Many people dream of buying a home. For some, it proves they’ve become an adult. However, wanting a home and being able to afford a home are two very different things. Costs are definitely a factor, but money shouldn’t be the only reason why you decide to become a homeowner.
Get your finances in order
To qualify for a mortgage, you need to have a minimum of a 5% down payment. So that means if your purchase price is $400,000, then you need to have $20,000 saved. That, however, doesn’t factor in your closing costs which will cost you an additional 1.5% to 4% of the purchase price.
Keep in mind that if your down payment is less than 20%, you have to pay mortgage default insurance (also known as CMHC insurance). This extra insurance gets rolled into your mortgage, but you can see how rushing in with just 5% saved might not be the best idea. Be sure to use a mortgage affordability calculator to get a sense of what your overall costs will be.
Understand your monthly costs
Even with a down payment in place, you need to think about your carrying costs. First, take a look at the best mortgage rates available. Even better yet, get pre-approved so you’ll know how much you can afford and what your monthly carrying costs will be.
Your mortgage payments are just one of your monthly expenses. You’ll also need to factor in property taxes, hydro, maintenance, and homeowner’s insurance. Of course, there are also your daily life expenses such as bills, groceries, and entertainment. Don’t fall into the trap of looking at just the monthly carrying costs as things change and interest rates may go up. You’ll want to give yourself some wiggle room just in case.
Consider your goals
Owning a home is expensive and could potentially leave you with little savings. If you didn’t keep some money aside for your emergency fund, you’ll need to start rebuilding your savings. Even if you’re approved to spend a certain amount on a home, you shouldn’t spend it all because you could overextend yourself. Your monthly costs don’t even factor in potential long-term goals, such as vacations and the cost of having children.
Also, is a home the only asset you want? You should also begin to save for retirement by investing your money. To be on the safe side, you could buy a smaller a home and invest the rest so all of your money isn’t tied to a single asset.
The bottom line
In the end, buying a home is a personal choice. Only you can decide when you’re ready to become a homeowner, but you definitely need to consider the costs of owning a home before making a decision.