previously available only to first-time home buyers, the program was expanded earlier this year to include all home buyers. Eligible borrowers include anyone who buys a home in Canada and occupies it as a principle residence. The mortgage insurance premium in 1998 is about 3.75 per cent of the mortgage loan and can be added to the mortgage or paid on a monthly basis.

Article Provided by: David Pusey Personal Real Estate Corporation

Source: OREA