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  • Rent or buy? 6 critical factors for buying a home, sweet home

    Rent or buy? 6 critical factors for buying a home, sweet home
    Published August 28, 2012
    Rent or buy? 6 critical factors for buying a home, sweet home
    Tired of paying rent? It may not be time to become a homeowner just yet...make sure you have these six things lined up before you take the leap!

    As any long-term renter knows, renting a home has some distinct disadvantages, most of which are related to the fact that many things about where you live are out of your control, from how it’s decorated to how long you’re allowed to stay. That leaves many renters frustrated and looking to move into a place of their own. Buying a home, though, is a bit like a relationship. It has to be a good fit, or it can end in disaster. So how do you know when it’s time to follow your heart and take the leap? We talked to Farhaneh Haque, director of mortgage advice at TD Canada Trust, to set the record straight. Here are six things you should have in place before you go from tenant to titled owner....

    1) A job
    It may seem obvious, but unless you have the money to buy a house with cash, you will need to prove to the bank or mortgage lender that you have a relatively stable employment situation. In most cases, this means you’ve been employed for at least a year, and your employer can confirm that your employment is likely to continue. If you’ve been job hopping or have been unable to get steady, full-time work, it might not be the best time to become a homeowner. Not only will it be tough for you to get a mortgage, but inconsistent income could make it hard for you to meet all the financial obligations that come with owning a home.

    2) A down payment
    You probably thought that buying a home would be a lot of fun. It can be - but the part that comes prior is a lot of hard work. If there’s any one thing you should focus on when working toward buying your own home, it’s saving the biggest down payment possible. Not only will this make your mortgage more affordable (in other words, smaller), it’ll also save you thousands on mortgage insurance premiums and interest charges.

    And we’re talking about going beyond the bare minimum. Make just a five percent down payment on a $375,000 home, and you’ll have to pony up an insurance premium of nearly $10,000 and pay more than $55,000 in interest over the first five years of your mortgage (and that’s assuming a relatively modest 3.25 percent interest rate). Boost that down payment to twenty percent and poof – that $10,000 insurance premium disappears. You also save $10,000 in interest. And that’s just over the first five years of the mortgage! So, if you’re looking to become a homeowner, trim your budget and start saving.

    3) Low (or no) debt
    A mortgage is a debt; if you want to buy a home, you have to get your other debts in order. Not only will this make it easier to secure a mortgage at a reasonable rate, it will also give you more financial breathing room. And chances are you’ll need it: unlike when renting, if something goes wrong with the home you buy, you’ll be the one responsible for fixing it.

    “Home ownerhsip is a major commitment, so you want to make sure that if you’re in debt, you work toward paying that down and start saving,” Haque says.

    4) A sound budget
    No matter how frustrated you might be about renting, buying a house on a whim is a bad idea. When you’re renting, all you have to worry about is making the rent payment. When you own a home, you’ll have a mortgage, taxes, insurance and maintenance to worry about. Plus, unlike your rent, which will be stable at least during the period of the lease, being an owner means that major maintenance costs can pop up at any time; taxes and insurance costs can creep in; and mortgage payments can increase according to changes in the interest rate. With this in mind, before you buy a home, you need to think long and hard about whether you can afford all these additional costs, and whether you’re up to the financial responsibility of ensuring that you can continue to afford them until the mortgage is paid off. In short, you need substantial savings and a sound budget.

    “If you’re thinking about home ownership, start thinking about it from a very critical perspective in terms of affordability and your household budget,” Haque said. “Then it’s time to start trimming the fat in your budget and boosting your savings.”

    5) Life stage
    Whether you’re a single gal, married or somewhere in between, it’s worth thinking about where you think your life might be headed before you settle down into home ownership. Sure, you can sell your home at any time, but this can present a big risk. If the markets have taken a turn for the worse, you’ll lose money. That’s why it’s best to buy a home when you can reasonably expect to live there for a while (most experts say at least five years). If you can’t see that far into the future, renting may be the best option.

    6) Lifestyle
    When it comes to home ownership, there are generally two kinds of people: those who can’t wait to buy a home, build a nest, put down roots and live happily ever after; and those whose wanderlust makes it hard for them to stay anywhere for long. For the latter group, home ownership just isn’t a good fit. That’s because many of the costs that come with buying a home can’t be recouped, at least not in the short term. Whether you’re following your career or just your nomadic heart, if you can’t stay put, it’s best to stick to renting.

    But what about the market?
    Ah yes, the market...that fickle, ever-changing factor that keeps so many aspiring homeowners on the fence. Does it really matter? Yes and no. When it comes to the economy, interest rates are a factor in the decision to buy – or at least they should be. According to Haque, it’s important to consider the interest rate environment to ensure you can afford your home in the future.

    For example, if you’re paying a typical mortgage rate of 4 percent on a $250,000 mortgage today, your payments will be around $1,300 per month. If that rate jumps to 6 percent in a few years’ time, so will your payment – to $1,610. The solution is to ensure that you get a mortgage that’s well within what you can afford, and work to pay it down faster through more frequent or larger payments.

    As for the real estate market, you might be surprised to learn that if you cover all your bases, what it does really doesn’t matter.

    “No one can predict what the market will do, but everyone needs a roof over their head, whether they’re renting or buying,” Haque says. “As long as you plan ahead and ensure you can continue to afford your home, what the market does won’t really affect your personal situation.”  Your home will remain your home...sweet home.

    About the Author/Partner: GoldenGirlFinance.ca is a free personal finance and education site for women.

    Nothing contained herein is intended to provide personalized financial, legal or tax advice. Before implementing any financial strategy, you should obtain information and advice from your financial, legal and/or tax advisers who are fully aware of your individual circumstances.

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