Whether you want to start a family, make a wise investment, or would simply like to have a place of your own to live, buying your first home is a huge step towards meeting your goals. Owning a home comes with a sense of pride as well as all kinds of perks and benefits.
However, buying a home is no easy undertaking. It comes with its fair share of challenges that you will need to overcome since there are many tasks and requirements involved in the process. Finding a property that meets your needs is only the beginning. After that, you must secure financing, make an offer, get a home inspection, and close the deal, and each of these steps comes with its own obstacles.
When you are about to become a first-time homeowner, one of the most important things to learn is how mortgages work. A mortgage is a loan you will likely need to get approved for by a lender in order to pay for your home. Once you receive this loan, you must start paying it back monthly.
Mortgages, though, are never a one-size-fits-all type of scenario. There is a wide range of different types of mortgage arrangements that you have to choose from. Your choice will impact how long you have to pay your mortgage off, what kind of interest you will need to pay on it, and how frequently your mortgage terms will change.
Ways to Protect Yourself From High-Interest Rate Mortgages
When you seek a lender to work with when purchasing your first home, your top priority should be finding one that will offer you a low-interest rate mortgage. Such a mortgage will save you a significant amount of money over time as you pay off your loan.
As you are considering your mortgage agreement options, you may come across some options for enrolling in a deferred payment plan, which would allow you to put off paying your mortgage principal for an extended period. Although such an idea may seem enticing at first, this approach should be carefully considered.
After all, delaying your payments often leads to paying higher amounts of interest overall. It is always a better approach to pay off your debt as quickly as possible because that shortens the amount of time you must pay interest, thus saving you thousands of dollars.
It is wise to always leave room in your budget to account for possible rises in your mortgage rate. If your rate does rise suddenly, you never want to be stuck in a situation where you can no longer afford to make your monthly payments.
However, if you ever do have difficulty with affording your mortgage payments, it is possible to use your home to bridge the gap in your income. Whether that means renting out an extra room, some storage space, or even a parking spot, there are various ways to use your home to augment your finances.
If you are worried about mortgage rates rising soon and you would like to lock in rates that you see available now, you should go through the necessary steps to get pre-approved by a lender or multiple lenders. Once you have been pre-approved, the rate you were provided will be locked in for up to four months.
How to Decide Between a Fixed and Variable Rate Mortgage
As you are seeking out a lender and looking into mortgages, there are two main types that you will encounter: a “fixed-rate” mortgage and a “variable-rate” mortgage.
When a mortgage interest rate is fixed, it will remain the same throughout the entire mortgage term. The term may range anywhere from six months to five years, but your rate will never change during that time.
On the other hand, when a mortgage interest rate is variable, it can fluctuate throughout your mortgage term. As market conditions impact the prime rate offered by your lender, your interest amount could either increase or decrease.
There are advantages and disadvantages to either type of mortgage rate. For instance, variable mortgage rates tend to be lower than fixed rates since they are less risky for lenders. It is also possible that if the market causes mortgage rates to drop after you secure your initial rate, you get to benefit from this drop, possibly saving a considerable amount of money.
If the market causes your rate to go in the opposite direction, though, you will be subject to the inverse effects, and you could end up spending much more. On the other hand, since fixed-rate mortgages are stable, you will never need to worry about shifts in the market. Since your interest rate will stay the same, it will also be easier to budget and manage your finances.
Top Mistakes That First-Time Home Buyers Make
The process of buying your first home can be overwhelming, and for that reason, it is easy to make mistakes along the way. One of the biggest mistakes is beginning to shop for a house before securing mortgage approval. It is a natural instinct to want to get a head start on putting in an offer once you have found the perfect house for yourself. Still, if your mortgage approval does not go through after finding your perfect home, it can be heartbreaking.
Limiting yourself by only talking to one lender is also a mistake. Sometimes the differences in rates offered by various lenders may seem marginal. However, getting even a slightly lower rate from one lender versus another could save you thousands of dollars over the lifetime of your mortgage, so it is worth doing some research into all your options.
Some first-time home buyers also feel the need to drain all of their savings to cover the cost of the down payment on their house, but this is not a good call either. It is never wise to leave yourself without any money at all. You should always have at least some savings because many more costs will come after your initial down payment that you must be prepared to cover.
It is also important to look into home-buyer rebates after purchasing your home, which many first-time buyers overlook. Depending on where you live, receiving a sizable tax credit from both the provincial and federal government is usually possible.
How to Prepare for Taking on Your First Mortgage
Buying your first home is extremely exciting, but taking on the huge commitment that comes with a mortgage can be a bit daunting. Not only is it a huge financial burden, but many complicated steps are also involved in the process. Nevertheless, doing your research and learning about the different types of mortgage rates available can help put your mind at ease.
Understanding all of your lender and mortgage options before making a decision will give you an upper hand. It may take some time to find an option that best suits your needs and financial plan, but once you find what you are looking for, your patience will pay off and you could save a significant amount of money over time.
Author
Jessica Coates is a blogger in Toronto. She graduated with honors from the University of British Columbia with a dual degree in Business Administration and Creative Writing. Jessica Coates is a community manager for small businesses across Canada. When not working, she leisurely studies economics, history, law and business solutions.