Buying a house is probably one of the biggest decisions you will make, so it’s important to understand what you’re getting into. Suppose you live in British Columbia and have decided to build a new home. So you have spoken to a custom home builder in Vancouver and you have determined the cost of your dream home. Next you find that some builders work with specific banks to help arrange your mortgage while others leave finding the mortgage up to you.
Although it may seem easier to go with the mortgage provided by the builder, you have to look carefully at the terms of the proposed mortgage. This is probably the largest purchase of your life so don’t be afraid to ask your builder and/or mortgage broker questions before you sign on the dotted line. Often the builder will “get a cut” which may increase the cost of your mortgage by 1% or more, which could add up to thousands of dollars over the life of the mortgage, so it pays to compare. A few minutes of diligence could result in the highest paid moments of your life! If you know what you’re looking at and have a good understanding of your mortgage contract, you will avoid making a costly mistake.
Your Mortgage Payment
Make sure you understand what you’re paying for when you pay your mortgage. You already know that you’ll be paying toward the principal balance and the interest on the loan. You’ll pay the same amount each month for the life of the loan, but initially, the bulk of your payment goes toward the interest. As time goes on, that ratio shifts and you’ll be paying more toward the principal and less toward interest. In many cases, the total mortgage payment will also include things like local taxes, private mortgage insurance, and your homeowner insurance premiums. Remember to factor that in when you’re deciding how much home you can afford. This means that your payment may change slightly each year, as the cost of those portions go up or down.
Paying Early
In most cases, you have every right to pay your mortgage early. All you have to do is transfer extra money with your payment and specify you want the additional money to go toward the principal. If you get paid weekly or bi-weekly, an easy way to pay down your mortgage faster is to arrange to pay half of your mortgage payment every other week. This way you will be making 26 half-payments every year, rather than 12 full payments. But you probably won’t notice the difference since you will have the same amount left from every paycheck.
This way you end up making the equivalent of one extra payment each year. This simple technique can mean your mortgage is paid off years earlier. For more information see: Save Thousands With a Bi-Weekly Mortgage
Even if you can’t do that, paying extra money when you have it will still help any loan get paid off faster. You can always refinance if you find a lower rate but that involves paying certain origination fees again so it is best to shop around and get it right the first time. But as time goes on a general “rule of thumb” is if you can reduce your mortgage rate by 1% it pays to refinance.
Equity
Equity is the amount of money you’ve put toward the cost of the home. It includes the down payment you made, plus all the principal payments you’ve made over time. If you’ve made improvements to the house that increase its value those extra payments count as well. If you have less than 20 percent equity in the home, you’ll have to pay for private mortgage insurance, which is just an insurance for the bank in case you default on the loan. Once your equity exceeds that much, though, you’ll no longer have to pay, and your monthly mortgage payment could go down. But you will probably have to make arrangements to get it taken off since they won’t volunteer to do it for you.
For many, buying a home represents a big step toward leading a secure and happy life. It’s a scary decision, but you’ll feel more confident by having all of the knowledge you need. Be prepared by studying your loan and budget now.
You might also like:
- 4 Hidden Costs to Refinancing Your Mortgage
- 3 Tips for Saving Money on Your First Mortgage
- Mortgage Protection Insurance vs Private Mortgage Insurance?
- Should I Roll My Mortgage Insurance Premiums Into the Loan?
- Is Financing Your Child’s Mortgage Right for Your Family?
- The importance of Mortgage Pre-Qualification
- What to Ask Before Signing for a Mortgage
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