Five ways homeowners lose money while banks get rich

BY CLEVE DeSOUZA

While COVID-19 pushes Canada into a recession, home shoppers should rejoice. You read that right. Now could be the time to buy a home.

Ignore the naysayers. Buying opportunities exist in every market, even during a global pandemic. When you hear about rising home costs on the nightly news, remember they’re talking about the overall market. Individual neighbourhoods still buck the national trends. And motivated sellers always are open to leaving money on the table.

For most Canadians, a personal home accounts for most of their wealth. The process of buying a home needs to be taken with care, especially if you are a first-time home buyer. Buying a home to keep up with the Jones is not a smart strategy; however, if you intend to grow, then the pursuit of home ownership is beneficial. This process can be daunting and overwhelming, especially for first-time home buyers.

Across the nation, 67% of us own our own homes, which is one of the highest rates of home ownership in the world, according to Statistics Canada.

Here are ways homeowners lose money while banks get rich.

Location, location, location
Buying in the wrong location and at the wrong time could cost you dearly. You may have heard the saying “LOCATION, LOCATION, LOCATION is the key to buying real estate. What does this really mean? Imagine a farmer seeking fertile ground to plant seeds. The farmer needs to understand what makes a location fertile or futile. Home buyers need to understand that location makes homes appreciate in value. If you pay $1,000 in closing costs and interest to the bank, your home should gain more than $1,000 in value.

Paying more than the property is worth
Paying more than the property is worth also helps the bank and hurts you. The emotional surge you feel when you see that home you love can quickly get you to pay more than it is worth. Fortunately, real estate is forgiving and over time you may get back on top. Be careful, though. Falling in love with a house could set you back and you may end up paying more interest to the bank than you should.

Ridiculous interest rates
Falling for low payment options while not understanding interests and costs is another pitfall to avoid. The concept is the same as the credit card offers you get in the mail promising 0% interest for 6 months. At the 7-month mark, a ridiculous interest rate kicks in and you’re stuck with a high balance. Sometimes low monthly mortgage payment options include unusually high interest. Your monthly payment is low, but a high percentage of the payment is interest. Over time, you pay more interest than you might with a higher monthly payment.

Understanding prepayment options
You need to understand prepayment options and amortization in order to plan how to pay your loan off early. Amortization is the length of time it takes to pay off the mortgage. If your initial amortization is 25 years, a few extra payments a year can significantly reduce this time and the interest cost.

Decision to switch homes frequently
Endless amortization by perpetually changing homes without a sound economic strategy steals away your equity. Buying and selling real estate comes with significant costs. The decision to switch homes is music to a banker’s ears because they stay in your pocket longer. If your home is appreciating well, stay put, or consider refinancing if you really need to pull equity.

While the above are general guidelines to avoid losing money, there is nothing that replaces getting help from trusted professionals. It makes no sense to be house rich and cash poor.