The down-payment is a crucial component of the home buying process – with a few exceptions, and everyone needs one. So, how do you figure out what you have, and what you can possibly bring to the table…
The more money you have for a down-payment when purchasing your home, the less it will cost you. And that doesn’t just mean paying less in interest costs over the life of a smaller mortgage. If you have at least 20% of the home’s purchase price that you can use as a down-payment, you can obtain a conventional mortgage. The key advantage to a conventional mortgage is that you do not need mortgage insurance: Banks are required by law to ensure that customers have such insurance when there is less than 20% equity in a home purchase transaction. Mortgage insurance premiums can range from 1.25% to 3.75% of the amount being borrowed, and can be paid in full on closing, or added to the mortgage amount.
So while you do have to pay a premium because your down payment is small, mortgage insurance may help make it possible for you to own a home that you might not otherwise be able to afford.
First, estimate your cash resources. They may be bigger than you think. The first step in figuring out the down-payment
you can afford is calculating your net worth. Your net worth is the total value of all your assets, minus all your debts. Then subtract from this your estimated moving costs and closing costs – which can add several thousands of dollars to your overall home purchase costs. Your net worth will help you determine both what you can afford, and what assets may be used toward a down-payment.
Now, where to find the cash:
Do you have RRSPs? You can be eligible to cash out up to $25,000 of your RRSP with no tax penalty on your first home. These are funds that do have to be paid back into your RRSP over a 15-year period.
Can your parents gift you some monies? Financial gifts from parents, which are non-taxable, can be used for the down-payment (gifts from other relatives are taxable). Gifts from family often come with strings – and emotional complications. It’s a personal decision that depends on family dynamics – remember that before you accept a generous offer.
Do you have any stocks or bonds that you can cash out? But first, consider whether this is the best time to liquidate your investment portfolio. If you have a valuable collection or antiques that you are willing to part with, the cash from the sale of those items can also go toward your down-payment.
If this is your second home, you can use the equity you have built in your first home as a down-payment. The crucial element of your down-payment is that none of the money must be borrowed from other sources. If you do receive a gift of cash for example, your lender will want to see a letter confirming that it is a gift, not a loan.
Now if you don’t have assets you can liquidate, there may be other options for you. Mortgage insurers will insure mortgages for up to 95% of the purchase price, so you only need to come up with a maximum down-payment of 5% of the purchase price of your home. In addition, at least one bank offers a no-down-payment mortgage designed primarily for young professionals, and other programs that are designed to help you save for a down-payment.
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