Do you aspire to be a homeowner? There are many good reasons to buy a home. Obviously a home provides shelter and it’s generally considered a good long-term investment. With real estate price reaching the stratosphere in red-hot housing markets like Calgary, Toronto and Vancouver, you may be wondering if now is a good time to purchase your first home. Buying a home is a costly and life-changing experience. Here are some factors to consider before jumping into the real estate market.
High-Interest Debt
If you’re buying a house for the first time, chances are you’ll need a mortgage. A mortgage represents a lot of money, so lenders will want to make sure you have the means to pay it back. If you have a lot of high-interest debt like credit cards, it could hurt your chances of obtaining a mortgage at the lowest rate.
Mortgage lenders use debt service ratios to determine your ability to repay your mortgage. If you’re only paying the minimum balance on your credit card, you should concentrate on paying that off in full before considering homeownership. It doesn’t make sense to be paying a mortgage at 2.99% when you have credit card debt accruing at 18.99%. When you’re a homeowner, you need to make paying your mortgage a priority, otherwise your lender will quickly foreclose on your property.
Mortgage Rates
Although home prices remain high, record-low mortgage rates help make homeownership affordable. Today you can find a 5-year fixed rate mortgage at under 3% and a variable rate mortgage for even less. That’ s a far cry from when mortgage rates were between 5% and 6% over five years ago. Low mortgage rates let you stretch your housing budget even further.
It’s a good to prepare yourself for when mortgage rates eventually rise. Although mortgage rates are low now, they won’t stay this low forever. Unless you have high-interest debt, you should aim to make prepayments against your mortgage. Paying down your mortgage offers a guaranteed rate of return. An extra $100 a week could shave years off the life of your mortgage and save you thousands in interest.
Type of Housing Market
The type of housing market can mean the difference between buying your dream home for a reasonable price or paying through the roof. There are three types of housing markets: buyer’s, balanced, and seller’s. A buyer’s market is when there are few buyers and many sellers. A balanced market is when there are roughly an equal number of buyers and sellers. A seller’s market is when there are many buyers and few sellers.
With mortgage rates near historic lows, it should come as no surprise many real estate markets are seller’s markets. In a seller’s market, you’re often competing against many buyers, and as such, bidding wars are common. It’s easy to get caught up in a bidding war and let your emotions get the better of you. It’s important to draw a line in the sand about the maximum purchase price you’re willing to pay. Not only can overpaying make you “house poor,” the appraisal value from your lender may come in lower, leaving you scrambling to come up with additional money.
Stricter Mortgage Rules
Ever since the housing crash in the U.S. in the late 2000’s, the federal government has clamped down on mortgage rules. You’re no longer able to amortize your mortgage over 40 years. The government has trimmed back the maximum amortization period from 40 years to 25 years on high-ratio mortgages. Although a shorter amortization period means you’ll pay less interest, it also means your regular mortgage payment will be higher. To help prepare yourself for homeownership, it’s a good idea to draw up a budget ahead of time. You don’t want to want find yourself a slave your mortgage, struggling to make the payments each month.
The Bottom Line
Before you consider homeownership, it’s important to get your finances in order. If you have high-interest debt, you should concentrate on paying that off first before buying a home. Once your financial house is in order, only then should you consider homeownership.
