Planning to buy a home? There are numerous steps - some exciting, some downright boring. But what is the BEST thing you can do to ensure long term financial success?
It's simple: Create an effective mortgage payment plan! Here's Why:
A mortgage is a repayment plan agreed to by you as a home buyer and the bank. The bank pays the home seller the price of the home (minus the buyers down payment) and then you pay the bank. So technically, when you buy a home, you don't own it. You only own a piece of it. The bank really owns it, because they (usually) have paid the majority of the money for it. This agreement is done through a mortgage broker, either through your bank or through an independent mortgage specialist.
Paying Off a Mortgage
Your home mortgage is paid off( or amortized) over many years. Traditionally this period of time was 25 years or less, but in the mid to late 2000s you could get up to a 40 year amortization. This has since been reduced back down to a shorter period of time. You are charged an interest rate that is calculated usually semi-annually at a certain interest rate. In Canada these rates are staying at historic lows. You have a monthly IPT payment - Interest, Principal, and Tax payment - that comes out of account every month.
Home Buyers Mistakes
Most home owners, especially those in their first few years after buying a home, take any extra money they may have to update or personalize their property. They are then shocked 5 years into their mortgage to learn that their balance owing has only decreased a few thousand dollars, even though they have invested tens of thousands of dollars into payments and renovations. This is a huge mistake, and one that costs home owners a lot of money. The first few years of your mortgage is when the bank charges you the most for interest, because you owe them the most amount of money in principal.
What Makes a Mortgage Prepayment Plan Effective?
A mortgage prepayment plan is effective when it is not the highest amount possible given your income, includes moderate to aggressive extra payments, and allows for mechanical or appliance emergency replacements. It is assertive, long term, and allows for you to be able to live your life comfortably. You Did you know that you can make extra payments of up to 15-20% of the principal each and every year? will not be "house poor"! The goal should be to pay the home off and OWN it, not simply make a payment to the bank to keep the happy. Making the minimum payment should not be the goal - just the absolutely least you do!
Why You Should Talk to a Mortgage Expert
A qualified mortgage broker will be able to assess what that looks like for you. It is my recommendation that you talk with 2 or 3 different mortgage experts and decide what is the most effective plan for you. It could just be the best thing you can do when buying a home!