The Marilyn Denis Show | Finance | The Cost of Home Ownership with Kelley Keehn

Here's the video link to the show:   October 15, 2012

Real Estate Reality Check

#1.  Is homeownership right for you?

• Do you have the necessary financial management skills? 
• Most importantly, do you have an emergency account with at least 3-6 months of your household income set aside in addition to your down payment?
• How financially stable are you?
• Are you ready to take on the responsibility of all the costs involved in homeownership, including mortgage payments, repairs, and maintenance?
• Are you able to devote the time required for home maintenance?

#2.  Are you financially ready and the pre-approval process

• Before the pre-approval process (in which your banker will need this information), you need to know:
• How much are you spending now?
• Do you know all  of your income and expenses? We could have this worksheet from CMHC on the website:www.cmhc-schl.gc.ca/en/co/buho/hostst/wosh_003.cfm (current household budget calculator and) www.cmhc-schl.gc.ca/en/co/buho/buho_011.cfm (household budget calculator)
• Once you have those numbers, you’re ready for a pre-approval with your banker.  This is an essential step before you head out house hunting.  Plus, the bank will hold the interest rate for up to 120 days in case interest rates rise while you’re shopping.  But just because you’re approved for a certain amount, it doesn’t mean you need to take as much as the bank is willing to give you. 

#3.  The next big question is how much can you afford? 

There are great calculators online but there’s really three key factors lenders are looking for when it comes to your affordability:

1. Your monthly housing costs shouldn’t be more than 32% of your gross monthly income.  This is what lenders call GDS –gross debt service – they want to see it less than 32%.  Housing costs include your monthly mortgage payments (principal and interest), property taxes and heating expenses.
2. Rule two is that your entire monthly debt load should not be more than 40% of your gross monthly income.  Entire monthly debt load includes your housing costs, other debts and car loans, credit card payments, leases and more.  This figure is called the TDS – Total Debt Service.
3. Lastly, the third key is the maximum house price you can afford based on the above rules, your down payment and interest rate.

#4.  What’s really important about that last point of affordability?

For a newer home buyer that is worried about their costs, going into a fixed 5 year term or longer might make sense as they don’t have to worry about their rate going up for a while, hence, set payments.

However, as a variable rate over say a 20 year period is unusually less than any fixed rate term, it’s not for everyone.  And I strongly caution those that are getting into homes too expensive because of the low variable rates without considering that rates will go up in the future.  If going variable, you should pad your payment and pay as if you’re in a 5 year fixed.  That way, when rates do go up, you’re already paying more than you have to a have created a cushion.

New buyers should also go in with a maximum possible down payment for many reasons

1. If it’s at least 20% down, you’ll avoid costly insurance fees that the banks require for more risky purchases.
2. Second, you’ll pay a significant amount less in interest over the life of your mortgage with every dollar more you save for a down payment.
3.  Remember, you still need that cushion of a solid emergency account.

#5.  But a payment isn’t the only factor – what about hidden costs?

There’s many the new buyer needs to budget for like property taxes, condo fees, closing costs and of course maintenance.  Plus, a house and condo owner need to get their own inspections to ensure there aren’t’ major possible repairs in the coming years over regular maintenance. A buyer needs to budget for closing costs like legal fees, title insurance, property insurance and more that aren’t always factored into your mortgage payment.

Lastly, don’t let low rates trick you into less of a down payment or bigger house than you could afford.  It’s better to rent a little longer and build up emergency fund than to potentially lose it in the future –just need to heed the lessons of some many in the US.