Numbers. They are an integral part of our day to day life. Your everyday numbers are those that you have memorized and repeated time and time again…like your phone number, age, birth date, etc. Just like you have those numbers memorized, it is just as important to know certain numbers when you are shopping for a mortgage. With the ever-changing mortgage industry, understanding the effect certain numbers can have on your borrowing power is more important now than ever. As a mortgage broker, I want to have our clients informed and up to date on the latest numbers as they are applicable to their unique circumstances. Today, we are going to walk through a few simple numbers that are important when applying for a mortgage.
- HOW MUCH OF A DOWN PAYMENT IS REQUIRED TO PURCHASE?
This is the question on everyone’s minds as of late. With the recent announcement of more changes coming in 2017 there is an increased need to understand how much is required for a down payment. When it is doable, a down payment of 20% or greater is advisable. This is due to the following:For Down Payments Greater than 20% (uninsured mortgage)
- For every $100,000 mortgage amount your payment is $425/month
- For every $10,000 increase in the mortgage amount your payment is $42/month
For Down Payments Less than 20% (insured mortgage)
- For every $100,000 mortgage amount your payment is $475/month
- For every $10,000 increase in mortgage amount your payment is $47/month
On a $300,000 mortgage, that works out to $1,275/month for a down payment greater than 20%, and $1,425/month for a down payment less than 20%. That gives a difference of $150/month, totaling $1800 in a year! It may seem like a small difference, but when you consider the median price of housing in the Metro Vancouver area, that difference adds up quickly.
2. WHAT IF I HAVE MORE OF A DOWN PAYMENT?
This is the ideal case! If you have more than 20% down to put towards a home, in most circumstances, it is advisable to do so. You will have less to pay off, and will qualify at a more appealing interest rate. You will also qualify for an uninsured mortgage* and will not have to worry about additional insurance. However, this is not to say that you must put more down. Every person’s financial situation is different and sometimes more is not an option. For those who are just breaking into the housing market it always advisable to take a good, long look at your finances and determine what you can truly afford. Those who are entering the market should consider the following numbers:
- A $20,000 gross income services a mortgage of $100,000
- A $13,000 credit card debt cancels out $100,000 of mortgage money
- A $400/month vehicle payment cancels out $100,000 of mortgage money
- If rates increase by 0.25% (as they have been) the monthly payment will increase by $13/month for every $100,000
Considering those numbers when examining your finances can further help you to determine how much of a down payment you can afford. Those numbers can further pinpoint the debts that may diminish your borrowing power (ex. Credit card debt)
There is not a magic, ideal number for a down payment as it will vary from person to person. As previously mentioned though, placing 20% down or more is advised. This amount will not only save you the insurance cost each month, but will allow you to pay off your mortgage faster, and will qualify you for a better interest rate.
If you are not sure how much you will qualify for, meeting with a mortgage broker and going through the pre-approval process can offer valuable information. A broker can work with you to find the areas that are lessening your borrowing power, offer solutions, and ultimately get you into your home faster and at a sharper rate.
