Ah, to be a first time homebuyer. I remember back how excited I was to finally get to own my own home. Well, the bank owned it, but I got to live in it. That the payments will go on beyond most of our lifetimes wasn’t something that was going to dampen my enthusiasm.
But there are also a ton of traps and insights that are really worth knowing to save a ton of money and grief. Unfortunately, most people get their information from friends or family. They certainly mean well, but most aren’t any smarter on the subject than the buyer.
This past month, a family member joined the ranks of newly minted homebuyers. So I’m near the end of tons of e mails, feedback, phone calls, and suggestions. Most of it you can have for $20 in the It’s Your Money book if you drive over to Mosaic, but here are some of the bigger traps, tricks and savers. And most apply to anyone who is already a homeowner with a mortgage:
Shop around for your mortgage: Convenience and ignoring that advice comes with a high interest rate. My relative ended up at 3.09 for a 5-year term and $7,200 under where he started. I also applied at ING Direct on-line. It’s not an easy site and I was really surprised their rate wasn’t competitive. But that changes almost week to week and you do need three quotes.
Take a long-term fixed rate. Rates will go up, and when they do, an extra $200 or so a month will kill most anyone’s budget.
Do whatever you can to get to a 20% down payment. I know that’s asking a lot, but in this case, an extra $15,000 down payment is a saving of $3,400 CMHC mortgage insurance. With interest, that’s $6,700 over the term of the loan.
Set up a separate savings account with two or three months of living expenses. He managed to be able to set aside two months and it’ll let him sleep a lot better knowing he always has two months of savings set aside – just in case.
Borrow as little as possible from your RRSP – you can certainly borrow some of your down payment from yourself, but you do have to pay it back, which just gives you another debt and more payments, or it’ll be taxed each year. I got him down from $20,000 to $15,000. Less money now but big thanks down the road – I guarantee it.
Stay away from money from relatives. Better to borrow from your RRSP than family. If it’s a gift – that’s great, and a blessing. If it’s a loan, don’t do it. Family dinners will never taste the same and it’ll come with judgments and questions. My relative already had a slight taste of that, even before possession.
The week of closing you’ll need a lot of money. The biggest source of trouble is when buyers don’t realize the money they need at closing. Then it goes on a credit card and that balance will now be around for years since they’ve also now got the mortgage payments. You’ll need to budget:
-$800 for home insurance….my relative shopped the two best places and saved $200 and was smart enough to take a high $5,000 deductible.
-$1,000 or so for the lawyer – again, shop around – the lawyer the no-service bank recommended was $300 higher than others. It’s just paperwork, so cheap is great!
-About one months’ payment for interest adjustment to cover the first months’ interest
– Some money for the moving expenses
-And definitely some money for the first months’ repairs and purchases. Nobody moves into a new home without needing at least $1,000 of stuff right away.
My relative did it the right way: He waited and waited until he could afford it, AND he has some money set aside for the inevitable. His shopping around and being smart has saved him $19,400 so far. His house purchase will be a blessing. Thousands of people don’t do those things, and it quickly turns into a nightmare. Do it the right way – it’s worth it, and I can’t wait for Tuesday’s possession date.