When making big financial decisions, it’s important to ask all the questions. So, to make it easier for you, I’ve answered 10 of the most frequently asked questions I get from my members about mortgages. You can read the first five in Part 1 and just to make sure we’ve covered it all, here are five more:
1. How do I know if I can afford a mortgage?
There a few things to consider when answering that question. So I’ll answer it by asking a couple more:
How is your monthly cash flow? How much of your net income is going towards debt? Typically, 43% debt-to-income is the standard. If 43% of your monthly income is going towards housing expenses and debt payments then you’re in good financial standing to afford a mortgage.
How much can you afford as a down payment? The minimum amount you need to have is 5% of your purchase price, plus some side savings for additional closing costs like insurance.
If you think those two answers through, you’ll have a pretty good idea if you can afford a mortgage.
2. What is the mortgage process?
The mortgage process can be broken down into six steps:
Before you get started, you need to know how much the bank will lend you. This is the appointment where they tell you what price range you can shop in. You’ll have to provide income, asset documents and have your credit bureau pulled. You should also receive a letter confirming the pre-approval amount and rate.
II. Start shopping
Work with a licensed real estate agent to help you find a place within your price range and negotiate a price you are satisfied with.
III. Make an offer
Your offer will include a number of subjects but an important one is subject to financing. This gives you and your lender the time to finalize the pre-approval application. Make sure the numbers work and that the bank approves of the property you want to purchase. At this point, you can still back out of the deal without losing any money.
IV. Remove subjects
Once—and only once—you have confirmation from your lender that your mortgage is approved, and you have completed the other necessary steps from your offer, you are ready to remove subjects. This is when you give your real estate agent a cheque for the deposit on the property. Once subjects are removed, you are no longer able to back out of the purchase without financial impact.
This is when you meet with your lender to complete the final review of the mortgage documents and discuss your insurance coverage. Depending on where you get your mortgage, you will either sign mortgage documents at the financial institution or a notary/lawyer office.
VI. Completion date
Congratulations on your new home. You are now a homeowner and your mortgage is now active!
3. How much should I budget for other fees like closing costs?
Typically, you want to have between 1-2% of the purchase price available for closing costs. Some costs could include legal, appraisal, inspection, a portion of property taxes, and the list goes on.
4. What is the best time to start shopping around to renew your mortgage?
Each financial institution is a little different but with Coast Capital, you can renew your mortgage up to 7 months early which is great because you can take advantage of rates if they are low in the months leading up to your renewal. But generally speaking, 2-3 months before your mortgage renewal date is a good time to start shopping around.
5. What is a HELOC and how does it work?
A HELOC is a home equity line of credit. It’s a line of credit secured by your property with a lower interest rate than a regular line of credit. HELOCs are great because they can sit at a zero balance if you don’t need it plus there is no monthly fee for it. A lot of my members use HELOCs for renovations, vacation home purchases, helping their children purchase a new home and the list goes on.