First-Time Home Buyer 101: Terms to Know
When you’re hunting for your dream home you may hear a lot of unfamiliar terms, especially as a first-time buyer.
But even if you’re a seasoned home buyer, here’s a few home-related terms you may need to know:
Pre-Qualification: A process by which a lender gives you an estimated amount they’re willing to lend you from a high-level view of your expenses and income. This is a rough calculation that will give you an idea as to how much home you’ll be able to afford.
Pre-Approval: A step further than a pre-qualification, a pre-approval is an evaluation of your credit, finances, assets and income by a lender in order to determine the maximum mortgage loan amount they’re willing to approve you for the purchase of a home. This involves a more thorough review of your finances including your credit score and employment history.
New Home Buyers’ Tax Credit: The New Home Buyer’s Tax Credit offers first-time home buyers a $750 rebate on the purchase of their first home. This helps with closing costs and other miscellaneous fees.
Home Buyer’s Plan: The Home Buyer’s Plan allows you to take out up to $25,000 of your RRSPs to put towards a down payment on a home. If you’re purchasing with a friend or partner (who is also a first-time buyer) they can withdraw the same amount for a total of $50,000.
Loan to Value Ratio: This represents the level of risk the lender assesses in order to determine whether or not they will approve the loan. It’s the ratio of the loan versus the asset purchased, in this case, the home.
Interest Rate: Like any loan, your mortgage interest rate is the numerical values associated with your mortgage above and beyond your principal balance. Your pre-approval evaluation and loan to value ratio are all factors in determining the interest rate you can be expected to pay in addition to your mortgage loan.
Fixed Rate Mortgage: The amount you pay monthly for your mortgage is at a fixed rate and will remain the same throughout the entire term of the loan. This means there will be little to no variation to your monthly mortgage, other than taxes.
Variable Rate Mortgage: The opposite of a fixed rate mortgage, a variable rate mortgage means the interest rate will rise and fall according to current market changes. This means you can potentially get a lower rate for the first few years of your mortgage and then the interest rate will follow current market trends.
Closing Costs: These are extra costs incurred after the purchase of your new home including, but not limited to, taxes and appraisal fees. It’s always recommended that you save extra for closing costs.
1-2-5-10 Warranty: Specific to Alberta, this outlines warranty coverage mandatory for new home builds in our province. Meant to protect home owners from builder-related material and labour, home warranty defects may be covered for up to ten years.
Equity: The value of ownership you’ve accumulated while owning your home. In short, this is how much of your home you actually own. The more you pay down your mortgage, the more equity you will have.
Amortization: While this term may seem complicated, it’s actually a simple concept. Amortization is simply the fixed repayment of a loan principle over a period of time. This means, as you pay down your mortgage loan, amortization is taking effect.
Valuation: In short, this is the estimation of your prospective home’s worth. The lender requires you to get a valuation on the property to determine how much they’re going to lend you.
We hope these terms have helped you on your home buying journey. Be sure to do your research or talk to your builder if there’s anything you’re unsure of. Trust us, you’re probably not the only one who’s wondering.