Buying a Home - Do Your Homework
By: Sonya M. Mount CGA, CFP, CIRP
You have decided to buy your first home and are overwhelmed with advertising, jargon and the advice of well-meaning friends and family. As a CFP professional and Licenced Trustee in Bankruptcy, many of the people that I see lose their first home, their dream, are the people who become distracted by these outside influences and don't get down to basics and do their homework.
You will need a notebook, writing instruments and a calculator to complete this homework assignment. No one is going to mark your work and your happiness and financial well-being are the measurements of success.
Use your notebook to record your wish list. You and your partner, if you have one, should complete your own lists and then compare notes. How big a home do you want or more importantly need? Where do you want to live? Do you care about commuting? Do you have children now or are you planning to have children? Are you handy so repair and maintenance of an older home would be considered fun or does the idea of repairing drywall give you nightmares? Do you like to cook and entertain? Do you like yard work? Are you prepared to shovel snow? This is your list, so consider everything that is important to you and take it with you on your home search.
Make a chart of recommended lawyers, realtors, builders and financial institutions. Don't deal with a professional because your parents or friends deal with them. We all have our own style and needs. Interview the professionals that you plan to use and find the right match. Two common pitfalls are using the same lawyer as the vendor "to save money" and thinking title insurance protects you; it doesn't. I have seen both of these shortcuts create problems for home buyers. You will be paying these people a lot of your hard earned money so don't be intimidated; they work for you.
Determine what size of a mortgage you can afford by recording personal cash flows, your monthly income and expenses. I recommend tracking every dime you spend for at least three months to ensure that your numbers are realistic. Forecast large future expenses because you will have to save for these items.
Price appliances and tools you will need when you own a home. These are needs, not wants. Don't forget the costs of your lawyer and what the industry calls closing costs. You should not borrow money to finance these costs. If you don't have the money to save now, you won't have the money to pay the debt later.
Use your current cash flows and forecast how they will change with a home purchase. Mortgage payments and property taxes replace rent. Property taxes rates can be obtained from municipalities. The Financial Consumer Agency of Canada (FCAC) website contains an easy to follow mortgage calculator and information about mortgages.
If you are currently using transit or have a short commute, how will your transportation costs change if you have a longer commute? If there is parental leave in your future, does substituting Employment Insurance for salary change mortgage affordability? If you work a great deal of overtime, reduce your earnings back to straight hours. Now what can you afford?
When you apply for a mortgage you may be told you only need a five per cent down payment or in some cases no down payment. This sounds great, but leaves you with negative equity the day you move in and you will have incurred more debt that must be repaid. Calculate how your payments will change if you put 10 per cent down on a smaller house.
Is term life insurance cheaper than mortgage insurance? Talk to your insurance agent about how your needs will change with the purchase of a home and add this expense to your cash flows. Remember that any costs added to the mortgage result in added interest costs.
When your homework is completed, you'll be armed with a notebook about the house you want and can afford. You can now relax and enjoy the search. Follow your notes and your cash flows, don't become distracted and at the end of the day you will have the home you want, the home you can afford and the home you will own and enjoy for a long time.
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