Buying a new home whether it be a condo, apartment or house is always an exciting investment! You probably can’t wait to have your very own home to make memories in to your name. However, for most the only way to afford a new home is through a mortgage or loan, especially in Canada’s current housing bubble that has seen housing costs soar higher than ever before.
Despite the serious implications for your financial future, many prospecting homeowners rush into the process, leading to many tripping unnecessarily over avoidable extra costs or trapping themselves in a downward spiral of payments.
With that in mind, we want to give you some tips on how to avoid these pitfalls and smoothly make your way to owning your very own home.
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Not checking your credit score before applying for a mortgage
Too many people start the application process without having a look at their own affairs first. The sad truth is that the loan amount you can qualify for as well as the interest rate you will have to pay depend heavily on your credit score. Many people excitedly start the process with the best interest rates in sight only to be left sorely disappointed.
Some people that don’t make a habit of regularly checking their credit score may not even know that it’s less than stellar. You can check your credit score at any time with Equifax Canada as well as TransUnion Canada.
600 is generally considered as the cutoff number for most traditional financial institutions such as banks which will deem you high-risk. 680 is required for most A-lenders and should get you a prime interest rate. If you score above 750 you can expect the best interest rates on offer.
Having a bad credit score doesn’t completely eliminate your options. Knowing what it is ahead of time can help you improve it before you apply for a mortgage. If you need one urgently, you can look at private mortgage lenders.
Being unaware of prepayment penalties
On average, over 60% of borrowers refinance within 3 years. The minimum term for a mortgage or loan is usually 5 years. This means a lot of people breaking their mortgages early. Most lenders will require you to pay a prepayment penalty if this is the case.
Few people even know of, or look for, prepayment penalties in their agreements. However, it could leave you having to pay an unpleasant penalty if you wish to pay your mortgage down early or refinance. If you want these options to be open to you, look for open mortgages and be sure to read the fine print.
Only looking at the interest rate
Sure, the interest rate is important and will determine how much you are paying extra effectively for paying off the home. However, it has been fetishized slightly so that it seems to be the only thing people look for when browsing options.
Nothing good ever comes for free and lower interest rates are usually as a result of higher down-payments, stricter penalties, shorter terms, and fewer features.
Not knowing all the fees beforehand
There are many other costs involved with applying for a loan and buying a new home that are also often overlooked. However, they might affect your finances for the near future and should be considered as part of the terms of your loan, for example, you might be subject to:
- Home inspection property/appraisal fees
- Application or processing fees
- Legal fees
- Origination fee
- Land transfer taxes
- Brokerage fees (if applicable)