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How Mortgages Work When You’re A First Time Home Buyer
Buying a home is a HUGE decision. Not only is it a lot of money, but there are multiple contracts to sign, and multiple people/parties involved. It’s a lot of responsibility. Plus, it’s a decision many of us will make before our 30th birthday.
One of the contracts you’ll need to sign as a first-time home buyer is a mortgage contract.
Signing a piece of paper and getting $100,000’s in return can be a surreal experience. Often, you’ll only put up a small fraction of the purchase price yourself and the rest will come from the bank. You put up $20,000 and they give you an additional $380,000 to go buy a house. Crazy!
As a first-time home buyer, it can be a nerve-wracking to take on all that debt.
Before signing a mortgage contract it’s a good idea to understand the basics of how a mortgage works. How much your payments will be. When your payments will occur. And probably most important, how much of your payment goes towards your loan.
How Much House Can You Afford?
Before thinking about buying a home you need to decide how much house you can afford. Housing represents 35%+ of a typical household budget but buying the right amount of house will depend on your other financial goals.
Buying a house is one of the biggest financial decisions you’ll ever make. Amazingly, about half of us will make this decision before our 30th birthday.
According to Statistics Canada 50.2% of Canadians have purchased a home by age 30. Not surprisingly this is down from previous generations where 55.5% had already purchased their first home by age 30.
Making one of the biggest financial decisions of your life can come with a lot of questions, especially when you’re making this decision at such a young age.
One of those questions might be “how much house can I afford”?
Like many big questions, there isn’t just one answer. If anything, this question just causes more questions.
To figure out how much house can you can afford, you really need to ask yourself a few more questions before coming to the right answer.
How Fast Will Your Income Increase In Your 20’s and 30’s?
When it comes to personal finance, one of the most important things is how your income compares with your expenses. Are you living within your means? Or are you living beyond your means? Are you spending less than you earn? Or are you going deeper and deeper into debt?
Living below your means is one of those ‘keystone’ financial habits.
Living below your means lets you save a bit of money each month. It gives you flexibility during emergencies. It provides you with some financial ‘room to breathe’.
Living below your means is important because a healthy saving rate is the only way to reach your financial goals. No amount of ‘financial engineering’ is going to help you unless you can save a small portion of your income each month.
That being said, saving a lot of money while your young can be tough.
Saving money while your young can pay off big time. If you can save money while you’re young, you basically let compounding do most of the work for you.
Unfortunately, when you’re young there are also a lot of demands on your income, and these compete with your ability to save.
Thankfully, as your income grows your capacity to save increases… that is… as long as you can avoid lifestyle inflation. A good rule of thumb is to put half of any salary increase towards your financial goals, and the other half can go towards increasing your lifestyle.
By estimating your future income you can plan to save more in the future and put less strain in your current budget. But what is the right amount to assume for income increases in the future? The answer really depends on your current age.