One reason people end up in more home than they can afford is that they leave it to their lender to decide how much mortgage to take out and how much house to buy. Really? You’re leaving it to the guy who is going to make a killing off your decision? Wow! That’s dumb.

Another reason people end up in more home than they can afford is that they’re so anxious about getting into the housing market that they throw all caution to the wind and buy without enough of a downpayment, triggering mortgage insurance premiums on top of their mortgage and adding to their costs. They often don’t have money set aside for closing either, and end up tapping other sources of credit. Again…dumb! Some even tap their credit cards and lines of credit for their downpayments. Once upon a time this wasn’t allowed by lenders but now everyone seems to be looking at their shoes.

Ultimately it all ends in a mortgage meltdown. Folks find themselves struggling to make ends meet and keep their dream roofs over their heads. Their best intentions end up with the worst consequences all because they failed to add up the real costs of buying their home. And since we haven’t seen the impact of rising interest rates (yes, they’re coming) on people’s cash flows yet, this sob-story is about to get a whole lot more sobby.

While a mortgage is “good” debt – you’re building assets, after all – too much mortgage is a fast route to bad debt. Why? Well, when it takes too much of your money to keep that “good” debt in good standing, you’re more likely to turn to your credit cards and lines of credit to make ends meet – never mind have some fun. The result: oodles of debt racked up, or a life given over to sitting in a home and staring at the bare walls.

Want to avoid becoming House Poor?

Start by Knowing The Numbers. All the numbers. Figure out how much mortgage you can comfortably afford to incorporate into your budget and then don’t look at properties that would take you outside your comfort zone. Add a couple of percentage-points to your mortgage to see how you’ll be able to cope with rises in interest rates (particularly important if current rates are very low). Know how much it’ll cost to close and move into your home, and then save the money up so you don’t end up tapping credit and paying huge amounts of interest. Know what it’ll cost to carry the home – things like maintenance, insurance, and utilities – and then build those amounts into your budget so you aren’t shocked when you finally do move in.

Practice, Practice, Practice. Why would you think you can move from renter to home owner (or from small home owner to bigger home owner) without having to adjust your budget? Yet people make the assumption that they’ll find a way to cope. Really? Why not practice living on your new home budget before you do the dirty deed to see just how it’ll feel?

This is a little like the advice I give newly preggers: Learn to live on the income you’ll have while you’re on mat leave while you’re still working and bank the rest. Ditto home buying: figure out what your new budget will be, auto-debit that amount to your savings account (less your current housing costs), and use those savings to build your Closing Costs Account. There now, you’ve killed two birds with one stone: figured out how to live on your new budget, and saved for closing costs.

Don’t Fall In Love. This is, perhaps, the biggest mistake people make when shopping for a home. They see something, fall in love, and have to have it at whatever costs. This is the root of the bidding war phenomenon. Dumb! A house may be a great deal at $350,000. But at $500,000 you’re a sucker! Do you really think there are no other houses anywhere? Lord love a duck.

Falling in love leads people to do all sorts of stupid things. They buy the surface beauty (homes are regularly “styled” to do just this) and fail to look at the structure of the home. They waive home inspection clauses. Dumb. Suppose all that new paint is hiding mold, water damage or a cracked foundation, wouldn’t you want to know?

Buying a home should bring joy and excitement. It should not be a twitchy response to a sales promotion or person, or a do-or-die event. While it’s normal to feel butterflies — it is after all a life event — if you can’t sleep at night because you’re not sure how you’re going to pay for it all, you haven’t done your homework. And if you’re giddily stepping into a major financial commitment without doing all your homework, then don’t be surprised when you wake up  in a cold sweat.

I caught an episode of Property Virgins the other night during which I was appalled to hear the host tell a couple that since the bank had pre-approved them for $350,000, that’s how much they should spend. She tried to convince her poor –sucker-clients that since the bank had run all their numbers, checked their credit history, calculated their debt-to-income ratio, it was the best judge of how much debt they could afford to take on.

Really? The company that’s in the business of collecting interest to make a profit is the best guide for how much you should end up borrowing? Wow! Kinda like putting the robber in charge of the bank, dontcha think? Course this is all coming from the woman who only makes a commission if she sells a house, and whose commission is directly related to how expensive the house is. Hmmm.

Time and again I try to impress upon people that where you get your advice is an important part of how you weigh that advice. Yes, a realtor can save you from buying a house in a fly-over zone – I love that ad, particularly when the guy puts his arm through the cupboard door – but is not necessarily the best person to help you decide how much home you can afford. And certainly, the lender who is going to make gobs of money off your borrowing shouldn’t either.

So who should? Well, that would be YOU. Since it’s your money, your cash flow, your long-term interest pain, only YOU should decide what you can actually afford.

Ultimately, the amount you earn will dictate how much home you can afford to buy. The other factor that will influence how much home you can afford is the amount of the downpayment you’ve managed to accumulate. But the long and the short of it is that it doesn’t matter how much mortgage you’ve been approved for, you have to be able to afford to fit those payments into your cash flow if you hope to keep the house you’re buying.

Over the next few years, we can expect to see interest rates rise. While the yield curve is pretty flat right now, that’s mostly because of the Bank of Canada’s commitment to keep the rate at which it lends stable until mid-2010.  It won’t stay flat forever. And people who are strapped tight on their mortgage payments (because they overextended themselves by borrowing too much) will be squeaking when they have to renew mortgages at 1, 2 or 3% higher rates.

Getting preapproved for a mortgage is always a good idea. But knowing how much mortgage you can reasonably manage is an even better one. After all, if you think one of your incomes might be at risk, if you think you might get pregnant and have to rely of mat leave benefits for a year, if you think interest rates might go up, it would behoove you to leave some wiggle room in your cash flow.

Or you can do what the lender and the real estate agent advise, spending more and then twisting in the wind when things change even slightly and you can’t come up with the bucks to keep your house of cards standing. Hey, it’s your call.

One reason I’m a fence-sitter is that I’ve moved so many ficken’ times in my life, I can’t imagine buying a house and living in it forever. While I thought the last home I owned would be the last home I owned, life spat at that idea and I was on the move in just under six years. Hmmm. So when I hear people contemplating the home they’ll live in forever, I can’t even imagine it.

I once had a neighbour who, at 70, was still living in the house she had been born in. Wow! She had watched neighbours come and go, houses get ripped down and replaced by “monster homes,” while she kept on living in the little bungalow her parents had bought so many years before. Talk about rooted.

The “starter home” concept isn’t something that I even contemplated when it came time to buy a home. I simply bought a house that suited my then needs. There was a little growing room, but not too much. And eventually I did move because I outgrew the house. So the next house was bigger, but again, it was something that suited my then needs.

The argument about buying once goes something like this:

• You won’t have to worry about buying high and then having to sell low
• Anything you do to improve your home, be it painting, flooring, or a brand new bathroom, would be for the long haul so you wouldn’t have to worry so much about return on investment (ROI). You could get things just the way you want them and then enjoy your space. Gone would be the need to “keep it neutral” because selling is always on your mind. And you would have to start all over again in a new house once you’d found your once-and-done place.
• You wouldn’t have the costs of buying, selling, buying again, and moving. And those costs can be substantial, so they shouldn’t be taken lightly.

The arguments for starting with a starter include:

• You’ll need a smaller downpayment, so you get into a house faster,
• You’ll have lower mortgage payments so you can have a house and a life too,
• You can use the equity you build up in the starter home to fund the larger home,
• Why buy bigger when small will do just fine for now?

Some people reject the idea of a starter-home because they sense they’d be compromising too much on the things they really want in a home. But lots of people feel so great in their starters that those homes become their once-and-done. Having found a great location, become used to a neighbourhood, and settled in, it seems easier to add a little extra room for the kids than to pack up and move.  I think this idea is key if you’re planning on beginning with a starter: It should not be a home with which you’re just ‘making do.’ It should be a home in which you can be happy to live fully in now, for this stage of your life, even while acknowledging that someday you may be in another stage of life which may necessitate moving.

I think going for the Once-and-done home can present problems if people end up house poor. In anticipating future needs, some people over-commit to homes they can barely afford to carry, never mind maintain. Even a small down-turn in the real estate market means all their equity vanishes and they feel defeated.  And even small increases in interest rates make those homes albatrosses, which people then must walk away from to maintain their sanity.

Okay, it’s your turn. Where do you weigh in on the Starter versus Once-and-done debate?

BTW: Thanks again to Saver Queen for arranging the picnic in the park. To the brave souls who dared the weather and then watched the skies turn blue, see what happens when you believe! I was very happy to meet you all. Now I have some faces to put to the names I see so often. Hope you had fun!

A wrote:

I am a stay at home mom of 3 kids (10, 5 and 5mths) My husband is the sole provider. I do work at a salon as a nail tech maybe 3-4 times a month. My husband brings home $3200/mth and our mortgage is $1900/month. Which doesn’t leave much room to pay bills, buy groceries and everything else needed on a mthly basis. I feel like i am not doing my job as a stay at home mom, when i have to tell my family that we can’t do or buy something because we can’t afford it, which of course, puts tension on everyone and i feel like the “BAD GUY” saying no. I find myself transferring money from our line of credit every month just to get us through the month. How can i make my husbands paycheck go further?

A, the reason you can’t make ends meet is because your mortgage is eating almost 60% of your income… never mind house insurance, property taxes, utilities and maintenance. Clearly you can’t afford your home. You can either sell it and move somewhere cheaper, rent some space in it to generate revenue, or open an at-home business so you can at least generate some income and get some tax write-offs. Or you can keep on handing over great gobs of your money and relish in your home while you remain House Poor.

M wrote:

We have a mortgage and a HELOC. Because of recent mortgage rate drops, our HELOC is at a lower rate than our fixed rate mortgage. We are attempting to pay off debt as fast as possible. Should we always pay the higher interest rate debt first (in this case pay the minimums on the HELOC, and make additional payments on the mortgage) or should we pay down the LOC in case of emergency?

M, because your line of credit is consumer debt and is “callable” –meaning the lender can ask for it at any time — even though it may be at a slightly lower rate, it makes more sense to get it paid off in full first and then focus on your mortgage.

Fiona wrote:

My husband (46yrs) is a Pilot and I am a stay-home-mom. He earns a decent income and we are not frivolous people. We are trying to pay off our mortgage ($135,000) faster by shortening our amortization (5yrs) and paying bi- monthly (our current mort rate is 1.5%). We have also been doing renos for the last year (all by ourselves to save cost) and using the line of credit to help fund it, it is at just over $6000 and also at 1.5%. Here finally is my query. Our housing costs eat up over 50% of his income. We have 2 very active boys involved in hockey and summer sports. Your Budget Worksheet shows that we keep coming up with a short fall every month I’m sure due to the fact that our housing is so high. Is it more beneficial for us to skimp even more on everyday living (we don’t do much as it is) or should we give ourselves a break on the mortgage?

Fiona, why are you hell-bent on having your house paid off in 5 years? If it’s strapping you so tightly, you need to revise your goal. Having the mortgage paid off and ending up with money on the line of credit is self-defeating. Sit down with your husband and make a reasonable plan for paying off the debt WHILE YOU HAVE A LIFE. Yes, it’s important to eventually own your home. Doing so at the cost of having a life doesn’t make any sense. Spread your amortization over 15 years, roll in your line of credit, and get some balance into your life.

KK wrote:

I’m a 27 year old, single professional and currently top up my RRSP to the full amount every year, maximize my TFSA and have an emergency fund tucked away to last 6 months (without EI), 10 months (with EI). I have a mortgage with a fixed rate of 4.2% that I locked in 4 years ago that has the option to make down payments every year up to 20% on the anniversary date. I’m not considering breaking my mortgage to get in on the low mortgage rates because the best I can probably find right now is 3.9% for a 5 yr fixed rate. Taking into account the penalty fee (3 months interest) and the slight difference in rates, I don’t think it’s worth the trouble and I am hoping the mortgage rates will stay low when renewal time comes along 1 year from now. Do you think I am making a wise decision on this? Also, with the way things are going (ie. BoC rates staying at 0.25% until at least mid 2010), should I use my TFSA and any extra money I have saved (outside of RRSP/Emerg) to pay down my mortgage? I figure I can pay down the mortgage, which would reduce the bi-weekly accelerated payments and save on interest payments. I also figure the rate difference (4.2 vs. 1.2%) would also mean the money is better utilized to pay down debt than leave it sitting in a bank. I am hesitating because with the economy as it is, I don’t know if I am making the right decision to do this vs. fattening up the emergency fund. What do you think? Also, an alternative to paying down my mortgage is to pay off my car loan (non-secured) which is at 6.8% that I got 3 years ago. I have 2 years left on the loan. Instead of paying down the mortgage, should I pay off the car loan? I know normally on the show you say to “pay off the debt with the highest interest rate first”. I’m confused because when I calculate out how much I could save in payments ($1560) and interest ($798) on the mortgage vs how much I could save in interest payments ($735) on the car loan for the next two years, it looks like I would save more by paying down my mortgage even though it has a lower rate of 4.2%.

KK: What a thoughtful question. It’s nice to see a body thinking so clearly. You’re right when you say that paying down the mortgage gives you the biggest bang for your buck in interest saved over the long term. But if that were the only criteria, then blowing out the mortgage would be the number one goal and that actually doesn’t work when you’re building up debt on the other side (consumer debt). Since your home is likely to appreciate and your car is only going to depreciate, spending money on interest costs on the car is really throwing money away. So if it were my decision to make, I’d pay off the car loan and then, if I was hell bent on getting rid of the mortgage, take the old car payment and use it to make extra payments against the mortgage. Good luck, and good thinking!

EE wrote:

In our family there is an ongoing debate about mortgage debt. My husband and I choose to pay off the mortgage, while my cousin (who is a real estate agent) keeps telling me to stop looking at the mortgage as a debt. We owe about $86,000.00 and we want to have that paid off sooner than later. The debate is that it is silly to pay off your mortgage. My cousin and her husband have just had a $450K renovation done…house is beautiful. Where is the line between good debt and bad debt and are we depriving ourselves of great things by choosing to pay our debt faster?

EE, any time you have to pay interest your costs are higher. So while a mortgage is considered good debt because you’re building assets, that doesn’t mean you should hang on to your mortgage for as long as possible. You and your husband have the right idea. Don’t kill yourself to get the mortgage paid off. Have a life, but keep paying that sucker down!

K wrote:

In the current economic climate, are banks recalling mortgages on homes that are worth less than what the mortgage is at? Should we be concerned about losing our house in the event that this may happen?

K, I haven’t heard of such a thing happening and think it unlikely if the borrowers are up-to-date with their payments since to call the mortgage would necessitate selling the house at less than perhaps is on the mortgage.

Karen wrote:

January 2008 we relocated for work, at the same time I was diagnosed with cancer. I have come through treatment and I am cancer free. However the job the I relocated for is no longer an option for me. I now have to return to my home base, which will be over an hour commute. So we have listed our home to return back to the town we came from. There are a few issues, 1. The market is very high, so it is more expensive to get back in. 2. We want to have a lower mortgage because we want to get rid of our debt. 3. Our penalty for breaking our mortgage is $17,000 unless we keep the same mortgage of $285,000. Should we buy a cheaper house to have a lower monthly payout and pay the penalty or do we get a mortgage of the same amount so we don’t have to pay the penalty?

Karen, congrats on coming through your treatment successfully. I’m sorry there have been some disappointments with work and that you feel strapped now. It won’t be like this forever. You’re wise to want to minimize your mortgage costs, but the only way to get around the interest penalty is to take a mortgage of the same amount or more. If you go with a lower mortgage, there’s no way around the interest penalty. Of course, the fact that you pay a penalty should not drive your decision to buy a bigger home. Buy a house you love, that you can comfortably manage financially and eat the penalty.

All the people who have been whining about their mortgage rate being higher than current rates have got to stop! And as for media folk blasting lenders for charging interest rate penalties to people who want out of those higher rates, this is just the kind of stupidity that gives the media a bad name.

When you sign a mortgage contract, you sign with your eyes open. You know how much interest you’re going to be paying, for how long and how often. If rates go down, hey… you guessed wrong. Suck it up and make your payments. If rates went up, you’d be laughing at your lender, right?

When you’re trying to decide what interest rate and term to use for your mortgage a whole bunch of factors come into play. The rates reflect where interest rates are headed and usually longer-term rates are higher than shorter-term rates. But the yield curve can become inverted. And nobody knows what’s going to happen and when, which is why choosing a mortgage term is a bit of a crap-shoot.

Mortgage lenders in Canada are a very different kettle of fish than lenders of consumer credit. Rates aren’t rapacious. Competition is healthy. And the terms and conditions can’t vary at the lender’s whim, as they have been apt to do in the credit card arena. When you make an agreement to borrow at a specific rate for a specific term, both you and the lender assume some risk. If rates rise, the lender is left holding the bag. If rates fall, you get stuck with higher than current costs. If you don’t like that idea, then you can choose a variable mortgage and ride the rate rollercoaster or simply choose a shorter term. To make a deal and then try to get out because that deal isn’t so good for you anymore is childish. And anyone in the media who is promoting the idea that FIs should eat the diff on the interest lost is delusional.

That’s not to say you can’t negotiate with a lender. If a lender is willing to negotiate, you should move heaven and earth to make your costs as low as they can be. So a blend-and-extend mortgage may work for you. Or asking for an early renewal with a rate guarantee can get you the current rate when you need it. Failing that, you’ll get another opportunity to pick a rate and term as soon as your current term is up. Some people believe that the three-year mortgage is the perfect vehicle for riding out the ups and downs of mortgage rates. Some believe the variable mortgage can’t be beat over the long term. Whatever you choose, it should be a thoughtful process you go through, as opposed to just a dart in the dark.

And as for the people who are hell bent on getting a lower rate RIGHT NOW, damn the cost, while that lower rate may hold until the end of your term, if you then have to renew at a higher rate because rates of gone back up, how much money do you actually end up saving when you take into consideration the interest penalty rolled into your mortgage for the rest of the amortization?

As borrowers we have to smarten up and figure out what we’re doing. It’s not enough to go blindly into deals thinking someone has our back. No one has our back. And sometimes, for the sake of a story, the media is not above stirring the pot to make people feel they’ve been duped. But you can’t say that about a mortgage contract where everything is laid out in black and white.

Maybe you need to ask more questions before you make your next deal so you feel better informed. As an illustration of what I mean, I received a letter recently from a young lady who had decided that she and her husband should negotiate a better rate for their mortgage with a new lender, which they did. They went back to their old lender and discovered that there would be a $4,000 penalty for breaking the mortgage. They put the penalty on their line of credit. Really! Then they discovered because it was a high ratio mortgage the new lender would have to be insured by CMHC, so they’d have to pay their high-ratio insurance again. Oooops. By the time they’d sorted that out, interest rates had fallen again and their new interest penalty was $10,000. After all the wheeling and dealing, they were $23,000 in the hole! OMG!

John Wayne said: “Life is hard. Life is harder for stupid people.”

I was yakking with an old editor on Facebook the other day and asked how her cute little house was. She told me she’d sold and gone back to renting. Too much work, she said. And it got me to thinking just how many people buy homes because they think they should only to find that they are in no way suited to home ownership.

Owning a home is the “big dream” for so many people. But you know what? Sometimes home ownership is a pain in the arse. Like when your shingles blow off in a windstorm. Or the furnace breaks. Or you’re trying to sell and no one wants to buy so you can’t move and get on with your life.

Before anyone buys a home, they should have to take a test to see how committed they really are to home ownership; not the dreamy, picket-fence home ownership, but the paying for all the crap that happens home-ownership.

Y’know, money isn’t everything. Peace of mind, ease of movement and a sense of balance are all important things to have too. And home-ownership as an investment isn’t a sure thing, no matter what The Spurts say.

Take this test:

1. Do you have a variable income?

Do you find that in slow periods, you have trouble making ends meet? For most people you’re a variable income, unless it’s very high, they find budgeting difficult. Take on home ownership – a mortgage, taxes, insurance, utilities, maintenance – and you take on a ton of stress.

2. Do you work in an industry where employment is seasonal or erratic?

Ditto above. Unless you really sock it away while you are working, you may find it hard to keep up with the financial demands of ownership.

3. Do you have the time and skills – and perhaps more importantly, the desire – to deal with home maintenance?

There is always something to be done on a house. There are lawns to be cut, gardens to be weeded, walls to be painted, plumbing to be fixed, snow to be shoveled, carpets to be cleaned, curtains to be replaced, roofs to be repaired, furnaces to be maintained… the list goes on and on and on. Home maintenance can be expensive. As a rule of thumb, you should set aside between 3-5% of the value of your home every year to keep it in tip-top shape. So on a $200,000 house you’d need to include between $500 and $833 a month in your budget for maintenance. If you can DIY, you’ll save on labour. If you must pay someone else…

4. Do you have extra money to pay for repairs or improvements, taxes, insurance, and larger utility bills?

People are under the gross misconception that home ownership costs the same as renting. It does not. When you compare renting to owning a home in the same area, of the same quality, home ownership is more expensive. Just being able to make the mortgage payments isn’t enough. If you don’t add up all the other costs with which you’ll be faced, you may find yourself house poor.

5. Will buying a house wipe out all your savings?  

Some people will do ANYTHING to get into a house. Once they’re there, expenses start cropping up and they have no safety net in place to see them through. If buying a house eats every red cent you have to hit together, you should wait until you can own a house AND have a safety net.

6. Do you move often?

I often get letters from people who are in the military, or who work in careers that have them relocating often. Nomads live in tents for a reason, people. Getting in and out of home ownership (sales commission, closing costs) can wipe out any equity you’ve built up, assuming the market has been going up in your area. And you know what they say about assumptions!

7. Can you afford to own in an area in which you would want to live?

This one slays me. For the sake of home ownership, people move far away from friends and family, from their jobs, from the lives they love. They become house-poor in a place they don’t even want to live. And they add huge commuting costs – both in terms of money and time. As if life isn’t stressful enough. One woman I know bought “what she could afford” and then spent her life worrying about her kids walking to and from school “in a bad neighbourhood.” Jeesh!

8. Are you financially responsible?

You’d think this would be a given, wouldn’t you? Not so much. I’ve met lots of people who are clueless about their money who have bought homes. They haven’t had the discipline to save up the down payment. They don’t even know for sure how much they make each month. They don’t pay their property taxes on time. And they haven’t given a thought to what they’ll have to do to keep the place from falling down.

9. Do you love being able to write a cheque for rent and then not sweat the details? 

If you’re a gad-about or hate routine, home ownership may not be for you. Ditto if you’d rather travel than buy furnace filters, shop for shoes than snow shovels, or go back to school than refinishing the floors. If home ownership is going to get in the way of other things you want to do with your life and your money, you’ll only end up resenting your house. So if Saturday morning in a café with a latte is more attractive than heading out to cut the lawn, stick with renting.

People buy houses for the wrong reasons. You father says you should. The media says you should. Your sister says you should. What do YOU want? If you don’t want the responsibilities of home ownership, don’t let anyone push you into it. Make the choice that’s right for you. Home ownership isn’t for everyone. Some folks are happier and better off renting. There’s nothing wrong with that choice. And don’t fall for the crap that you’re throwing your life and money away. Just point out that of your best-friend’s $2,100 a month mortgage payment, $2,084 is going to interest at least for the first five years or so.

Yes, home ownership brings the opportunity to grow equity over time, but if you rent and invest wisely, you can achieve much the same end. Being house poor, stressed out on time, and lonely in a far-away place isn’t the price you must pay to have money for retirement. There are other ways. Go find them.

Some people are rabid about paying off their mortgages. They turn themselves inside out to double-up their payments or to pay off a whopping amount of their principal each year. Hey, if you can do it and have a life, more power to you. But many people can’t. And so they end up stealing from Peter to pay Paul. Like this chick:

My husband and I are mortgage free, but owe a substantial amount on a line of credit and several credit cards. We can never seem to get ahead and I am wondering if a home equity loan to be used specifically for clearing off all of our debt would be a good idea. Are there any other alternatives for us to consider.

Mortgage free doesn’t mean sweet diddly-squat if you’re walking around with a ton of consumer debt. Yes, wanting to pay off your mortgage is an admirable goal, but not at the expense of your Life, and not if you’re just going to rack up the debt somewhere else.

So today, do a net worth statement and take a snapshot of how you’re doing financially.

Add up what you Own:

• Cash in your chequing/savings account(s)
• Cash in a money market fund, TFSA or government bonds/treasury bills
• Cash in a term deposit or GIC (non-registered)
• Cash value of your insurance policy (not the face-value, which is what the policy would pay out; the cash value, which is what you’ve built up in a permanent life policy, if you have one)
• Assets in your retirement account (including the value of your company pension plan)
• Unregistered assets such as mutual funds, stocks, bonds or anything else you may own
• Current value of your home
• Current value of any other property you owe
• Value of collectibles (Forget about your car, your jewelry or your other stuff. It’s just put on most people’s net worth lists to make them feel less like losers.)

Now add up what you Owe:

• Mortgage(s)
• Car loans
• Lines of credit
• Credit cards (all of them)
• Investment loans (like the RRSP catch-up loan)
• Student loans
• Other loans
• Whatever else you may owe to family and friends

Subtract what you Owe from what you Own. That’s your net worth. You should do a net worth statement at least once a year to measure your overall progress. If the chick from the note above had done one, she’d have seen that her mad dash to mortgage free was coming with some very real costs.

I’m not sure why we think we need to have our mortgage paid off in a nano-second. It’s dumb, particularly if we strap our cash flow so tight that we have no life, or we end up using more expensive forms of credit to get the things we need or want.

Yes, being mortgage free by the time you retire is a great idea because when you’re living on less having your housing costs reduced makes sense. But tying one hand behind your back financially for the sake of becoming mortgage free makes no sense at all.

Unscramble your priorities and make a plan that will improve your net worth instead.

If you check around the web, you can find a list of the things most homeowners need to do on a regular basis to keep their castles gleaming. From testing your ground fault circuit interrupter(s) to ensuring your windows and skylights close tightly, checking and cleaning (or replacing) furnace filters, to checking your faucets for signs of dripping, the list of what you have to do to keep your home humming along smoothly can be hugely intimidating, especially if you’re not sure how things work. But ignoring the little things can only go on so long, and then they turn into really big things that cost a lot of money to fix.

A few weeks after moving into my home, it suddenly struck me that as a single woman who hates to climb ladders, I was going to have to figure out how to cope with things like changing furnace filters and replacing light-bulbs in high-up fixtures. I panicked. I hate balancing on a ladder in a stairwell. I just can’t do it. So I put out a call to friends for a rent-a-husband. Annie was the first to respond, offering up her husband as my Sub Hub (substitute husband). He’ll be happy to strap on his tool belt and head on over to Casa Gail whenever I need him.

It might be easier to just let him do everything, but I feel I’ll be failing to provide Alexandra with an appropriate role model if I abdicate my home maintenance to any guy who is willing to strap on tools for me. So I’m making a commitment to DIY. Which means I have to figure out what to do and when … and eventually how.

You can create (or print from the web) a seasonal home maintenance list or you can create a custom monthly maintenance schedule for your home. I like the monthly schedule more since:

a) you can create one that is specific to the home you’re living in, and

b) you can schedule the tasks to be done in an efficient way.

In my last home, I lived on a septic system, had a well and had to cut 3 acres of grass every two weeks. In my present house, I’m on town water, town sewage, and have a postage-stamp lot. The off-the-rack seasonal checklists don’t do a really good job of covering what I need for either properties; my new monthly, customized list will.

Once you’ve listed all the stuff you need to do every month, you should incorporate the biggies into your plan. If your dishwasher will need to be replaced in two years, figure out the approximate cost of the replacement, divide it by 24 (the number of months) and make sure you allocate that portion of your maintenance budget to the dishwasher. If you’re planning on painting the kids’ rooms, installing a new counter-top in the kitchen, or redoing the main floor bathroom, estimate your costs and divide by the number of months remaining until you execute your plan. Now you’re working proactively to keep things in tip shape, and create the environment you want, as opposed to flying by the seat of your pants and hoping you’ll magically come up with the money.

When I moved into my new home, I knew I would need a roof almost immediately. I negotiated the cost of the new roof off the purchase price of the house and then slapped that money into a high interest savings account so that come spring I can have the roof replaced AND pay for it. I could just ignore my sad roof until it starts to leak, but then not only will I have to replace the roof, I’d have to replace insulation, re-drywall ceilings and paint… again!

Now I have to start planning for new carpeting/flooring. Man, it’s always something.

The excitement of moving into your first home, or a new home, is something that just can’t be described. There’s a flutter in your tummy, a sense of OMG that just wraps itself around you. And when you finally get the boxes unpacked and you walk around your castle, you’re often pinching yourself that you’ve done it. More OMG moments.

I distinctly remember looking out my kitchen window and wondering how I’d managed to make the life I had. I was living in the city at the time, the weeping mulberry was shooting pollen into the air, and the kids were romping, laughing and shouting. I did pinch myself.

The warm fuzzy feelings of owning your own digs eventually give way to the what-the-hell realization that when you own a home, there is always something that needs doing. Each time I’ve bought, I’ve had a home inspection that identified what was good and what was not-so-good about the home I was buying. And each time I’ve been told that there was stuff that would have to be done to fix or keep the house in good shape.

The rule of thumb for budgeting home maintenance costs is that you can expect to spend between three and five percent of the value of your home holding the sucker together. Older homes require more financial investment. Brand new homes require almost nothing initially, often lulling home-owners into a false sense of what things really cost.

People screech when I tell ‘em they need to budget for home maintenance. “What!?” they bellow at me when I tell them that on a $350,000 home, they need to set aside between $875 and $1,460 a month, depending on the condition they got the sucker in. Are you kidding me? That’s the equivalent of rent!

Home ownership is a big responsibility. And it can be very expensive. Let’s take a new roof as an example. A new roof on an average sized house costs between $6,000 and $8,000 if you go with a reputable roofer and use good quality materials. If you buy a home that’s brand new, you can expect to get 10 to 15 years out of your roof. Let’s be optimistic and say you’ll get 15 years; that translates into socking away just $39 a month to have what you’ll need when the time comes. But if your home is already 12 years old, you only have three years to come up with the money, so it’ll cost $194 a month. And that’s just for the roof.

There are furnaces to be replaced (a good gas furnace should last 15 to 20 years), windows and doors to be updated (window glass usually has a 10-year life span), and appliances to be fixed or replaced (anywhere from 6 years to 15 depending on the appliance). You have to paint inside and outside, repair asphalt or interlocking brick, and lay new carpet or other flooring periodically. And then there’s the stuff you must do seasonally – like clean the chimney, open and close the pool, maintain the garden, clean the eave troughs, – to keep the place in working order. Never mind the stuff you choose to do: painting or wall-papering, changing window coverings, putting down new flooring, adding storage or living space in a basement, upgrading bathrooms and kitchens, planting a garden.

When we bought the house in the country five years ago, our home inspector was fabulous (get a reputable one so you can trust what he/she says, it’s worth every extra penny you spend) and gave us a list of what would have to be done, along with a timeline and an approximate cost. And he was dead on. The chimney liner had to be replaced the second year we were there, the appliances in the kitchen in year five, and the roof soon after.

You can skimp on your home maintenance, ignoring the cracking foundation, the rotting deck or the fence that’s falling down only so long. When it finally MUST be done, no doubt it’ll cost three to five times as much as it would have if you’d simply maintained it. Out of the U.S. comes the statistic that for every $1 spent on home maintenance, you’re likely saving $100 on repairs. Pay now or pay big-time later. It’s your call.

Everyone wants to know whether or not to consolidate their consumer debt onto their mortgage. Well, it depends on whether you’re doing it to reduce your interest costs, or to buy room on your credit card so you can keep shopping!

R wrote:

When purchasing our home four years ago, we decided to get a bridging loan (I still don’t understand how it works). But the person at the bank also suggested an Equity Line of Credit, amalgamating our car loans while saving on monthly interest etc, because we were richer than we thought.

To our dismay and four years later we are still paying off this equity loan. We are now at 26,000 (down from 56,000) – We increased our payment to 1,500 a month, but I am so fed up of paying this money, because its 1,500 we could use on other things, like vacations or retirement. I am wondering, when our mortgage comes up for renewal (May 2010) we would then owe around 12,000 on the Equity Loan. Do I continue to keep paying it off monthly or should I add this money to our mortgage just to get rid of it. Right now we have a variable mortgage at 2.25 %interest. I am now 50 years of age, and really want to get our mortgage paid off. So I am not sure if adding the left over from the Equity Loan to our mortgage is the right thing to do. We have another 10 years on the mortgage.

R, sorry you got suckered. No one is richer than they think, but it sure is a great way to convince people to borrow more money, isn’t it? If your mortgage rate is lower than the equity loan rate, consolidate to lower your costs. But don’t reduce your payment amount. Slap as much on the mortgage as you were paying for debt and mortgage payments together and you’ll not only save money, you won’t add to the length of your mortgage.

K wrote:

I have $170,000 equity in my house, but have $45,000 in credit card debt. Question: Should I apply for a loan to clear the cc debt all at once (using home equity as collateral) or just keep paying it off as agressivly as possible (currently paying around $1000 a month)? Interest rate on my 5 credit cards varies from 28% to 5%. My net monthly income is $4950. My mortgage payment is $900/month (variable) I am a single parent of one child.

K, with such high interest rates, it makes sense to consolidate on your mortgage to save on interest providing you put away all forms of credit, learn to live on your current income, and continue to make extra payments against your mortgage to offset the consumer debt you stuck on there. Stick with a payment of $1900 a month and you should be fine over the long haul.

Maureen wrote: (I’ve summarized)

I wonder what would happen if for a couple of years the interest rate on all loans, mortgages, lines of credit and credit card debt was reduced for everyone. For example – 5% on $1000 of debt is $50. 19% on $1000 of debt is $190. Believe me, if that $140 dollars (multiplied by all the debt in North America) was still in our hands we (the millions of tax payers) could really stimulate the economy, create jobs and businesses and/or stave off foreclosure and bankruptcy. And the lenders would still be getting something – which is a lot better than the nothing so many can no longer pay. Would this not give many the breathing space that is needed to stave off more foreclosures and bankruptcies? Would this not act as a grass roots stimulus package instead of robbing from the tax base and our children’s future? I do know what an enormous difference it made to our lives when we were able to renegotiate all of our credit card debt down to 5% interest a few years ago. We are debt free and have some savings for the first time ever. Multiply what we were able to do by all the people who are in the same situation that we were in and I think we would see some real change. I honestly think that we the people could do a much better job of rebuilding our lives and the economy if just given a break.

Maureen, you’re very right when you say that a significant reduction in interest rates would help people not only get out of debt but create enough cash flow to help stimulate the economy. I received an email the other day from someone who tried to consolidate all their debt with one of our biggest banks only to be offered an interest rate of 16% — this when prime is at 0.5%. It is frustrating to watch. I’ve actually blogged about the fact that I think there should be a sliding scale implemented… take a three year consolidation loan and watch your interest rate come down semi-annually if you keep your monthly payment plan. But it would take some imagination and a willingness not to walk lock-step with everyone else for this to happen. In the mean time, I hope people are learning the lesson that borrowing at any cost is NOT a good idea. Maybe there are enough lessons in these tough times to make people wake up. And maybe those companies that do right by their customers will be rewarded with loyal customers over the long term.

S wrote:

I know that everyone says going with a variable-rate mortgage is cheaper in the long run than going with a fixed-rate mortgage. But to be honest I’m scared to death that the rates are going up. I mean if they’re this low now isn’t up the only place left? So what should I do?

S, I think you answered your own question. You know what you want to do, but you just don’t want to look stupid doing it. Doing what’s right for you is never stupid. It may be fine for some to go with a variable rate if they have a high risk tolerance and are prepared to keep a keen eye on the mortgage marketplace. The reality is that the spread between fixed-rate and variable rate mortgages is pretty thin right now, with fixed-rates coming in at about 4% and variables hanging at about 3.3%. (FYI, lenders charge a premium on fixed mortgages because they have to accept the risk that rates might go up. When you choose a variable rate, there’s no risk to the lender so you get a better rate.) So the question is, are you willing to eat .7% higher cost to know for certain what your mortgage rate will be for the next five years?

When the Feds introduced the Home Renovation Tax Credit, a lot of people started rubbing their palms together planning how they were going to take advantage of the credit to do some renos around the house. Since “consumption” is a huge part of our economy, the government is hoping that people will use the tax credit as their incentive to spend money. And, of course, that’s exactly what people will do.

If you’d don’t already know, homeowners may claim eligible home renovation expenses performed after January 27, 2009 and before February 1, 2010, up to a maximum of $1,350.  The credit must be claimed on your 2009 income tax return and you must spend between $1,000 and $10,000 to receive the credit. If you spend the maximum of $10,000 you’ll get a credit of $1,350.

What qualifies? Anything from renovating your kitchen, to laying new carpet or flooring, building a deck, fence, or addition, installing a new furnace, or painting inside or out. Building permits, professional services, and equipment rentals are also covered.

What’s not covered? Routine repairs and maintenance don’t qualify, nor does new furniture, appliances, electronics, or construction equipment.

Spring is the perfect time to start fixing up the little homestead. But before you lay down your bucks, make sure you know that it’ll be money well spent. If you’re doing stuff just for the tax credit, you’re a dope. If you’re putting the renos on credit, no doubt the interest will offset the tax benefit PDQ. But if you’re doing stuff that improves the value of your home, you can pay cash on the barrel, and the government is willing to help, you’re ahead of the game.

Want to renovate your kitchen or bathroom? Go ahead. According to the Appraisal Institute of Canada you’ll get between 75 and 100% back on your investment. Painting the house returns between a 50% and 100%. Replacing your roof or your heating system, installing a fireplace or new flooring, building a garage, adding a rec room, replacing windows or building a deck all have a 50-75% payback.

While the tax credit covers sod, landscaping is one of the lowest payback steps you can take. Ditto installing asphalt or interlocking paving, putting in a swimming pool or adding a skylight.

Of course if you’re making a change simple for the sake of change, you may get nothing back. So don’t think that replacing perfectly good carpet with another version of floor you are “improving” the value of your home. On the other hand, if you put on a new roof to replace a roof that was shot, you will get most of your money back. The trick is to balance your desires with the return you’ll get on your investment. Pour 10-15% of the value of your home into a kitchen reno and you’ll be in the positive. Spend more and you should be willing to commit to living in the house for more than five years to make the reno pay.

The Appraisal Institute of Canada has an interactive web-based guide designed to help you figure out the value of home improvements you may be considering. CMHC also has an extensive list of resources you should check out if you’re planning to do some upgrades this year.

If you’ve been bitten by the reno bug, be careful not to spend too much. If the next best house in your neighbourhood is worth just $400,000 and you bring yours up to $750,000, you won’t be able to get the money out.

So, what are you planning to spend money on in your home this year? And how do you feel about the tax credit the Feds have put on the table? Would you do something now because of the credit? And are you planning to do any renovating even if you’re still carrying consumer debt?

I’ve been getting a bunch of letters from people recently about taking advantage of the new, lower interest rates. Here’s one from Kristina:

Today’s mortgage rates have my husband and I tempted to refinance our current mortgage. We are 17 months into a 5 fixed year term, 25-year mortgage. When we bought our house, the 5 year fixed rate was 5.75% and now it is 4.09%. This is a difference of $320 a month, an amount that would significantly accelerate the down payment of the mortgage. I have read that we can expect that the bank will want 3 months interest in penalties if we try to get out of our current mortgage. Is this always the case or are there any other options that we can explore? When does it make sense to refinance?

When you’re trying to decide what interest rate and term to use for your mortgage a whole bunch of factors come into play:

• There’s the difference between the rate for a variable mortgage and one for a fixed-term mortgage, along with
• The different terms being offered, usually anywhere from six months to 5 years (or in some cases even longer), as well as
• The choice to go with a closed mortgage or one that is open and can be repaid early.

From the lender’s perspective, the rates reflect where interest rates are headed. Usually longer-term rates are higher than shorter-term rates, but the yield curve can become inverted  if the economic gurus are predicting that rates will be coming down over the long term. And usually, variable rate mortgages are less costly than closed, fixed-rate mortgages. But those closed, fixed-rate mortgages also protect you from interest rates that head upward during your term.

If you choose to go with a closed mortgage and then watch interest rates drop, as they have over the past few months, you may feel like you’ve been cheated since your mortgage is going to cost way more than it needed to. If only… if only you had known interest rates were going to fall, you’d have gone with a variable rate… if only you had known rates were declining, you’d never have committed to such a long term at such a high rate… If only…

Quitcherbitchin people. You looked at the info at hand, made a decision and now must stick to your side of the bargain. If you try to get out, the lender will hit you with a big fat penalty – called a “lost interest compensation, or LIC” – because you’re breaking the contract.

Some people are very willing to eat the LIC, adding it into their mortgage so they can get the lower interest rate for a longer period of time. Hmmm. They argue that the longer-term savings on their mortgage is well worth paying the LIC.

If you’re determined to renegotiate your mortgage, let me introduce you to the concept of the “blend-and-extend.” With a blend-and- extend, you continue to pay the existing interest rate for the remaining term on your mortgage, but you renew early to lock in the lower rate for the remaining term.

Let’s say you have 18 months to go on your mortgage at 5%. For argument’s sake, the current 5-year rate is sitting at 4%. If you used a blend-and-extend, you’d pay 5% for the first 18 months and 4% for the remaining 3.5 years on your new 5-year term.

Most lenders offer the option to blend-and-extend. They may not know it, but they do. And you may have to convince them that this is something they can do, since the financial world is sadly under-educated in terms of how stuff works, and what their own companies offer. Hmmm.

You must be persistent. Your persistence will be rewarded with big savings. Brenda wrote me to say:

You are a peach! Dear Gail your advice has saved me $2,259.70 blending and extending mtg, and I negotiated a rate of 4.638 from 5.1 based on $214,515. locked in for 5 yrs closed. It took a lot of wear on the branch mgr, but TD came through.

So, are you going to beat yourself up for not having the foresight to predict where interest rates were going? Are you going to bitch and complain about how lenders are greedy dicks?  Are you going sit there wondering how long the lower interest rates are going to last? Or are you going to find a way to capture those lower rates right now, so there are fewer surprises in your future? Hey, hindsight is 20/20. It’s what you do with the information you have in the here-and-now the separates the whiners from the winners.

BTW: A lot of you have been indicating that you’d like an opportunity to get together and meet me in person. Saver Queen is making plans for a Potluck in the Park. There’s a forum set up under Gail Clubs (all the way at the bottom), and if you’re interested in participating, you can go there and get into the mix. I’m coming, and bringing kids with, along with a nice salad. Saver Queen has been good enough to front the costs for the park permit, and we’re all going to chip in. Go check out the forum!

I received letter from a young lad recently that asked a very good question. He wanted to know how he should prepare for home ownership. While I’ve written about what you have to do when it comes time to buy a home, there are also things you should do well in advance of hitting the pavement to go shopping.

1. Save a downpayment. When I tell people they should have a  minimum of 20% of the purchase price for a downpayment on a home, they balk. TWENTY PERCENT! How are we ever going to come up with that kind of money? Well, sweat is one way. Cutting back on what you’re spending is another. Here’s the thing about NOT having 20%: You immediately make the home more expensive because you have to incorporate mortgage insurance fees into the equation. On a $210,000 house with only $10,000 down, the mortgage insurance would be 3.1% of the value of your home or $6,200. Added into your mortgage, that mortgage insurance premium would end up costing you $13,605 if you amortized for 25 years, or $19,330 if you amortized for 40 years.

2. Calculate your carrying costs. I can’t believe the number of people who leap into home ownership without a clue about the financial responsibility they’re undertaking. Home ownership is NOTHING like renting, so if you figure you can afford a home because the mortgage payment is almost like rent, you’re a dope. You’ll have utility costs. You’ll have taxes. You’ll have insurance. And then there’s maintenance… the cost everyone likes to ignore. Resist the urge to guestimate what these costs will be. Find out. Ask friends and family in the area what they pay for heating, electricity, water, oil, whatever your house consumes. Look at real estate listings to see what the taxes on comparable homes in the area are running at.  Use the rule of thumb of between 3% and 5% of the value of the home for maintenance every year. If you can’t afford to carry the sucker, then you’ll know you’re not ready to buy.

3. Calculate your closing costs. Some experts say to estimate 1.5% of the value of your home for closing costs. Others say more. You need to know what to expect so you can make a budget that’s realistic. There are legal fees and expenses, a home inspection fee (don’t skimp), adjustment costs for things like pre-paid property taxes, an appraisal fee, land transfer tax, title insurance, an interest adjustment, a property survey (maybe), water quality inspection if you’re living in a rural area, and hook-up fees for setting up your new services like a phone line. And don’t forget GST.

4. What will you need or want to buy for your new home? From window coverings to appliances, from a new bed to new broadloom, there are always ways to spend money on a home. If you have grass, you’ll need a lawn-mower. If you buy a house with a pool, you’ll have calculate the on-going costs to open, maintain and close the pool each year. If you have a driveway, you’ll need a shovel or a snow blower, or you’ll have to hire strong backs to do the shoveling for you.

Once you’ve worked out what you’ll need to have ready in cash, you can get busy accumulating the money. Let’s say you decide you’re buying a $250,000 house.

• Your downpayment will be $50,000
• Your closing costs will be $3,750.
• Your new stuff budget will be $6,000.

In total you’ll need to save $59,750.

Alrighty then. Now to the cost to your cash flow:

• If you’re buying a $250,000 with 20% down, at 4% amortized over 25 years, your monthly mortgage payment will be $1052.05.
• Let’s say the property taxes run at $2400 a year, so that’s $200 a month.
• And you’ll have to pay house insurance, which we’ll estimate at $100 a month.
• Then there are the utilities, which we’ll estimate at $300 a month.
• And maintenance. Following the rule of thumb you’ll need to budget about $625 a month.

For a grand total of $2,277.05 a month… which is what it’ll cost you to actually live in your new home.

So now we come to the Gail’s Great Advice part. This is where you figure out if you’re ready for the responsibility of home ownership. If you can come up with $2,277.05 a month for your savings (less whatever you may be paying to keep a roof over your head right now), then you’re ready.

Hey, I’m not talking about if you can THEORETICALLY come up with the money. I’m talking about taking that money and socking it away every single month. So if you’re currently paying $1,000 a month to keep a roof over your head, you’d be committing to socking away $1,277.05 every month to your Home Buying Account.

Here why you’re going to do it this way:

First, you’ll learn to live on less disposable income. You better start practicing before you buy your home so you’re ready for the adjustment in your lifestyle when you do take the big steps. Loads of people buy a home and then keep on spending like they did before they became home-owners… racking up gobs of debt.

Second, the $1,277.05 a month is going to get you to your 20% downpayment in under four years. Yup. In just four years, not only will you have enough to put 20% down on your home, you’ll have your closing costs and your new stuff budget covered too. In the mean time, you could have friends and family gifting all the stuff you’ll need for your New Home Adventure for all the birthdays and Christmases in between.

So, whaddaya t’ink? Are YOU ready to take the dream of home ownership from the I-wish-we-could stage to the I’m-gonna stage?

If you want to know how to make this decision for yourself, you’re going to have to wrap your head around an economic concept called the “yield curve.”

The yield curve is a graphic representation of the interest rates being paid on government bonds of differing maturities. If the one-year bond is at 5%, the two-year at 6%, the three-year at 7%, and so on, you can see that the longer the term, the higher the interest rate. The yield curve is curving upward from left to right. This is referred to as a Normal Yield Curve because this is the way the curve usually looks. A normal yield curve represents investors desire to charge more for the use of their money over the long term because longer term investments are inherently more risky. To encourage investors to plunk down their money for a longer period of time, a higher interest rate is offered as compensation for the extra risk being taken.

Sometimes yield curves are Inverted: the longer term carries a lower interest rate. And sometimes the curve isn’t a curve at all; it’s flat, but it’s still called a Flat Yield Curve. That’s when there is virtually no difference between the interest rates right now and those five years from now.

So what can the yield curve tell you about mortgages? Well, if the curve is normal, then the longer-term rates are predicted to be higher than the shorter-term rates. In other words, right now Them That Knows say that interest rates are going to go up. All you have to do is look at the difference between the one-year and five-year mortgage rates to see where interest rates seem to be going.

If they are, in fact, predicted to go up (I say “predicted” because anything can happen), then the question you have to ask yourself in making the decision of what term to choose is how much the increase in interest rates will affect your ability to make your mortgage payment.

Find a mortgage calculator on the net. Put in the mortgage amount and the new higher rate. If you have 10 years to go on your existing mortgage, put that 10 under the amortization period. (Do not used a longer amortization period because you want to see a lower payment. That’s delusional.) Look at what the monthly payment amount will be.

Let’s take the example of a $350,000 mortgage amortized over 12 years.
At your existing rate of 4%, your monthly mortgage payment would be $3,058. But if the one-year rate has jumped to 6% your monthly payment is $3402, biting another $344 a month from your cash flow. If the five-year rate is 7.5 %, your new monthly mortgage payment will be $3672, a jump of $622 a month.

While my numbers are examples taken from a net calculator and will differ from what you get from your lender, they are enough to paint the picture.

Here’s the tough part. Now you have to decide if you are going to take the “risk” of a one-year renewal where rates are less, but there is no security, so rates may go up even further, in order to keep your increase to only $344 OR are you going to bite the bullet and take the five-year term, coughing up another $622 a month so you know where you stand for the next five years.

I can’t make that decision. If you’re mature enough to have bought a house, you’re mature enough to decide your own term. I will say, however, that there are more than a few people who say if you consistently take a three-year term, you can iron out the bumps a little more easily. And while Adjustable Rate Mortgages (ARMs) have been the hot ticket to lower costs historically, lenders are eliminating the “premium” (the interest rate discount on ARMs) so that right now they are a lot less attractive.

Do the math, take your stress levels into account, and then decide what you’re going to do. Make sure you negotiate hard for the best rate going. Just because the mortgage rate is posted at 7.5% doesn’t mean that’s what YOU have to pay. Lenders routinely discount their posted rate for customers who have shown they are trust-worthy. If you’ve been a good borrower, now’s the time to use it to your advantage.

FYI: The Yield Curve is also said to be able to predict a recession since for the past 50-odd years an inversion in the yield curve has proceeded every recession on record. An inverted yield curve means that Them That Knows think that rates are going to come down from where they are today. Why does that smell like a recession? Usually it’s because Them That Knows believe the central bankers are trying to fight inflation, so they’re tightening up the money supply to discouraging people from borrowing. When the curve inverted in 2007, that might have been The Signal We Ignored that the economy was about to hiccup and then choke.

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I’m not sure when renting got such a bad name, but if I were to hazard a guess I’d say when real estate started zooming through the stratosphere and a “home” became an “investment.” Then renting  became “throwing away your money.” Never mind the fact that you were putting a roof over your family’s head. Only slugs rented. Anyone who wanted to be wealthy knew enough to get into a home. As you can see for the sub-prime fiasco in the U.S., that attitude left a lot of people homeless when they found they couldn’t CARRY their homes AND EAT.

When I was in my 20s, I lived in a neighbourhood that was suited to a single girl hell bent on a good time. Back then, renting was the perfect solution: one of limited responsibilities and commitment. If a window broke, I called the landlord. If the fridge stopped working, I called the landlord. Renting is virtually a worry-free existence. (All this is assuming you have a decent landlord). 

Home ownership can be a pain in the rump. There’s always something that needs fixing. But home ownership also brings a ton of warm and fuzzy feelings. You have complete control of your environment so, yes, you can paint your living room red. And if you enjoy puttering about, you’ve just secured yourself years of weekend entertainment. Course, when it comes to the rent versus buy question, you can’t just focus on the feel-goods. You’ve also got to get in touch with at the financial facts of life. 

People often believe that a home is a good investment. And virtually every rent-versus-own question is a lead into why you HAVE TO buy your own home. It’s funny how none of those arguments present the positives of renting. Maybe it’s because they’re all in the business of financing home purchases.

First there’s the calculation that compares the cost of carrying your own home (your principal and interest payments and property taxes) with the cost of renting. Sometimes that comes out a wash, which immediately brings people to the conclusion that renting sucks. Hang on now, there are some other factors that weigh heavily in the decision making.

Renters aren’t responsible for maintenance. Home-owners are, and generally the older the home, the higher the maintenance. A good rule of thumb is to estimate home maintenance costs to be 3-5% of the home’s value per year.  So if you’re home is worth $300,000, you should have room in your budget for about $800 a month for maintenance. Sure, this won’t happen every month. Sometimes you’ll go a year or two with little to do. But eventually there will be windows to be replaced, driveways to be repaved, a roof to be reshingled, a furnace, a water heater, a fridge, a stove… I could go on FOR EVER!

Renters also don’t have to shell out the whack of cash homeowners must. There are  “closing costs”:  legal fees, land transfer tax, and other miscellaneous expenses that you don’t pay if you are renting. Assume another 5% of the purchase price on the home will go toward these additional costs.

And first-and-last-months’-rent is a lot smaller than the typical downpayment on a home. Of course, all that MONEY YOU’RE SAVING AS A RENTER has to be balanced off against the fact that no matter how small the principal portion of your mortgage is (and it’s miniscule in the early years), as long as the market is stable or rising, home owners are building equity and increasing their net worth with every mortgage payment.  And that money is earned tax-free. Thanks to the principal residence exemption, the capital gains on the sale of a home is zip, zero, zilch.   The way to offset this downside is to use the money you would have put into things like maintenance and downpayment to building an investment portfolio.

Do you suffer from wonderlust? Are you upwardly mobile and constantly on the move in your career? Stick with renting. People who relocate for work are often better off as renters because they don’t have to worry about the horrendous home acquisition and disposal costs (real estate sales commissions alone are between 4-6%). Unless you get lucky and the value of the home you purchased goes up by at least 10%, you’ll be losing money.  Keep in mind, too, that In the first five years of ownership, most of your mortgage payments are applied to interest, with minimal paid to the principal. So you won’t get this money back when you sell, and you’ll have all the hassles and costs of putting your house on the market.

Buying a home in a neighborhood you don’t know well is one of the top mistakes home-buyers make. If you’re new in town, you may be better off renting a house for six months or a year to get a feel for it. If you like living there and you like your neighbors, you’ll feel much more comfortable signing on the dotted line later on.

Your employment prospects should be pretty stable before you consider buying your own home. Home ownership requires a number of regular payments – the mortgage, property taxes, utilities, maintenance, and insurance. Missing any of these payments can trigger dire consequences. And unless you have a steady work history, lenders will be loath to ante up with a mortgage. 

It’s clear that while there are a number of financial factors that will weigh in when it comes to the rent versus buy question, the decision involves much more than just running the numbers. You’ve also got to look at the emotional rewards and challenges of each alternative.

As a good friend of mine put it, “You can either own capital or you can own property.” If you’re making regular investments and have a well-developed portfolio, you may be content to rent while you’re focused on you’re putting your money through its paces in the market. But if you’d rather put your money to work where you live, then home-ownership’s rewards go far beyond the bottom line.

I’ve been a renter and I’ve been an owner and overall I like home-ownership. Course, like the weather and my underwear, that could change. Who knows what the future holds.