There are ways to significantly reduce the amount of interest it costs and the time it takes to get to mortgage-free.

1. Choose an accelerated payment frequency. Most mortgages come with a vanilla-flavoured monthly payment. If you want to speed things along, choose the caramel-almond version: an accelerated weekly payment. Since you end up making an extra payment directly against your mortgage each year, you’ll save $70,003.63 in interest. That’s gotta be worth the extra thirty bucks or so you’ll have to come up with each week, dontcha think?

2. Shorten your amortization. The shorter your amortization, the more you have to come up with for each payment, but the less you’ll pay in interest overall. If you shorten a 35-year amortization to 30 years, you’ll save $55,430.90 in interest. Go with a 25-year amortization and save $108,345.42. Can’t swing the higher monthly payments every month? Then…

3. Make a principal prepayment against your mortgage. Most mortgages come with the flexibility to make an annual prepayment each year. It usually runs somewhere between 10 and 20% of the original mortgage amount. So on a $300,000 mortgage you could make somewhere between $30,000 and $60,000 principal pre-payment, assuming you could come up with the money. Hey, that’s what you can use a least a part of that bonus you’re getting for! But you don’t have to come up with a huge amount for the principal prepayment to work for you.  You know that RRSP contribution you made that resulted in the $3,200 tax refund. Slap that sucker against your mortgage each year and you’ll save $112,348.58 in interest on that 35-year mortgage.

The Financial Consumer Agency of Canada has a terrific mortgage calculator tool that you can use to run your own scenarios to see just how much you can save on your mortgage. Spend a few minutes playing with the numbers. It might help you focus on a goal that will see your mortgage paid off up to ten years sooner! Invest a little time now and save a lot of time making mortgage payments, and scads of money too.

“But Gail, my home IS my retirement plan.”

Have you not been listening? If your whole retirement savings is wrapped up in your home, you’re assuming your home will continue to appreciate (there won’t ever be a down to the UP we’ve been on for so long), and that it’ll be worth a lot more just when you’re ready to sell to make some food money.

And what about your other savings: education savings for the kids, your emergency fund, that curveball account you need for the stuff that pops up out of the blue.

And what about your planned spending: the kids’ hockey fees, the car you’re going to have to replace in two years, or the roof that lost some shingles in the last wind storm.

Squeezing your budget tighter than a frog’s ass to wedge your way into a home you can barely afford is short-sighted and – well, let’s be frank – STUPID! I don’t care how low interest rates are now, how afraid you are of missing out on the real estate market or how often your mother tells you rent is “throwing money down the drain.” Strapping yourself so tight that you can’t take care of the other aspects of your financial life – really, you can afford the $350 it’ll take to make a Will? – means you’re too focused on one goal and you’ve lost sight of the big picture.

And then there are the IDIOTS who not only buy too much home, but go into debt to keep it by using their credit cards and lines of credit to supplement their incomes. Lord love a duck! If buying a home means you’re going to carry a balance on your line or on your credit cards, how can you ever hope to come out even.

If you added the cost of the interest on your consumer debt into your “shelter,” you’d get a more realistic picture of just how much of your money your home is eating.

1. First you set the goal for how much you want to have saved.

2. Then you divide how much you want to have by the amount of time (months) that you have.

So if you want to buy a $250,000 house and you want to put 20 percent down (which you should), you’d need to save $50,000. That part is easy.

If you’re planning to buy your home in three years, you have 36 months to save. So you divide your $50,000 goal by 36 and you come up with $1,389 a month. That’s how much you have to save every month to meet your goal.

Impossible! There’s no frickin’ way you can sock away $1,389a month. Well, you have three choices:

1.  You can extend the amount of time you’re planning to save. Saving for five years instead of two means you only have to sock away about $800 a month. (I know I’m not including anything for return on your savings here, but it makes this example a lot easier.)

2. You can reduce the amount you have to save. Buy a cheaper home and you’ll need a smaller downpayment.

3. You can cut expenses and find more money – or get another job – so that you have the money to sock away.

Once you’ve decided how much you’re going to save, set up a high-interest savings account (don’t settle for a piddley-assed account that pays next to nothing) and have the money automatically deducted from your primary account and moved to this savings plan so you aren’t tempted to spend the money. That’s the pay-yourself-first way.

Don’t step into the poop.

Here are 5 reasons why you should buy less home than you can actually afford, and far less home than your lender will tell you that you can afford.

1. You can’t assume property values will always go up. Yes, they’ll go up sometimes. But sometimes they’ll go down. And if they are down just when you need to sell, you’ll have had a good place to live, but the “investment” part of the equation won’t have paid off.

2. You could lose your job. Most big home purchases are based on the income of both breadwinners. If one or t’other of you lost your job, had your hours cut, got sick… yuck… would you be able to stay in that home? If the answer is no, it’s too much home.

3. A more expensive home means higher selling costs. Agents have reaped huge rewards as home prices have skyrocketed. Takes the same amount of time and effort to sell the $300,000 home that’s gone to $600,000, but the rewards are double.

4. Home-maintenance and carrying costs are going up. Do you really want to heat 3,500 sq ft? Do you want to turn on 12 pot-lights at the flick of a switch? How much with the property taxes be on that bigger home? How about the insurance premiums? My Little House in the country cost me almost $1,000 a month to carry everything in, but no mortgage. And it’s a very efficient R2000 home.

5. Wouldn’t you like to be mortgage free so you can spend your money on other stuff? Eliminate the mortgage payment quickly and you’ll have money for the future and for the present.

In the last 4 months, I managed to completely pay off my Visa from $2500; the LAST payment was made last night to bring it to 0!!!

I took your advice and got a part time job to make some extra money. I was lucky enough to find a job that I love, at Chapters, so it makes it much more pleasing! I just did the calculations and if I continue to have shifts the way I have, I will be able to pay $800/month toward my student loan, and be completely debt free in 1 year and 8 months!! My loan is $14,673.99 as of right now. I can’t believe there’s an end in sight I’m extremely pleased with myself!!

I wanted to thank you for all of your help but I also have a question. My common-law boyfriend and I are wanting to get a house in the near future and we had a meeting with a lendor yesterday who said we qualify for a $216,000 mortgage…We are hoping to get a home for around $230,000 so we need to bring our income up by $5000/yr. She suggested we take our downpayment savings ($20,000) and put it into a TFSA, and then take out a loan to make a maximum contribution to an RRSP which we haven’t started yet. It makes me nervous to take out another loan just to that and pull it out, and from my information from you, is that you should never pull out your RRSP contributions…What do we do? I’m not sure where we go from here because I don’t want to get out of debt just to take on more for what I consider a silly reason! I would like to save and put it in the RRSP and wait an extra year or so to get a house than to go into more debt. Help!  Thanks so much for all your inspiration and information!

Gail says:  It’s perfectly fine to use RRSP money for a downpayment, assuming you put the money into the RRSP for that purpose. So don’t sweat that. But as far as taking a loan for the RRSP contribution, don’t. Of course your lender would suggest that. That’s how lenders make money. But you need to be sure you can afford all your payments, and you’re already short on income, so don’t go digging yourself a deeper hole. You can’t buy until you’ve saved your downpayment (inside or outside an RRSP).

S Wrote:  My husband and I have been watching your show for a few years. In Sept 2008, we faced 82K of debt to approx 14 creditors (4 credit cards, 2 student loans, 1 furniture, 1 car, 1 dept store card, 2 LOC, wedding, family)…you get the picture.

So we set a plan in action and almost 3 yrs now, we now only have the car and 1st loan for a total of 17K. I also bought 2 of your books, the Debt Free Forever book and the retirement one. I actually wish that we had purchased it sooner because there’s even more info in the book! Now my question! We want to buy a condo but because we haven’t saved anything (I know what you’re going to say about that & you are correct, we had to use credit for emergencies but we don’t have anything now!) – we don’t have 12K for the downpayment.

The mortgage pmts would be 1010$/mth, condo fees 340$, property taxes 145$. The total mortgage amount is 232K (we’re very conservative). The mortgage rate is 2.2% variable 1 yr closed. My husband makes 61K and I make 53K. Net, we make 78K. Our only remaining debt is the car and the 1st loan.

So here’s the dilemma. We want to put the mortgage in one of our names and the other take a LOC at 4% for the 12K downpayment. The pro is that I get to leave the dreaded rental! The condo meets all our expectations for our first home purchase. The con is that my husband will likely be transferred for work again in 2 maybe 3 yrs. We live in Edmonton so real estate is much more expensive here than out East. But I hate the thought of staying in our current rental

My husband said that he’s learned a lot from you and he thinks that we should save up for the downpayment and save the 4% interest. I know that we’re getting a really good deal (5-8K less than the paid price). BTW, this is the same guy that 3 yrs ago was paying 50$ a month in bank fees, he’s come a very long way!!! Can you PLEASE PRETTY PLEASE answer this question? It’s driving me crazy!

Gail says:  Sorry, m’love, you’re probably not going to like what I have to say. Since you know you’ll likely be moving in 2-3 years, you should NOT be buying anything. Home ownership is for people who can put down roots. You’re still wondering around, so stop trying to have both a mobile life and a stable one. Enjoy the flexibility and freedom on your current life. Look forward to the next posting adventure without having to worry about selling a home, or how you’ll manage to continue to carry it if you can’t sell right away. If you don’t like where you’re living, find a better place to live. Buying would be a dumb move because in a few years you’ll have to sell again, and pay commissions and other costs.

S Wrote:  I’m not sure we can afford to buy a house. I’ve followed you religiously and we’ve even used your spreadsheet to crunch the numbers. I’m wondering if you have a moment if you would consider offering your expert opinion.  I’m making the transition from former student to new professional.  We have a 60 k downpayment so we can technically afford to put 20% down on a 300k house. Luckily we are in Manitoba so the market has not gone hog wild the way it has in other large cities.  We also have about 17k outside of that downpayment to cover closing costs and moving costs which I’m guessing would be somewhere around 10K? Is that a good guesstimate?  Leaving us with about 5-7 k to have as emergency fund.  In the actual budget we’ve put in all predicted expenses and have no debt (thank goodness) so we are able to put aside 4% of the value of the home into a maintenance account by putting aside $1000 each month for a total of $12,000 annually.  We also have $550 a month going into long term savings (which will mean we still put 10% gross into long term savings because I also contribute to a pension plan at work) and 1/15 of our home buyers plan repayment at $235 a month.  We also have $50/month going into emergency fund (not a lot but we may be able to shimmy the numbers from things like vacation fund–fund to see family in Ontario–, etc).  At the moment we don’t have any insurance outside of our work LTD’s but that is on the list of to-do’s! The bank of course said we were eligible to borrow up to 600 k. I’m conservative in my planning but I wonder if I’m being so conservative that I’m afraid to take the next step in life? We are both turning 34 this summer, and this will be our first home. We plan on living here for at least five years. The market seems to be doing very well in Winnipeg, growing steadily. I worry if we don’t do something we’ll lose a year we could have been building equity. Do you think we can afford this home when we have factored in all of the saving-just-in-case criteria and we make a combined income of app $120/k a year? The house is close enough that I can walk to work (weather permitting of course!)  I grew up without much of anything (single mother, low income) so to be looking at a 300k house is very daunting as I always feel like I could go back to nothing some day and want to be prepared for the worst. Any thoughts you have would be very much appreciated, as always thanks for your time and I hope you are having a great weekend.  Incidentally, I was in Cobourg visiting my in-laws a few weeks ago and went into a store that was selling lavender sprays for your sheets and I mentioned you to the girl behind the counter said you’ve been in there!

Gail says:  Thanks for the detail. It helps. I think you’re doing fine. You’ve planned well an you’ve got all your ducks in a row. And you’re being very sensible to go with 20% down and not over-extend yourself on a mortgage. GO DO IT! As for the home maintenance, trim back a little, to 2% (I’m about to do a blog on this) and use the difference to rebuild your emergency fund. I hope you’re having some fun too! Best wishes to you and your partner if finding your home together.

A Wrote:  I love your show and watch the re-runs to catch the good advice I missed the first time around. I have managed to catch Princess on occasion as well, but find I don’t have any patience with the younger, “I want everything now” set. God bless you for taking them to task and making them see reality.

I have a couple of questions, and have searched through your site but couldn’t find anything exactly like this. Here goes….

We’re planning on buying a home very soon. When it comes to paying a mortgage, I know that it is advantageous to accelerate payments. I’m considering weekly payments, but read somewhere that such action was discouraged because, “there is no appreciable difference in increasing from bi-weekly to weekly.” Is this statement true? Why or why not?

My second question is a follow-up to one from your Q&A section. You recommended that a person make their RRSP contribution at the beginning of the year (i.e. in March). A banker once recommended that I spread my payments out over the course of the year to take advantage of the varying purchase price as the market fluctuates. Is this really prudent or simply a good sales job by the banker?

Gail Says:  There is a small advantage to paying weekly over paying weekly over paying bi-weekly. Go to an online calculator like this one at the Royal Bank, put in your numbers and see for yourself. Change the frequency to see how the payment amount changes.

Your banker and I are actually talking about two different things. I am trying to encourage people to make their contributions earlier, instead of waiting for the deadline. Your banker is encouraging clients to take advantage of dollar cost averaging by investing monthly. It is a prudent strategy, not just a good sales job.

Do Shop with a Friend. If you shop alone you run the risk of not seeing all sides of the equation. Another set of eyes can be priceless when it comes to noticing the small details that can affect your decision.

Don’t Arrive Late for a viewing. The last thing you want to do is rush through your home tour. And you don’t want to run into other home-buyers because that might push you to do something stupid like getting involved in a bidding war. No house is worth going into more debt than you can afford to carry comfortably.

Do Take Photos and Notes. If you’re relying on your memory you’ll soon find that all the properties you’ve viewed start running together. Take a notebook, note the address and some of the details of the property, and take lots of pictures. Later, if you have questions about a particular property, you can note them on that property’s page in your notebook.

Don’t Focus on the Clutter. Most sellers now know to clean up and clear out. But there are still families that have to live in the homes they are selling, particularly ones with kids. Don’t focus on the stuff. Imagine the rooms empty. And remember that paint is cheap!

Do Go Bank and Look Again. Once you’ve short-listed the properties you like, go back for a second round of note- and picture-taking. Now you’re weighing characteristics of one home against another to find the perfect fit. Try to go at another time of day from your initial viewing so that you can see the property (and the surrounding areas) in a different light, literally.

Don’t Ignore Details. Transportation, parking, neighbours, shopping, schools, churches, where the sun rises and sets, traffic patterns, they’ll all have an impact on your life in your new home. Don’t brush them aside in favour of a fabulous kitchen or a spa-like bathroom. Yes, the features of the home are important, but so is the area in which you live and the amenities available.

Do Have a List of Questions. In the excitement of the moment, it can be easy to forget important questions you want to ask about a property: What does it cost a month to heat? What’s the traffic like in the area? Where is the closest grocery store? Have there been mould, termite or foundation leakage problems? Write down a list of whatever you want to know so you can make a sound decision. Then ask those questions and note the answers consistently at each viewing.

While I was shooting the TDDUP Home Editions, I noticed an alarming trend among the people I was working with: they skip a home inspection or, having had one done, they completely ignore the report. Whazzup with that?

It makes no sense to put good money down without getting a professional opinion on the property you’re considering. It is very important that you get a GOOD home inspector. If you’ve watch Mike Holmes, you know that inspectors are a dime a dozen and some of them are downright awful. But a good one can help you feel confident in laying down your buck-sixty-two.

‘Course, home inspectors won’t find everything. First of all they don’t have psychic powers so they can’t see behind walls. And if there’s been a recent mold cleanup just ahead of the inspection, there may be no signs of that. Mice droppings under floorboards won’t be spotted either.

But working with a good inspector means you’ll get a heads-up on what will need replacing, when, and approximately what it will cost. That’ll help you decide what you’ll need to set aside for home maintenance. If there’s a big cost coming, like the replacement of a roof or furnace, you can use that information to negotiate the sales price down. (Yeah, I know, not gonna happen in a seller’s market. But at least you’ll know there’s more money going out the door in the not too distant future so you can plan for it.)

When you’re hiring a home inspector know that they come in various shades and styles: from highly educated and accredited to not so much. Ask about their experience. Check to see if they are members of associations. And ask to see what their inspection report looks like before you buy from them. You do get what you pay for; if you’re coughing up less than $350 for your home inspection on a 3,000 sq. ft. home, you’re probably not getting the best advice.

Your home inspection should take three to four hours. You should be present every step of the way. And you should end up with a very detailed report that shows all the deficiencies and comments on all the features of your home that may need attention.

If you have children, hire a home inspector that has some environmental and child-safety experience. While neither environmental nor child safety issues are typically covered in a home inspection (you usually have to hire specialists for this) if your home inspector has some experience, they could at least let you know that you need to go the next step. And as you walk around with them ask every question that pops into your head. Don’t worry about looking stupid. You’re never going to see this man or woman again. Suck every drop of info that you can out of the inspection experience.

At the end of the day, the home inspection should provide you with peace of mind in terms of the big things that need to be addressed when you’re buying a property. Depending on the season, there may be things you just can’t check. When I turned on my outside taps in the spring, my inside line was leaking. But there was no way for the home inspector I worked with to know this since I bought the house in the dead of winter. I just sucked it up and got it fixed.

Gail Says:  First off, the taking out of the mortgage should not have been conditional on buying the lender’s mortgage insurance. Unfortunately, if it was only in conversation, you’ll have a tough time proving you were coerced. I am not a fan of mortgage life insurance sold through lenders. First off, when you buy the life insurance offered when you take out a mortgage, there’s no underwriting done. That doesn’t happen until you try to make a claim. So after years of paying premiums and thinking you’ve protected your family, you could find that you are declared “uninsurable” and your claim denied. Doesn’t that sound a little like buying a pig in a poke?  When you buy life insurance from a life insurance specialist, the underwriting is done before they start to take your premiums so you know you will be covered.

Another flaw with the mortgage life insurance sold at the bank or by your mortgage lender is that the lender is the beneficiary.  If the worst does happen, your lender gets paid off. To add insult to injury, while you’re paying off your mortgage, your principal goes down, but your premiums never change. So towards the end of your mortgage, you’re still paying premiums on your original mortgage balance even though you owe far less. With private life insurance, you get the coverage you need on the mortgage in the early years. As your mortgage balance is paid down, you can use the difference to meet other needs your family may have because your family is the beneficiary of the policy, not the lender.

I don’t know of any life insurance that offers a refund of premiums, unless you buy that as a specific add-on to your policy, and it’ll come with a price. If you are simply trying to cover your mortgage principal, look at term insurance and make sure the renewal is guaranteed. I would speak to an insurance specialist about this. Don’t just go off and done a one-use policy purchase… take all your needs into account.

P wrote: Hello Gail, Currently I’m saving for a down payment for my first home. I was informed that I could take the money for a down payment for my home from my RRSP contribution. Upwards of $25,000 dollars, however I was recently informed that this is not the case. That my $300 dollar bi-weekly contribution into my RRSP will not qualify for a down payment. That is anything that was contributed within the last three months into my RRSP. Can you please advise me, what is the best way to invest my $600 dollars a month to achieve the fastest most productive results for a first time home buyer?

Gail says:  You can take up to $25,000 from your RRSP under the Home Buyer’s Plan, but the contribution must have been in the RRSP for 90 days before it is eligible to be withdrawn under the plan. As for how to invest your $600 a month, you must be pretty conservative with that money if you want it to be there when it comes time to make the down payment, so nothing risky. Sadly, interest rates are very low right now, so returns aren’t great. But a small return is less painful than losing money just when you want to be able to access the money for the down payment, so be smart and stay safe.

L Wrote: I am a 24 year old, recent university graduate. I am currently renting an apartment with some roommates but I’m looking to buy a place. I’ve rented for almost four years now and feel like I’d rather own something for myself. I have some money saved, but I know I’ll need quite a bit more to put a down payment on something I’d be looking for. My question is about which types of accounts I should open to help me save the most. I already have a TFSA but I was looking into RRSPs, savings accounts and Canada Savings bonds. Which one would you suggest to someone looking to save for a down payment in the next 1-2 years?

Gail Says:  Any of the options you suggest will work. Two things to note:

1. You can use the Home Buyers’ Plan under the RRSP, but you will have to repay 1/15 of the money (which is interest free) each year to the RRSP.

2. Make sure you’re getting as good a return as you can. You’re right to stick with safe investments like CSBs and savings accounts but make sure you’re getting as high an interest rate as you can find available. Do some research and look at options like ING for higher interest than you may get at a traditional bank.

J Wrote: Gail, love your show (of course, that’s why I’m here). I read your post on renting vs owning a home and I am so glad you posted it. My husband and I are still in an apartment after years of marriage and our friends and family are always trying to talk us into buying a home. We enjoy apartment living and feel kind of smug (I know, shameful) when those same friends spend all their free time doing home maintenance and repairs they hate or shelling out tons of dough for a new hot water heater or roof. So, thank you for showing people that owning a house is not always the better financial move.

Still, one thing that makes me nervous about enjoying our apartment living: what happens when we retire? We plan to experience living in a few different cities throughout our life. But I worry: when we retire, will we have trouble still affording monthly rent? Will I end up in the poor house if I don’t have a paid off mortgage? Can I buy a home when I’m 60 and afford paying on it until I die?

Please help give me some honest answers about if I can afford to not be homeless if I don’t buy a house now. (I am eager to read your new book “Never Too Late,” but my local library hasn’t purchased it yet.) Thank you for all your help to us all!

Gail Says:  Girl, you’ve got to stop and take a breath. Home ownership is one way of reducing costs when you retire if — and only if — your mortgage is paid off.  There are still substantial costs associated with home ownership: property taxes, utilities, maintenance and up-keep and insurance. I live in a small home in the country. My taxes run to almost $300 a month, utilities another $225, insurance about $100, maintenance about $300. So even owning the house outright, it’s costing me almost $1,000 a month to keep a roof over my head. Home ownership does not mean no housing costs in retirement.

If you’re very concerned about whether you’ll have enough money, you need to make a budget to compare how much your income vs expenses will be. You may have to get creative: move to a less expensive home or used shared accommodation (think Golden Girls).

Don’t get yourself in a knot. Start thinking about where you want to live when you retire and how you’re going to get what you want.

W Wrote: My wife and I are both in our 60’s. We have rented all our lives. We have four adult children and have lived on one income. My wife had small part time jobs so she could be home with the children. We have no savings and no RRSP’s. We have now inherited about $300,000 and don’t know if we should invest it to live on when I retire in about 4 years or buy a small house.  All we will have is our CPP and old age pension to live on.

Gail Says:  If you buy a home you will tie up all the money you could be using to live on. Have you done a budget yet to see if you’ll be able to live on your CPP and OAS. In all likelihood, your wife will receive very little CPP since she’s worked only part-time. This is where you have to start. Then you can look at how you can use the money to bridge any gaps between your income and what you need (and want) to spend. There are a number of ways to use your capital to create an income, from purchasing an annuity to building an investment portfolio of your own that slowly draws down on the principal. You will need to seek some professional advice. Please start with the budget and go from there.

Carlie wrote:  I just bought my first house and I keep hearing that by having weekly mortgage payments can save you money, I don’t understand how it saves you money or how you figure out how much money you will save from it.

Gail says:  You can save a smidgeon by making your payments weekly instead of monthly, but where you’ll really get the biggest bang for your buck is to go with an accelerated weekly repayment that will not only save you thousands in interest but know about four years off a 25 year amortization. That’s because the calculation of the “accelerated” payment option is different, allowing you to make the equivalent of one extra monthly payment a year that goes directly to your principle. But you do so in such small amounts that the extra payment fits easily into cash flow. With a regular monthly payment, the total annual payment is divided by 52 to get your weekly payment amount. But with the accelerated option, it is divided by 48 instead, raising the payment amount ever so slightly. How slightly? Well, if you take out a $100,000 mortgage, amortized for 25 years, for five years at 5%, paying monthly would cost you $581.61 a month and the total interest cost over the life of the mortgage would be $74,890.04. If you did it weekly (dividing your annual payment by 52), your weekly cost would be $134.22 and you’d pay $73,385.56 in interest because you got the money to the bank a little bit faster. But if you went with an accelerated weekly (dividing your annual payment by 48) your weekly payment would be $145.41 and you’d end up paying $61,817.95. So your weekly cost would go up $11.19. Yup, lunch out one day a week. And your total interest savings on your mortgage just from switching from weekly to accelerated weekly would be $11,567.61. Well worth it in my humble opinion.

#7. Resist the “we can fix that” bug. Unless you negotiate those fix-up costs off the price of your house, where are you gonna come up with the money to make your dream house a reality. Sure, there are things you’ll want to do given some time and planning. New floors are something you can save for (I waited two years for my new floors!) and execute down the road. But the house has to be livable. If you’re always going to be apologizing because there are things you want to do but don’t have the money yet, don’t buy that house. And if you’re considering more debt to make your home perfect, give your head a shake.

#8. Don’t think short term. Selling and buying another house is an expensive proposition. There are legal fees, taxes, moving costs and real estate commission. Until your home has appreciated to double what you spent on closing (and what the other guy paid his agent to sell you the home), you shouldn’t consider moving. Make a file folder for your home and write this number on the front.

#9.  Consider resale. Since you may want to sell one day, you should think about the resale potential of the home. While there are lots of things that can be changed and improved in a home, some things can’t. If you have a railway line running past your home, you’re facing a factory or your neighbour is an empty lot that could be turned into an industrial park, you’re going to have to be patient when it comes time to sell.

#10. Don’t fall in love. First-time home-buyers (and second, and third) can be suckers when it comes to negotiating the “house of their dreams”. Don’t buy without a conditional on financing clause even if you’ve been pre-approved. And don’t buy without an inspection clause, no matter how good the house looks. Always be prepared to walk away if there’s a bidding war that takes the home out of your price range. There WILL be another house. This ISN’T the only house for you. Keep your wits about you and don’t make this big a decision with your heart or your ego.

#2 Know how much mortgage you can afford. You can go and get preapproved for a mortgage, but that doesn’t mean you have to take all the money a lender will give you. Your housing should be eating up no more than 35% of your total net income, assuming you’re paying off debt too. That 35% isn’t all mortgage; you have to pay property insurance, property taxes, utilities and maintenance too. If you’re debt free, you have another 15% of your net income that you could spend on housing… or on having a life… but not both.

#3. Look at what’s available on the market. There may be particular areas in which you want to live, or a particular kind of home you want to buy. Look at the recent sales to set a realistic expectation for what you can have. No point in every viewing being an exercise in frustration.

#4. Think about the extra expenses of being a home-owner. If you buy a home with a pool, you’ll need pool stuff. If you buy a home with a yard, you’ll need garden stuff. You may need window coverings. You might want a snow blower if you’ve got a long driveway. How about appliances?  Don’t let these things surprise you into using credit.

#5. Don’t look at the way the home is decorated. There’s a whole industry that’s grown up around making a place look good enough to eat. And if you bite, you’re a sucker. The house doesn’t come with the artwork or snappy furniture. You’re looking at the bones of the house to see if they’ll work for you. This goes hand in hand with…

Ha! A cliff-hanger… tune in tomorrow.

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 few years.

Before you jump into the home-ownership pool, it would behoove you to really think about taking such a big step. Are you really committed to home ownership? Not the dreamy, picket-fence home ownership everyone is in love with, but the paying for all the crap that happens home-ownership.

1. You don’t make enough. People are under the 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. According to the Stats Man, Homeowners spend $57,649 a year compared to renters who spend $32,536, which is a significant difference (over $25,000). 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.

2. You have a variable income. If you find that your income has some slow periods when you have trouble making ends meet, taking on a home may be the straw that breaks your cashflow’s back.  Most people with a variable income, unless it’s very high, find budgeting difficult. Taking on home ownership – a mortgage, taxes, insurance, utilities, maintenance – means taking on a ton of stress.

3. 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.

4. You don’t have the time, skills or desire to deal with home maintenance. There is always something to be done on a house. There are gardens to be weeded, walls to be painted, lawns to be cut, plumbing to be fixed, curtains to be replaced, roofs to be repaired, snow to be shoveled, carpets to be cleaned, furnaces to be maintained… the list goes on and on and on. Home maintenance can be expensive. One rule of thumb is to estimate between 3% 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 about $500 a month in your budget for maintenance. If you can do it yourself, you’ll save on labour. If you must pay someone else, your costs will be higher.

5. You’ll wipe out all your savings. Some people will do ANYTHING to get into a home of their own. They take money from their retirement savings plans. They annihilate their emergency funds. Once they’re there, expenses start cropping up and they have no safety net in place to see them through. If buying a house gobbles every red cent you’ve managed to squirrel away, you should wait until you can own a house AND have a safety net.

6. You move often. If you work in a career that has you relocating often, the costs of buying and selling are prohibative.  Nomads live in tents for a reason. 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 if the market’s taken a turn for the worse just when you’re pulling up roots again, you’ll eat the loss.

7. You can’t afford to own in an area in which you would like to live. 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.

8. You’re not financially responsible. You’d think this would be a given, wouldn’t you? Not so much. Loads of people who are clueless about their money have bought homes. They haven’t had the discipline to save up a healthy 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. 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.

1. Figure out how much you’ll spend. Do you know what kind of home you want: a condo, a townhouse, a semi-detached or a mansion?  Will you live in the city, in suburbia, in the bush? How much will it cost? Those are some of the basic questions you should answer as you move from dreaming about a home of your own to making it a goal. If you don’t have a clear picture of what you want in your mind, it’ll likely just stay a pipedream. Making the picture concrete by nailing down the specifics will turn it from something ethereal to something you can actually work towards.

2. Calculate your carrying costs. 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. If you can’t afford to carry the sucker, then you’ll know you’re not ready to buy.

3. Practice. If you figure it’ll cost you $1,850 a month to carry your home, that means you actually have to come up with $1,850 a month every single month. To see if you’ll be comfortable with that cost, live like you’re spending that money while you’re still renting. So take that $1,850 a month, less whatever you may be paying to keep a roof over your head right now, and stick it in a savings account. 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. 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. Second, that money is going to get you to your downpayment faster… speaking of which…

4. 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.

5. 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 taxes.

6. Budget for what you will 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 to calculate the on-going costs to open, maintain and close the pool each year. If you have a driveway, you’ll need a snow blower or a shovel and a body with a strong back to do the shoveling for you.

7. Build your team. You’ll likely want to work with a real estate agent. You’ll need a lawyer. You’ll need a lender to give you a mortgage. And you should have a home inspector working for you too. If you don’t put together your own team – ask family and friends for referrals – then you’ll end up using any warm body your real estate agent recommends.

While the prospect of home ownership is very exciting, taking on that big a responsibility without a plan is just dumb. Don’t get so caught up in the thrill that you fail to make a solid plan.

It’s easy to look at the real estate market and be overwhelmed by how much you may need as a down payment. Even though the cost of real estate can be daunting, don’t be put off. With a sound plan and a commitment to making your dreams a reality, you can put yourself in a home of your own.

The amount of down payment you’ll need depends on the kind of mortgage you want to use. Put another way, the amount of down payment you have will dictate the type of mortgage for which you will qualify.

With at least 20% of the purchase price, you can finance your new home price using a fixed-rate conventional mortgage. This is my favorite mortgage. You’ll take the mortgage for a specific term, usually somewhere between one and five years although longer term mortgages are also available. And you’ll pay a fixed rate of interest. No surprises with this mortgage. It’s all laid out at the onset and you just get in the habit.

Of course, there are lots of people who can’t come up with 20% of the purchase price to qualify for a conventional mortgage. If you can only arrange a down payment of between 5 percent and 20% you’ll need a high ratio mortgage. These mortgages are insured through organizations like Canada Mortgage and Housing Corporation (CMHC). An application fee and insurance premium will apply. This insurance premium is calculated as a percentage of the loan amount, and the percentage ranges from 0.5% to 2.9% of the mortgage amount and depends just how much you managed to come up with for the downpayment, along with your employment status, your credit score, the source of your downpayment, and the length of your amortization.

The lower your downpayment the higher the premium cost. If you’re self-employed and don’t have a third-party income validation, you’ll pay more.If your credit score is 580 to 600, you’ll pay a premium.  If you use non-traditional sources for your downpayment – borrowed funds, gifts, lender cash back incentives.– you’ll pay more.  And if you go with an amortization longer than 25 years, you’ll pay more. You can pay this premium in cash or do what almost everyone else does and add it to your mortgage. Clearly this is a more expensive mortgage, but it’ll also get you into your home that much sooner.

Try to beef up the downpayment you’ve scraped together to minimize your long term costs by avoiding mortgage loan insurance. Take a good hard look at your spending for the last few months and look for places to trim so you can really save big. You may be pleasantly surprised at how much you can set aside once you eliminate all the little frivolities that, in the long run, add very little to your life. Brown bagging it once or twice a week can save you $40 to $100 a month. If you still smoke, quit. If you hang out at the neighborhood bar on Friday night, nurse one beer for the evening or switch to soda.

Don’t forget about the RRSP Home Buyers’ Plan. Under this plan you can withdraw up to $25,000 from your RRSP as a tax-free loan towards a down payment on a home. If you and your honey each have RRSPs, you’ll be able to pull a total of $50,000 for your downpayment.

Finding the money to buy a home is a little like a scavenger hunt. But the effort can be well worth it. Home-ownership is as much an emotional thing as it is a financial one. Once you get over the fright — did you really spend that much on a house? — you’ll be able to relish in the joys of home maintenance and repair. Which brings up a final important point. Make sure you don’t strap yourself so tight your foundation is shaken by the first hole in your roof or set of frozen pipes. The downpayment is only the beginning of a long financial commitment.

Gail, I’m in a bit of a fix. When my husband and I bought out home three years ago, we both had great jobs and interest rates were very low. We decided to go for it and bought our dream home. We didn’t have much of a downpayment, but we managed to pull together just over 20% to avoid the mortgage insurance by borrowing from family and maxing out our line of credit. We took a 35-year amortization so that we’d be able to manage the payments. It took us about a year to pay off the line, but we still owe my MIL some money. Now it’s time to renew our mortgage and because interest rates are headed up we’re thinking of locking in our mortgage for five years. But that means our mortgage payment is going up a bit. To make things even more complicated, I’m pregnant now and I’ll be off work and getting only about half of what I’m used to on maternity leave. My husband and I have actually discussed selling our home. We bought it for $425,000 and it’s now worth about $472,000 – that’s what a similar home sold for in our neighbourhood. So should we sell, rent for a while, pay off our debts (we owe some money on credit cards and for some furniture we bought for the house) and then save up another downpayment?

With $47,000 in equity, you can see why Casey is considering selling the home. That’d get them back to zero and they could start again. Or would it.

People seldom think about the costs associated with selling a home. First there are the things you have to do make the house ready: patch and paint, clean up and clear out, trim and touch-up. Your real estate agent will likely have a list of things that need to be fixed or polished if you want to get the best price.

Speaking of your agent, there’s also the sales fee. Sure, you could sell privately, but that might take a while. And you can bank on the buyer wanting at least half that sales fee in price concessions. If you go with an agent at 5%, which is pretty standard, selling the house at asking will cost $23,600 wiping out a hunk of that equity.

You’ll also have to pay legal fees (budget about $1200 plus HST) and utility/property tax adjustments if you’re at all behind on your bills. And, of course, there’s the cost of the new place you’ll be living in, and the costs associated with getting there.

If your mortgage is up for renewal and you go with an open mortgage, you’ll get out without paying a penalty. But if there’s any time left on your term, your lender is going to charge you a fee to get out of your mortgage contract early. If interest rates are going up, the fee should be relatively insignificant send the lender can relend that money at a higher rate. Most mortgages have a clause that says premature cancellation requires paying three months’ interest or an interest rate differential (IRD), whichever is greater. There is a trend among lenders to charge you the penalty and if they insist on doing that you’ll have to suck it up. But make sure you find another bank to deal with.

If interest rates are stable or have gone down, you will most certainly have to pay a Lost Interest Compensation (LIC) or IRD for getting out early.  The Financial Consumer Agency of Canada has a detailed explanation of how these are calculated.

You can’t assume anything about the penalty since some lenders use the posted rates for their penalty calculation, while others use a discounted rate. Some lenders also round up to the next longest term (ridiculous!) while some round down. Get in touch with your lender and get an exact quote on the penalty. And if you have assets (RRSP, TFSA, RESP) and want to see how valued you are as a client, tell them to waive the penalty or you’ll walk taking all your biz with you.

As if that’s not bad enough, these are averages. Live in a city like Toronto or Vancouver and your housing costs are eating even more of your income. And since the affordability index is based on buying a home with 25% down and a 25 year amortization, the news is even worse since there are a whole bunch of folks who never managed to come up with even the 20% down it took to avoid mortgage insurance.

Earlier this year in a poll I asked, “What do you think will happen to house prices in 2010?” Fifty-three percent of people who responded said they thought house prices would go up.

Really?

Well the Royal Bank disagrees. The ultra conservative financial institutions that makes it’s profit from selling optimism to the masses concedes that the Vancouver market is vulnerable to a price correction, and it was only because vendors are eating crow that the Toronto market isn’t headed into the dumper too.

Once upon a time, owning a home ate up about one-third of our resources. And according to my Life Pie, your housing costs shouldn’t exceed 35% of your net income, especially if you’re spending to the hilt in the other categories like transportation, life and debt.

If y’all think that getting into a house at any cost is the way to make money for the future I’d like you to do the following before you jump into the market:

Take the cost of your home on the day you buy it. Add the interest you’ll pay over the amortization you’ve chosen. Look at what you’d have to sell it for to actually make any money.

So if you buy a home and take a $300,000 mortgage at the current five year rate of 5.39%, you’ll pay off $32,878.93 in principal (so you’ll have that as an asset) at the end of the five-year term, but you’ll also pay a total of $75,841.67 in interest, so your house would have to sell for almost $376,000 for you to break even.

If you paid off the house assuming your interest rate didn’t go up (right!) and it took you the full 25 years, you would pay $243,603.24 in interest, so your house value would have to rise more than BEFORE YOU WOULD MAKE A PENNY.

Amortize for 30 years, and you’ll pay over $300,000 in interest, so if you sold your house for $600,000 you’d be breaking even.

Never mind taxes. Never mind upkeep. Just add the interest cost to the original purchase price. This is the step NO ONE takes, preferring instead to believe that the “appreciation” in the value of their homes has come without a cost. And it is perhaps this lax attitude that has allowed so many people to consolidate their consumer debt into their mortgages time and again without a blink of an eye.

It’s time we stopped looking at the housing market in our delusional ways. Yes, it’s nice to own a home, but owning a home at ANY cost doesn’t make ANY sense. If you can’t afford to come up with a downpayment of at least 20%, what makes you think you’re ready for homeownership? If your pouring more than half your income into your home, and you’re carrying consumer or student loan debt, you’re going to struggle to have a life. And if you’re not saving anything for the future, you’re a fool.

Y’know, when the banks start sounding like me, we are in big trouble!