As the picture shows you need to look to the future when getting a mortgage. Yes the “rate” and “I want a house” represents today but you need to plan not only for today but also the future.
You need to ask yourself “Do I/we want to be house poor?”
Yes I know your broker has qualified you for a $250 000 home and you are all excited and ready to leap/run to the nearest agent and start looking. Life is moving and you need to move with it – come on let’s go – we can be in the home before the summer ends. Quick, quick, quick we need to get this done. Come on hurry up. Around and around you go.
Take a breath, relax and let’s discuss what you need to be doing. First of all congratulations, you have done the right thing and spoke to a mortgage broker to see what you do qualify for but this is only part of the equation. If the broker has qualified you for your maximum purchase without discussing all options or implications of such a rash decision then you need to start questioning your broker.
So what is the issue? I qualify for the mortgage so why not take advantage of it? I am paying just as much or more in rent so again why not?
All valid and great points but there are other factors to consider.
The first big question is how much do I have for my down payment and closing costs. When buying in New Brunswick you will have 2 large amounts that will need to be addressed at closing. These are the land transfer tax and property taxes. The land transfer tax in NB is 0.5% which equates to $750 on a 150k purchase or $1250 on a 250k purchase. Now in NB we pay our property tax ahead. This basically means that you pay for the full year. For example property taxes for 2015 have been paid in full (January 1-Decmeber 31/2015) as of the end of May. This means if you purchase a property say July 1 you will be responsible to pay the seller back taxes from July 1 to December 31/2015. If I use a average tax base rate (city properties) of 1.68/$100 of selling price then a 150k purchase would equate to $2520/year or around $210/mth. This means you will have to pay on closing around $1270. Now if we go to a 250k purchase the yearly taxes would jump to around $4200/year or roughly $350/mth. So using a July 1 closing date you will have the extra charge of around $2100. These amounts are over and above the lawyers cost and disbursements.
A 5% down payment is going to cost you $7500 on a 150k purchase and it will cost you $12500 on a 250k purchase. Using a current 5 year fixed rate of 2.54% your monthly payments will be $664.28 on 150k and $1107.13 on the 250k purchase. Remember the property taxes are over and above this amount.
Now let’s look at 5 years in the future and your mortgage is coming up for renewal. Using a rate of 3.54% (5 years ago rates where in the high 3 to low 4% range) you new payment would be around $726.16 on the 150k purchase and $1210.27 on the 250k purchase.
Now using the above examples (illustrative purposes only as figures and rates can change without notice) you need to ask yourself if you have the money for the property you qualify for without going further into debt. If we add the numbers up you are looking at $6330 more to purchase the 250k home. (Remember this is only the property tax/transfer tax and down payment). The legal fees will be about the same for both properties. You also need to remember that the 250k home will cost you around $443 more per month for the mortgage payment and an extra $140 per month more in property tax payments. Think about having an extra $583/mth in your pocket. What would that mean to you and your family?
Some other expenses to consider – heat, electricity, water and repairs to name a few. It stands to reason that a more expensive home will cost more.
As you can see there are some significant differences here. You need to plan for now and the future. You do not want to be house poor where you cannot enjoy the other things in life. If you are putting all your money into a home then how can you possibly enjoy a vacation? Are you going to be able to put money aside for retirement or emergencies? Are you going to be able to start an education fund?
This is a big decision and one not to take lightly. Ensure your mortgage broker goes through this with you. Yes it makes you feel good to be able to qualify for a big mortgage but you need to know you are going to be comfortable with the payments and have enough left over for other things. We qualify you on your gross income and not your net. You know what you spend/make NET each month so be sure you can afford it.
Consider a purchase plus improvement loan. For example let’s take the 150k purchase and add another 15k in order to put in a new kitchen, bathroom or update the heating systems to make the home more energy efficient. The new mortgage on this scenario means you will have a mortgage payment of around $730.71/mth. The property taxes and the land transfer tax will remain the same as the 150k purchase. The down payment would become $8250. But you can see that you are still saving money monthly and you have a home that suits your needs. It is a great program and one I highly recommend.
So be weary about getting qualified for the maximum amount on paper and realistically look at your budget. As a broker I can go through all of this with you to ensure you make an informed decision on this important purchase.
So while a mortgage payment maybe less than your current rent you have to realize there are numerous other costs associated with owning a home. You owe it to yourself to be informed so that you can make a decision that works for you and your family.
As always comments and questions are encouraged.
I invite you to contact me to discuss any of your mortgage related inquiries. Remember no questions is stupid if you do not know the answer. I am here to help. Contact me today and let me help you realize the dream of home ownership or getting out of debt sooner.
Eric Gall is the owner of Avanti Mortgages (operating as a mortgage specialist for TMG – The Mortgage Group Atlantic). If you are purchasing, refinancing or renewing your mortgage contact Eric or check out his website and apply online.
