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new home mortgage pre-approval

I remember a situation from a number of years ago: One of my employees decided to dive into home ownership and buy her first house. A few days later, she came into my office walking on air to tell me that she had just been pre-approved for a $500,000 mortgage. She then described how she was able to look at far larger homes than she had originally thought she would be able to. Additionally, her bank was giving her a screaming good interest rate for a three year term.

She was very excited, but I was worried. At the time, she was one of my most successful employees and deserved a nice home. But, I knew that maxing out her potential pre-approval was risky!

So I asked if I could run some numbers for her. I told her to imagine the same house and mortgage, with an interest rate just a half percent higher, three years down the road when renewal was due. Lo and behold, the buffer she had built in would have disappeared, as would the lifestyle she was planning on!

Many first home buyers look at their pre-approval numbers, and look to buy a home at the top end of the amount. After all, the bank approved them, didn't they? Unfortunately, we often forget that we may still want a vacation, the car might one day need replacing, or the kids might need braces. Or, the interest rate could be considerably higher at renewal. 

When buying your first home or moving up to a bigger home, remember to look at the mortgage payments as opposed to the total lump sum the bank will loan you, and find a number that:

  • Takes into account emergencies.
  • Looks at the expenditures that you want to continue to have beyond owning a home.
  • Considers maintenance that a landlord is no longer responsible for.
  • Factors in potential increases in interest or taxes.

Then, look at a home in that price range. 

At the end of the day, you will be much happier with a mortgage that fits your lifestyle.

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