How to Finance Your Home Purchase
Although covid and the booming home market have added challenges to purchasing a house this year, it is still a goal many families are striving for. This major financial investment is not to be taken lightly, but when you know you are ready, there is still a lot to consider. Just like choosing your new home, there isn’t one right way to finance your home purchase. Read ahead to learn more about the different options for financing that can help you buy your first home.
The Basics
A mortgage is a loan from a lender or bank that enables you to buy a home without having to pay the full amount yourself. You can borrow up to 95%, and the higher the percentage you borrow, the more fees and interest will be paid out over the life of the mortgage.
Variable versus Fixed Rate Conventional Mortgages
A conventional mortgage will require you to have at least a 620-credit score and employment history. Overall, they generally result in lower costs over the lifetime of the loan. A variable rate mortgage fluctuates based on the prime lending rate. This means your interest level can fluctuate up or down given the state of Canada’s major banks. It is less “stable” in terms of knowing your exact payment every month but frequently there is an option to “lock-in” on a fixed rate at no additional cost. This allows for savings if the rates drop but come with the added risk of a potential rate increase. A fixed-rate mortgage means you know your exact payment every month over the set time frame of your mortgage.
Seller Financing or Private Mortgages
While this option comes with more risks for the seller, a highly motivated one may offer the option for you to borrow and make the mortgage payments directly to them. This generally comes with a higher interest rate and may need a much higher down payment. Other conditions may be included such as a larger one-time sum paid by a certain date, called a balloon payment, usually within 5 years of the purchase. Theoretically, you should be able to negotiate a traditional mortgage within a few years and end the agreement.
If you have a friend or family member with the capability to loan you the money, you can also arrange a private mortgage. You would sign a contract stipulating the details and terms including the amount of the loan, the repayment schedule, the interest, and the penalties.
A lawyer is a MUST for these types of agreements to ensure you are fully aware of the conditions. The penalties for default are typically quite severe. If you don’t qualify for a conventional loan, this may be your best option but ensure you are fully aware of the high level of risk.
First-Time Home Buyer Incentive
The incentive offered by the government makes it easier to buy a home by letting you borrow 5-10% of the purchase price to use as a down payment. This helps you lower your monthly costs, making ownership more affordable. The program is based on a shared-equity mortgage. This means that the government will share in the property value of your home—if it goes up, they stand to gain as well. The entire amount must be repaid within 25 years or if the home is sold.
Get an Investor
If you are handy, this might be a great option for you. In this option, you find someone to invest in the home you wish to purchase. You would commit to completing the renovations needed, using the investor’s money, and a move-out date when the renovations would be complete. This is another arrangement that would require legal oversight and a good contract but could work out to your advantage. Some investors will even share the profits.
Go Fund It
While VERY unusual, the internet and social media can potentially be a source of funding. Sites like Go Fund Me allow individuals to share their stories and reach out for help. Friends, family, and your community may be able to help you achieve your goal of homeownership. This is even more true if you have a story that will impact others. You never know how far your story could reach and every little bit could help.
Rent to Own
While this isn’t as appealing as purchasing, it might be the only viable option for some. Generally, you arrange to live in a home as a tenant for a certain term of time while you cultivate your credit and build your savings. You can either organize to purchase the home at the end of the term or pay a certain amount each month towards the value to help you reach the purchase point sooner.
Regardless of which option you choose, ensure that you have a professional overlooking the arrangements. Your home is likely to be the most expensive purchase you will ever make and the legalities should not be taken lightly. Once you’ve figured out what works best for you, reach out to a realtor to help with finding the home that best fits the needs of your family. At The Blackwell Group, we promise to go above and beyond to help you find the best home for your budget. We can’t wait to get started on turning your dreams into reality!