When you decide that the time is right to purchase a home, there is a lot more to the process than simply choosing one home from thousands of Toronto homes on the market and signing the loan documents. First you must know how much you can afford in a mortgage and gain pre-approval from a lender. This will give you an upper limit for a price range and give you the category of Toronto homes you can consider when shopping around.
Your real estate agent will come up with a list of available properties within this price range and will make arrangements for you to inspect the homes. Then you must narrow down the choices to one or more Toronto homes that appeal to you and meet your needs. Then you decide on an opening offer and present it to the seller to start the price negotiation process. Once a price is agreed upon, you proceed with the rest of the mortgage process.
One of the first questions a lender will ask is whether you want a fixed or adjustable rate mortgage. Chances are, if you are a first time Toronto homebuyer, you may not understand what the difference is between these two terms. It is important that you do have an understanding of the terms because it will affect the amount of your monthly payment.
A fixed rate mortgage has a set interest rate that will remain the same over the term of the loan. Your payment will remain the same as long as you are repaying the balance of the mortgage. It makes it a lot easier to plan a monthly budget when you know exactly how much your payment will be from month to month and year to year.
There is a disadvantage to choosing this type of interest rate on your mortgage. If you take out a mortgage when interest rates are high, you are locked into the mortgage at this rate no matter how low the interest rates may go in the future. In order to have the interest rates lowered, you will have to refinance the mortgage, which involves closing costs and perhaps penalties for repaying the loan before the term has expired.
Adjustable rate mortgages are, as the name suggests, mortgages in which the interest rates change according to market conditions. Also known as ARM’s, the interest rates on such a mortgage usually starts out low and then adjusts to the current rate after a specified period of time. The initial period of time for this low rate depends on the lender and the rate at which the interest will fluctuate will be spelled out in the terms of the mortgage. Thus, you will not be taken off guard when you find that the rate has increased.
The initially low rate is a large advantage for home buyers opting for an adjustable rate mortgage. This will give you the advantage of being able to afford to borrow a higher amount of money. This choice is also beneficial if you buy a home in Toronto at a time when interest rates are high because you will naturally be able to take advantage of falling interest rates.
One of the main disadvantages of taking out an ARM is that your monthly payments may not be the same every month, due to the differences in the amount of interest you pay on the unpaid balance. This makes it difficult to budget for your payment. When you start off with a low interest rate that rises after a year or two, the result could be that your mortgage payment could actually be double what it was in the beginning.
Your individual financial situation will determine whether you choose a fixed rate or adjustable rate mortgage. Most Toronto home buyers take a good look at the interest rates at the time of taking out the mortgage. In times when interest rates are high, it is best to choose an ARM and then when you feel that the rates are at their lowest, you can switch the mortgage to one that has a fixed rate. An ARM also works to your advantage when interest rates are low because you get an even lower initial rate, this saving you even more money.