Peace of mind
Most first-time buyers recognize that there will likely be some unforeseen costs that go along with home ownership. Generally speaking, Siegle says, these people likely have less tolerance for change in their payment arrangements so they have a higher tendency to go more often with the five-year fixed rate.
It's only those first-time buyers who are feeling financially secure that say they want to reduce their costs as much as possible and go for the variable even though it's only a half a point (0.5%) difference, he says.
"It's all about the individual's psyche, their budget, their ability to absorb payment increases, and their desire to take advantage of payment decreases," says Siegle. "There's not one answer. It's the circumstances that will help you decide what's best for you."
Amortization
The length of time it takes you to pay back the loan is called the amortization period. Your amortization period helps determine how much your monthly payments are going to be, so if you're trying to keep your monthly payment lower, you may want a shorter amortization. But the longer your amortization, the longer you're paying for the home. Plus, your equity takes longer to build up.
So if you're interested in paying down your mortgage rather quickly, you may want to amortize over a shorter period of time.
You have the option to change your amortization period each time you renew your mortgage. You may want to start your mortgage with a shorter amortization period, and after your first term, you may decide to extend it if you want or need to, says Dal Bianco.
For instance, Dal Bianco says you can take up to 35 years to pay off your mortgage, but if you initially choose a 25-year amortization period and you have difficulty keeping up with the payment, extending it to 35 years would mean a lower payment, but over a longer period of time.
"The way you shorten your amortization period is, if you start at 35 years, every year you have the ability to make lump sum payments on your mortgage and you can increase the frequency," she says. "Some people pay weekly or bi-weekly payments, as opposed to monthly, so you get about one or two extra payments in each year by doing that. That pays the mortgage down more rapidly and shortens the amortization period."
Kuo says he's noticed that many first-time buyers are taking the maximum amortization period, or 35 years, so they can lower their monthly payments and ease their financial pressure on a monthly basis.
Siegle says buyers should ask themselves, 'What impact does 35-year amortization have on my monthly payment, and is managing my cash flow and having the lowest payment possible that the most important thing to me right now? Or do I want to pay the least amount of interest over the time I have my mortgage? If so, let me see how a three-year, a five-year or even a 20- or 30-year amortization might fit me.'
If you're a first-time buyer who hasn't been able to save much for a down payment but you've got really, really good income, then you might want consider a much shorter amortization.
Choosing a 35-year amortization period should be a strategy for getting into the market and not your long-term goal, says Siegle.
But if cash flow is really important to you, then make a commitment to increase your payments when you get a raise or make a lump sum payment when you get a bonus. That way, you can turn your 35-year mortgage strategy and shrink it to a 20-year strategy, he says.
Case study: Brokering a deal
Jennifer Guzzwell made a down payment on her home in October 2008 in Spruce Grove, Alta., just outside of Edmonton. She and her boyfriend Mike bought a brand new duplex for about $300,000, right in the middle of her $260,000 to $330,000 budget. Before she and Mike decided on a home, she went to a couple of banks to apply for a pre-approval. Unhappy with the initial experience, she spoke to her realtor who referred Guzzwell to a mortgage broker.
"We sat down with the broker and she walked us through the process, the different interest rates and how much we got approved for and why, so we ended up going with the mortgage broker because we felt that she was a better fit for us."
Guzzwell, 26, says she spoke to colleagues, family and friends about their homebuying experiences and it seemed the mortgages broker route was a good option.
She was pleased by the idea that a mortgage broker could shop around on her and her boyfriend's behalf. In addition, the broker asked about their long-term goals - they are not planning on living in Alberta forever - and discussed which mortgage options best suited their life.
"The broker asked us questions specifically about what our long-term goals were, whereas the bank just wanted to crunch numbers and find out what we were approved for and call it a day. But, of course, we had other variables to think about, like how long we were going to stay in this house, do we want to pay off our mortgage quicker or just have low monthly payments."
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