What You Can Afford
to Buy
Setting a maximum price range is more important than
simply establishing an upper price limit because unanticipated costs
could push you into the "house poor" danger zone. To determine
your "affordability" price range, you must calculate two
amounts; the amount of cash you can afford to put toward the purchase
(the down payment) and the maximum amount of loan (mortgage) you
can comfortably carry.
About
the Down Payment
A mortgage covers the difference between the purchase price
and your down payment. The larger the down payment, the less you
have to borrow, the smaller your monthly mortgage payment, and the
lower your cost of interest over the term of the mortgage. So it
probably makes sense to put down as much of your own money as possible.
You should keep a cash reserve for unexpected expenses
and such typical "post purchase" expenses as land transfer
tax, legal fees, mortgage arrangements, moving expenses, new furnishings
and appliances.
How
Much You Can Afford to Borrow
The first step towards establishing a maximum mortgage limit
is to calculate a monthly payment you can afford. Financial institutions
do this by calculating your debt-service ratio.
To calculate your debt-service ratio, list all your
loans (car, personal loans, monthly credit card balances). The sum
of these loan payments and your mortgage payment (including principal,
interest and taxes) should not exceed approximately 40% of your
gross income. The mortgage payment and taxes should not exceed approximately
30% of your gross income.
Interest
Rates and Other Variables
The size of the mortgage you can arrange, based on payments
you can afford, depends on interest rates. The lower the rates,
the larger the possible mortgage and the more affordable housing
is.
But there are other mortgage terms to consider, as
well. How open is the mortgage? Would prepayment be allowed? Is
the mortgage portable? Discuss your mortgage options with a REALTOR,
your banker or a financial advisor. Establish a limit — and
stick to it.
Where
to Get a Mortgage
The usual source of mortgage funds is a lending institution
such as a bank or trust company — and it is the particular
policy of the lending institution that determines the maximum loan
allowed. But there are other sources of funding too, and a REALTOR
can help you choose the best lender at the best rate and terms.
Honesty
and Integrity
Most real estate professionals in our province are members
of the Ontario Real Estate Association (OREA) — and only members
of OREA can call themselves REALTORS.
When you deal with a REALTOR, you can expect not only
strict adherence to provincial laws, but also adherence to a Code
of Ethics. And that code is very important to you — because
it assures you will receive the highest level of service, honesty
and integrity.
Highest
Professionals Standards
Before receiving a real estate license, candidates must successfully
complete an extensive course of study developed by OREA on behalf
of the Ontario Government. And that is only the beginning: in the
two years after receiving their licence, the new professionals are
required to successfully complete three additional courses as part
of their articling with an experienced broker.
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