Are you ready to begin the search for your first home? There are few endeavours more worthwhile or thrilling. Depending on the kind of person you are, visiting potential homes is either an exciting adventure or a dreaded chore. However, one thing is certain; you will feel an incredible sense of joy and pride once you’ve found “the one” and the transfer of the title takes place! The journey itself can be a little more harrowing, especially when you’ve never dipped a toe into the fast-moving world of Guelph real estate or if it has been a long time since you’ve dabbled. A little education is the perfect cure for whenever you feel overwhelmed or unsure what to do next. The following glossary of real estate terms will help you feel more at ease no matter what stage of the process you have reached.
First Time Buyer
The term might seem obvious, but the government’s idea of a first-time buyer may differ from yours. To you, it’s someone who has never bought a home before. But legally, it could just mean someone who hasn’t purchased in a long time. You can qualify as a first-time buyer under any of the following circumstances:
- You have never owned a home or a share of a home anywhere in the world.
- You are recently separated from a marriage or common-law partner.
- You have not lived in a home that you or a partner owned in the past four years.
Why does it matter whether you can be considered a first-time buyer or not? If you qualify, you can apply for some or all of the incentives the government offers to assist you with your purchase.
Do you want to know more about the programs for first-time home buyers? Read our complete guide right here.
Property Ladder
The property ladder indicates how many properties you own. Buying your first home gets you onto the bottom rung, which is a great place to start! If you own your home and invest in a second-income property, then you move up another rung. Real estate investors who own multiple properties are higher on the ladder, which has no limits. The more you add to your portfolio, the higher you climb and the more financially secure you and your family become.
Looking for more information packed resources for first time buyers? The following posts will give you food for thought:
- Can You Buy a House With a Poor Credit Score?
- Is it Time to Leave the Guelph Rental Market Behind?
- 5 Reasons to Make Guelph Your Next Home
Mortgages
This is another term that seems simple at first glance, but there’s a lot more to it than meets the eye. Unless you have hundreds of thousands or even millions of dollars at your disposal, you will need to borrow money to buy a home. That loan is called a “mortgage.”
To complicate matters, there are different types of mortgages to know about. You can choose an open mortgage, where you can pay it off early without penalty. You might love the flexibility of this type of loan, but it can come with higher interest rates.
A closed mortgage offers less flexibility, with potentially steep penalties if you break your term early. However, it can also offer lower rates which save you money in the long term. A closed mortgage is often the best choice since few people can pay off their mortgage in one lump sum.
Did you know that we have an entire course just for first time home buyers? You can get it for free today right here.
Interest Rates
Whenever you borrow money, the lender charges interest. You will either be on a fixed rate or variable for your mortgage. What is the difference?
A fixed rate is locked in over the term, generally five years. If rates decrease, you don’t benefit from a lower payment. On the other hand, you are protected when interest rates rise, as they did several times in 2022.
A variable rate means your rate will fluctuate based on what the Bank of Canada sets. When rates are low, you pay less. When rates increase, so do your payments. Alternatively, you can keep your payments the same, with more going to interest than the principal, which means you will take longer to pay off your loan.
Pre-Qualification
If you’re on the fence about buying and wondering how much you might be able to borrow, a pre-qualification is a fast and easy way to find out. No credit check is required, as this is just a rough estimate. Still, it’s a good starting point. You can go online and answer a few questions about your income, debts, and assets. Within minutes, you’ll have an idea of what you may be able to afford.
Pre-Approval
Like a pre-qualification, a pre-approval gives you an estimate of how much you can borrow in your mortgage. The difference is that it’s far more accurate. You will first go through the mortgage application process and a complete credit check is performed. The process is more involved, but there are many benefits to a pre-approval if you are a serious buyer.
- You have an accurate estimate of how much you can borrow and can use this as a springboard to create your home-buying budget.
- You can lock in the lowest interest rate from your pre-approval date right through to the purchase of your new home.
- It shows sellers that you qualify for a loan, allowing you to drop the condition of financing, which can give you an advantage over another buyer who has not gone through this process.
Appraisals
Bank appraisals are one of the most misunderstood terms for both buyers and sellers. And yet, it’s a critical concept because it can affect your ability to obtain financing on a particular home. Here’s how it works:
Imagine that you have gone through the process of getting your pre-approval and now know that you qualify for up to $1 million in financing. Just think of the possibilities open to you! But first, you must realize you are not guaranteed the full amount even though you qualify on paper.
If an appraiser determines the property you have your eye on is worth $800,000 that will limit how much you can borrow. If a bidding war ensues and you end up placing an offer for $900,000, you could be in for an unpleasant surprise when you finalize your mortgage. The bank is not likely to lend you more than the appraised value, which means you may have to come up with that extra $100,000 out of your pocket.
Down Payment and Deposit
The differences between the down payment and the deposit confuse many home buyers, not just first-timers. They sound like the same thing, but there is a distinction. The down payment refers to the total amount you will need upfront to purchase a house. This will range from 5% to 20%, depending on the price.
For example, if the home you’re considering is $1 million or more, you’ll need at least 20% to qualify for a mortgage. If it is $500,000 or less, you can get away with only 5%. On anything in between, you need 5% on the first $500,000 and 10% on the amount over and above.
When your transaction closes, your down payment gets released to the seller, along with the funds from your mortgage. How is the deposit different?
The deposit is the amount you pay in good faith within 24 hours of the seller accepting your offer. Usually, this works out to 3% to 5% of the total purchase price.
Mortgage Term and Amortization
Buying a house is a lifelong commitment. Unlike a car loan that can be paid off within a few years, a mortgage usually means you are in it for the long haul. Amortization refers to the amount of time it takes to fully repay your loan. Whenever you pay less than 20% as a down payment, the maximum amortization period in Canada is 25 years.
The mortgage term is the length of your current mortgage contract, typically about 5 years. When you hear people talk about “refinancing,” it usually means that the mortgage term has expired and it is time to renegotiate a new contract. You can typically expect to renew your mortgage four to five times throughout the amortization period.
What concerns should you be aware of when buying a home? The posts below will help you make an educated decision:
- Buying an Older Home? Here Are The Red Flags To Watch Out For
- Should You Look At Listings In A Termite Zone?
- Can You Time the Market and Win Big?
Closing Costs
Having a financial cushion is always great advice when buying a house. That’s because a lot of unexpected expenses can arise, and you also need to be aware of the closing costs. In addition to the purchase price, you will also have legal fees, land transfer taxes, home inspection costs, title insurance, and appraisal fees. These costs can range from 1.5% to 4% of the purchase price.
Now that you have a deeper understanding of these real estate concepts, you’re in an excellent position to start your house hunt. This market education will help you find and secure the right home at terms you are comfortable with. Your next step is to make your home your own and get ready for many happy years of memories!
Do you have more questions about buying your first home? We are here to guide you through the process from start to finish. Reach out today at info@gowylde.ca or call 519-826-7109 for more information or to begin your home search.
