Today's guest blog is by Helen Prasad is the Co-Founder/Business Development Manager at Ratehouse.ca.
Sure, Rates are Low – But Can You Actually Afford a New Home? Here’s How To Find Out
You have a solid job, have saved some money, and you're ready to take the next step - it's time to buy a house. You've probably heard that mortgage rates are relatively low right now, but does that mean that you're actually financially ready to buy a home? There are lots of ways to figure out if you're ready for the next step, and below are just four ways to determine if you're ready.
Save Money In a Way That Prepares You For Paying a Mortgage
You can actually practice paying a mortgage payment, this will determine if you have the ability to manage your personal finance. First, you'll need to figure out what your purchase price is. Then, calculate roughly how much the mortgage payments will be each month: factor in your hypothetical taxes, and utilities cost. Subtract this amount from what you currently pay for your housing, and put this amount of money away into a savings account. The ratio for calculating mortgage plus taxes plus heating cost is that 32% of your gross income for these expenses. You should only be using 42% for your gross income for total expenses such as the PITH and all other payments. If you begin to feel the financial burden of putting away this much money, you'll know you'll need to wait a few more years. But here’s the good news: you've avoided a huge mistake, and you've already collected a comfortable amount to go toward your down payment!
How Is Your Credit Rating?
The next thing you need to consider is your credit rating, have you paid your payments on time as agreed or are you late and have missed a few? The impact of not making payments for credit is severe, if your credit score is too low, you will not get a mortgage from regular Bank or Credit Union that offer the best mortgage rates. If you owe credit card debt, student debt or any other kind of debt, this will likely damper your chances at being able to afford a home as these payments will be calculated in your total debt service rate which is only allowed to go to a maximum of 42% of your gross income.. While it's always a good idea to first contact a mortgage brokers to find out if can afford a house and the maximum mortgage amount that you will qualify for. This is called a Pre-approval. By getting the broker to pre approve the amount of mortgage you qualify for creates an accurate picture of your purchasing power.
Use Online Calculators To Find Out If You Can Afford a Home
There are many mortgage calculators online that will help you calculate whether or not you are truly ready to purchase a home. These calculators will determine your price range as well as your maximum loan amount. However, these calculators are just a good place to start; make sure you also speak with a mortgage broker and your Bank to negotiate the best Mortgage rate that is currently available and if this rate can be held to 4 months.
Factor In Other Expenses
It's good to realize that when you buy a house, you don't just buy a house. You also buy everything that goes along with it. Are you going to buy new furniture? Are you going to need to buy a new car to get out to the suburbs where your home is located? Are you and your significant other planning on starting a family? These are all questions you need to ask yourself, as all of these will all require significant saving. If you think that you'll be scraping to make those monthly mortgage payments, realize that you'll need to be spending money elsewhere too.
Rates are low right now, but these are four things you should consider carefully before you buy a home. A house is an incredible expense, and on top of that, it is a huge commitment and a big responsibility. If you're not entirely sure if you can afford a home right now, don't rush the decision.
Helen Prasad is the Co-Founder/Business Development Manager at Ratehouse.ca. In her opinion, great investment advice can play an important factor in our everyday stressful lives, so people need to be more aware and detail-oriented.