If you’ve read my blog before, then you know that my husband and I are approaching being first-time home buyers!
Also, by approaching, I mean . . . that whenever we do finally get there it will be a first. I do not mean that we are buying tomorrow. But, well, that would be nice. We are currently renting, and are hoping to buy within 2 years. I’ve written about mortgages before (5 Things You Need To Know About Mortgages), but today I’m going to break down all the jargon. The language can be quite fancy and hard to understand so I’m going to explain some of the most key words.
Home Price – Okay, maybe this one isn’t so tricky!
This is the price of the home that you are paying.
Down Payment – A down payment is the amount of money that you put towards the property. The down payment is deducted from the borrowing amount. In Canada the minimum down payment is 5% of the purchase price. Down payments can come from savings, rrsp’s, a monetary gift, etc. It’s not recommended to use a credit card, (I couldn’t verify if this was allowed at all actually) in order to have the money for a down payment. To calculate the minimum down payment needed, my husband and I use this handy calculator. It allows us to put in the home price, and then it calculates the minimum down payment required, and still has a spot for what down payment we want to put. This is a great way to see the impact of a good down payment also.
Mortgage Insurance – This is an insurance policy that protects the lender if there are any defaults on payments. The insurance protects the lender against a loss.
Buying mortgage insurance is a fairly common thing in Canada. However, if you want to avoid it, you need to have a 20% down payment. If you use that calculator I recommended, it actually gives a good idea of how much this will cost. (The mortgage insurance.) This is usually tied into your mortgage, but you should always be aware of all the costs, and I think this is one area that often goes missed.
Annual Percentage Rate – This is the yearly rate of interest that you are going to pay on the loan (mortgage). Basically, it’s the cost of borrowing. You want something as low as possible. Using a calculator can really show you the impact a percentage makes.
Amortization – This indicates the length of time to repay the loan back in full with equal payments.
Closing costs – These are all the fees and expenses associated with purchasing the property. Closing costs cover things like, lawyer fees, property survey, legal fees, etc. I heard that a good rule of thumb is to imagine that closing costs are about 10% of the house price.
Principal – The total amount of money borrowed not including any interest.
Remember there are a TON of words to learn and you should consult a professional if you need. Make sure you understand everything you are reading before you make a committment!
Love Always, Enn