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Book Excerpt

Home ownership isn't for everyone Add to ...

The following excerpt is from Chapter 11 of Vesna Milevska's book Financial Hacks.

Chapter 11: Mortgages

Buying a home is one of the biggest financial and emotional decisions you will ever make. You must prepare yourself to make a knowledgeable decision and be comfortable with what homeownership involves.

You should also be aware that many professional investment advisors believe diversification of investments is crucial to long-term success. Sinking most of your wealth into a house does not allow you to diversify. Thus, home ownership is actually the opposite of a good investment strategy. In some circles, it is now being acknowledged that the so-called wisdom of home ownership was actually a government strategy after the Second World War for preventing social unrest. The rich and powerful felt they could better control the majority if that majority felt they had a stake in society through fixed assets: their houses. The masses would be less likely to object to social conditions if they thought this stake was the ultimate dream. Hence, the American Dream was created through government policies and subtle advertising. The same thing happened in Canada.

Before you buy a home have an idea of the advantages and disadvantages of being a homeowner because a significant portion of cash is removed from your monthly income and you will be required to make certain sacrifices. Remember, the allocation of your income should not be more than 35% towards the payments on your mortgage.

One of the main advantages to being a homeowner is financial security-your home will provide you some financial security from capital appreciation if housing prices are rising. For much of the last fifty years in most Canadian housing markets, prices have been rising. However, there are no guarantees in life!

Statistically, homeowners are wealthier people. Also owning a home gives you flexibility and stability. Having a place of your own being able to decorate and adjust your home to meet your family and personal needs is another benefit. As well, you won't ever have to deal with a difficult landlord. However, it will mean all the repairs will be up to you.

Although it is an exciting and great idea you should be prepared for the disadvantages of owning a home. The most important is the financial stress that goes with paying a down payment, meeting regular payments, and on-going cost. The maintenance expenses require money and time along with repairs and keeping your home in shape. Do not forget property tax and bills which are usually higher than when you rent, mainly because you property taxes are based on the value of the property and rental units tend to be smaller and to occupy less space. Buying a house locks you into some very heavy financial commitments, sometimes for a very long time (see amortization in the tips section below).

Before deciding that you want to own a home, the first and most important question is ARE YOU FINANCIALY READY? Have you done your net worth and cash flow statements? To avoid surprises calculate your net worth, your monthly expenses, and current debt payments. This will give you an idea how much you can afford to put as a down payment.

Some of the basics were covered in chapter one. I will not go into the calculations regarding mortgage financing. You can find simple calculators on any financial website. They all work from the same formula and give you a good idea on how big a mortgage and maximum price of a home you can afford. You should first think about paying your existing debts (if you have any), which will allow you to qualify for a higher mortgage or save for a larger down payment. Before I approach all the terminology and different mortgage options, I would like you to consider the most important factors in finding a right home.

You need to consider the size of the home. How many bedrooms or bathroom do you need? Do you need a garage, an office, storage space, or any other special features? When you start your search make sure your most valued features are included. Many people find that in a short period of time they need a new home because they have outgrown what they chose. Many people end up buying a different house every few years and, in doing so, face expenses that eat into the equity they have been trying to build, such as transfer fees, legal fees, home inspection fees, moving expenses, mortgage fees (yes, you may pay fees each time you get a new mortgage).

Another important decision to make is choosing a location that is right for you. You have surely heard it before: real estate is all about location, location, location. When you decide where to live, consider whether you want to live in a city, suburb, or rural area. Think about where you work and how easy it is to commute, how close you are to your friends and family, and your proximity to recreational facilities. Many people who buy in the country eventually move to the city because they can no longer tolerate driving for hours every day to get to services and shops. If you have children, look at the schools in the area. Unfortunately, there is no guarantee the school board will keep your local school open, which may mean inconvenience for you and your children, and a lower resale value for your house.

Location is important to consider from the marketable point of view. How easy will the resale of your home be in the future and what is the market increase in the value of the home in the area.

Surround yourself with a good team of professionals throughout the process of finding, evaluating, and buying a home. Your real estate agent will play very important role finding a home. That agent will provide you with the information about the community, arrange the home inspection, write the offer, and negotiate the final price with the seller. Do not hesitate to ask questions about the agent's services, especially about possible service charges.

Normally, the seller pays a commission to the real estate agent. When you are a buyer, just make sure that you do not incur any expenses. If you are selling your home, do not hesitate to negotiate the commission. Typically, the commission is 5%, but that is not set in stone. You can ask your real estate agent for a lower commission charge, especially if you have used the person's services before. The trend these days is selling your home through private sales websites. You will pay a small amount to list the property and save a lot on real estate fees.

Remember, as a buyer, any real estate agent involved in the transfer of a home from one owner to another is actually an agent for the seller. The agent makes income based on the value of the sale. If an agent can get both sides of a deal, he does really well. If he has to split the commission with another broker, that's his loss. So, real estate agents often want first to sell houses for the highest price they can get someone to pay and to sell houses they themselves have listed for people who want to sell.

Please visit the Canadian Real Estate Association website at www.crea.ca to learn more about a real estate agent's ethical and professional obligations.

The Lender or Mortgage Broker

Many different institutions lend money for mortgages, including banks, trust companies, credit unions, pension funds, and insurance companies. Typically, you will go to the bank where you hold most of your portfolio to get pre-approval for a mortgage. Do not be so sure that place is your best option. Ask them for the best mortgage rate-remember to tell them not to check your credit score. Then, ask institutions what their best rates would be for the same terms-again, do not disclose your credit information yet and do not authorize a check of your credit score. You could be surprised at the results.

When you find the best interest rate, you can proceed with the pre-approval for your mortgage. This will give you details about your maximum purchase power, monthly costs, and insurance cost (if applicable). You will also be able to guarantee you the interest rate for some period (likely 120 days) to protect against rising rates.

A mortgage broker is another option. These people do not work for any specific lenders and their role is to find for you the lender with the best terms and rates. Make sure you find a good mortgage broker by asking friends and family for referrals. You can do a search on www.caamp.ca or call 1-888-442-4625 to find about a broker's credentials, obligations, and service provided.

A mortgage broker is paid commission by the lender. Make sure to ask about any charges applicable to you. When you contact you're the broker you intend to use, please make sure the person do not give them your social insurance number (SIN ) or your credit score before you are sure that person is your best choice. The good news is that when mortgage broker checks your credit rating, one report will be used for all lenders on the market.

The Lawyer/Notary

You need a lawyer (or a notary in Quebec) to protect your interests in the process of purchasing a home. This person will make sure the home you want to buy has no liens against it. He will review all the contracts before you sign them and give you a piece of mind ensuring the whole process of buying is smooth and legal. Shop around for the legal fees and rates when you are choosing a lawyer. Fees range widely and depend on complexity of the transaction. Make sure your lawyer is licensed full time lawyer/notary, familiar with local legal requirements, understands real estate law, and has reasonable fees. Again, referrals from other satisfied customers can be invaluable.

The Home Inspector

When you consider buying a particular home, make sure you hire a knowledgeable and professional inspector to inform you of the property conditions. He will tell you if anything is not functional, needs to be fixed, or if it is unsafe. Also, the home inspector can find if there were problems in the property in the past. Any repairs that need to be done should be done to your satisfaction before you buy the house or allowance should be made in the price you pay so that you can get the repairs done. Again, fees, qualifications, and services may vary from one inspector to another, and referrals can be priceless. Whatever you spend will likely be worth it in terms of peace of mind and protecting you against buying a lemon.

Not that you may even want to get two different opinions on a house you are seriously considering. Why not spend a few hundred dollars to keep yourself from spending tens of thousands on unexpected repairs. Have you ever watched the television show Holmes on Homes? Sometimes the homes he repairs have been inspected by people who missed major faults.

The Insurance Broker

Lenders insist that you maintain property insurance because your home is their insurance for your mortgage. Property insurance covers the replacement cost of your home, so premiums will vary depend on the value. House insurance is required by all lenders.

Your lender may provide you with mortgage life insurance, which is that pays out to your family (or designated beneficiary) if you die before the mortgage is repaid in full. The lender will add the premium to your regular payment. Life insurance is optional.

Make sure you compare rates between both an insurance broker and your chosen lender.

Do not confuse property and life insurance with mortgage insurance. On a mortgage where you have less than a 20% down payment, you will need mortgage insurance because the lender will be less certain that you fully intend to repay the amount you are borrowing.

The Appraiser

Appraisal may be required by the lender when you are buying a property so that the lender can be assured the price you propose to pay is reasonable and the lender won't get stuck with property worth less than the mortgage if you default on payments. This is assessment of the property, its physical condition, recent comparable sales, and the current condition of the local market. Appraisal fees can be between $250 and $350 for the typical family home. If you would like to spend money, this is a very helpful and good idea. The bank may require it of you, in which case you can try to negotiate how much of the fee you pay and how much the bank pays.

Tips on Mortgages

What you can afford is most important. If you don't have a budget, start listing all your present monthly expenses, excluding the rent and utilities-you are considering switching the rent and utilities you currently pay for payments on your new place. Include everything: monthly car costs, student loans, credit card payments, groceries, clothes, entertainment, insurance, and so on. Also, do not forget your major once-a-year expenses, such as vacations, averaged out on a per month basis. Then, subtract this amount from your net monthly pay (that is, after taxes). This will give you how much you can afford each month on a different house. Do not go beyond your means. If you are not satisfied with the affordability, you will have to reduce some of your expenses or lower your expectations regarding just how big and fancy a house you can buy.

YOUR MUST HAVES…Most of the first home buyers have a long list must-have items for their homes. When looking for a new home, if you find everything on your must-have list, you will be lucky and unusual. When you start house-hunting, you will realize few places are perfect and the houses that have most features are more expensive. Be smart and flexible. Don't be an emotional buyer, be a smart one. It might be worth it to live with the ugly wall paper or carpet you don't like for a while in exchange for getting into a house you can afford. If the home otherwise meets your needs in terms of the big things that are difficult to change, such as location and size, don't let physical imperfections turn you away. Besides, doing home upgrades yourself, even when you have to hire a contractor, can be cheaper than paying the increased home value to a seller who has already done the work for you. However, something they say in the real estate business is good to know here: sellers rarely get the money back out of their investments in renovations. This is because few buyers have exactly the same tastes as home sellers.

Sellers Tricks

Minor upgrades and cosmetic fixes are inexpensive tricks that are a seller's dream for playing on your emotions and eliciting a much higher price tag. Sellers may pay $2,000 for minimal upgrades or staging for which you'll end up paying $40,000. If you're on a budget, look for homes whose full potential has yet to be realized. Also, first-time homebuyers should always look for a house to which they can add value with their own labour, as this ensures a bump in equity to help you up the property ladder. Buy What You Really Need

Don't get a two-bedroom home when you know you're planning to have kids and will want three bedrooms. By the same token, don't buy a condo just because it's cheaper if one of the main reasons you're finished with apartment life is that you hate sharing walls with neighbours. It's true that you'll probably have to make some compromises to be able to afford your first home, but don't make a compromise that will be a major strain.

Home Inspection

Get the full picture of physical condition of a house that interests you. If it is not sound, you can avoid making a serious financial mistake. Buy a different house or get enough compensation in the price to pay for all the needed repairs. Don't find yourself surprised after you buy your home and be fully prepared for what will need to be fixed in the near future.

Location

It's impossible to predict the future of your chosen neighbourhood, but paying attention to the information that is available to you now can help you avoid unpleasant surprises down the road.

Questions to ask about each prospective property include:

  • What kind of development plans are already in the works for your neighbourhood in the future? You probably don't want a property that may be expropriated for some public project.
  • Is your street likely to become a major street or a popular rush-hour shortcut? Many other prospective buyers are not going to want to live near intense traffic noise, which will lower the resale value of the property.
  • Might a highway be built in your backyard in five years? Not only will a highway mean noise. It will also mean air pollution, a threat you likely do not want to give your family.
  • What are the zoning laws in your area? You may not want to be moving into a neighbourhood where the nature of the housing fabric will soon change as larger and larger buildings are installed.
  • If there is a lot of undeveloped land? What is likely to get built there? Buying a property with few neighbours may give you only a short period of isolation if the urban boundary is nearby.
  • Are nearby houses being renovated or replaced with fancy new houses? Gentrification may mean high property values in future.
  • Have home values in the neighbourhood been declining? Your property might suffer a similar fate if the social landscape is deteriorating.
  • How much crime is occurring in the neighbourhood? This you can determine from published police statistics. Like most people, you probably don't want to face repeated break-and-enter crime, home invasions, or assaults.
  • What are the geologic hazards in the area? Is the property on a flood plain, near the foot of a slope that could slide, or near a geologic fault? Why buy into a hazard zone if you do not need to do so. Consulting a surficial geology map or geologic hazard map of the area, likely available from a local government agency or library, could save you some big headaches.

Where are current and past pollution sources within a few kilometres of the property? Checking to ensure you are not buying on or near a major factory, dump, fuel spill, or other pool of pollution could mean you avoid going through years of suffering with health complaints, followed by a big environmental clean-up. Again, local agencies may have maps that show such features.

If you're happy with the answers to these questions, then your house's location can keep its rose-coloured lustre.

Down-Payment

A mortgage can be conventional or high-ratio depending on the size of the down-payment you make. A conventional mortgage is one that does not exceed 80% of the property value. This means that, if you have 20% or more saving to put towards the purchase of the property, you don't pay insurance and save money as a result. The down-payment required by your lender will depend on that lender's analysis of your income, saving, and investments. Typically, the lender will request 3 months of statements. You can use your RRSP savings, up to $25,000 for each adult partner in the purchase, if you are a first-time home buyer. See chapter four for the details on RRSP first-time home buyer withdrawals.

In some cases, a gift or inheritance from an immediate family member is acceptable as part or all of your down-payment. However, you will still have to prove you have enough income to stay current with your mortgage payments.

If you contribute less than 20% of the property price as a down-payment, you will need to have what is known as a high-ratio mortgage and to pay mortgage insurance. The minimum down-payment one can make is 5%. The lenders set the refinancing limit at 85% so as to prevent people with inadequate funds of their own from buying properties they may not be able to finance in the long term.

The cost of mortgage insurance can be added to amount borrowed through the mortgage. This will mean a higher monthly payment, but at least you won't have to pay for it with cash.

The most used insurance company in Canada it is CMHC (Canadian Mortgage Housing Corporation), 18 but you can use others, such as Genworth Insurance, a major bank, or an insurance company.

These are the typical insurance charges for a mortgage with a 25-year amortization period (see below for more on amortization):

  • 2.75% of the mortgage value with a 5% down-payment.
  • 2% with a 10% down-payment.
  • 1.75% with a 15% down-payment.
  • 1% with a 20% down-payment.

18 See www.cmhc.ca.

If you would like more than a 25-year amortization (you can get up to 30 years) to lower your monthly payments, you will pay a 0.20% more premium for an amortization of 26 to 30 years. The Minister of Finance changed the maximum amortization period from 35 to 30 years just before this book was published.

Please use a mortgage calculator to see the difference in monthly payments when the amortization is greater, this will help you to keep your payments within your budget.

Mortgage Term

The term of a mortgage is the length of time that the mortgage conditions, including the interest rate you pay, are in effect. Terms can be between six months and 10 years. At the end of the term, you can pay off the remaining balance or you can renew the loan with a new term and interest rate. Interest rate negotiation is the most important process when it comes choosing a term.

You will probably find that taking a shorter term means paying a lower rate of interest. This is because lenders are less able to predict where interest rates will go the further out in time they need to take into consideration. The result is that they charge more for the privilege of borrowing their money.

As a borrower, choosing a shorter term means not only getting a lower interest rate, but having to renegotiate your mortgage sooner. Many people take a five-year term just to avoid having to renegotiate often.

You can get mortgages with terms of up to ten years, though five years is much more common.

Amortization

Amortization is the period of time in which you will pay off the mortgage completely. If you have a 25-year amortization, you will need a series of seven 5-year term mortgages to pay off the entire amount you owe, complete with interest.

Amortization can be done over a period of up to 30 years, 19 though most people opt for 25 years. This amortization period is what is required to pay off the mortgage when all regular payments are made on time. If you miss a payment, you will either have to make it up, or extend the period over which you are borrowing, or increase the amount paid per month in later years.

Remember, the longer the amortization period you choose, the longer you will be locked into making mortgage payments and the more interest you will pay in total. So people are beginning to ask whether there is any advantage to being locked into mortgage payments as opposed to paying rent. The answer is not as clear as many once thought it to be. The key is paying off the mortgage as quickly as you can, minimizing the interest you pay, and taking complete control of the house as early as you can.

If you can, once higher interest loans, such as credit card balances, have been repaid, make periodic extra payments against your mortgage. This will reduce the time it takes you to pay off the mortgage. As a result, you will pay much less interest over the whole amortization period of the mortgage. Many mortgages allow you to make such early repayments any time, with no fees or penalties. If the mortgage you are considering from a lender does not allow this, I would look for a different lender.

19 The government changed the amortization to 30 years because Canadian debt burdens had hit the highest levels on record, with a hope to reduce interest payments and have mortgages paid off by retirement. A change was also made when refinancing your mortgage, now you can borrow a maximum of 85% (it was 90%) of the value of your home mortgage. With a fixed rate mortgage, you benefit from the security of locking in your interest for a fixed period of time. Fixed mortgages have terms from 6 months to 10 years and your payments will not change during that period.

Mortgage Types

There are two basic types of mortgage: fixed and variable. Careful thought should you go into choosing your mortgage type. Typically, if you are risk adverse, you should choose a fixed

Most Canadians prefer fixed rate mortgages. They give you the peace of mind knowing how much money to set aside each month for the mortgage payment for the term of the mortgage. Just before the maturity of the five-year term, the lender will send you a renewal note with its current interest rate offers. Only at that time will you need to decide again what kind of mortgage and what term you would like. If interest rate rises during the term of your mortgage, you will not pay anything extra. However, if interest rates fall, you will continue paying the same amount.

At the end of the term, if interest rates are much higher, you will get a shock and have to adjust your lifestyle or perhaps extend the period in which you are repaying the mortgage by going back to the same length of amortization with which you started. As a worst case scenario, you may have to sell your home and down-size. In Canada, you can no longer walk away from the property and stick the lender with having to sell it to recuperate the amount of the mortgage.

A variable mortgage allows the interest rate you pay to change during the term of the mortgage. This gives you the benefit of getting a lower interest rate if rates are falling. Of course, the reverse is true: if rates are rising, you will pay more.

Most variable rate mortgages are convertible mortgages periodically, allowing you to change to a fixed rate mortgage with no penalties.

You monthly mortgage payment can be set up as a fixed payment or can vary along with interest rate movements. When the payment is constant and the interest rate starts to drop, as less interest needs to be paid, a bigger part of each payment will be applied to the principle of the loan, so you will pay the loan down faster. Of course, the opposite happens when the interest rate stars climbing, more will go to interest, less to principle, and you will take longer to repay the money.

If you monthly payment is not set, it can be difficult to budget if interest rates are on the rise. If you are on fixed income, you will have to adjust other expenses to get the money you need to cover you mortgage payments.

Variable rate mortgages are for people who live with short-term uncertainty. They are not necessarily more risky than fixed rate mortgages, they just carry a different kind of risk. The interest rate is based on the bank's Prime Rate (overnight Bank of Canada rate plus additional bank premium). All the banks have the same Prime Rate or very close to it. You should ask your lender for a discount on the prime rate. Historically variable rate mortgages could get a discount up to 1% off the prime rate. Please negotiate the discount with your bank (see the Rate Negotiation section).

If you are in a variable rate mortgage and the interest rate is high while fixed rates mortgages have low interest rates, as some people experienced in 2009 and 2010, you can always switch and lock in to a fixed rate.

Over the past 30 years, variable rate mortgages have been more cost effective about 82% of the time. This may come as a surprise to most of you. Except for short periods, fixed rate mortgages were the better choice only in the late seventies and eighties, when rates rose steadily

Payment Frequency

A closed mortgage does not allow prepayment whenever you have extra cash nor renegotiation of the mortgage conditions before the term ends, unless the lender agrees and the borrower pays a penalty. In recognition of consumer demand, many closed mortgages now allow some prepayment options, the most popular being that of increasing the regular payments or making a lump sum payment against the principle of up to 20% of the original mortgage amount.

If you would like to sell the current house on which you have a closed mortgage and purchase a new one, you can transfer your existing mortgage to the new property and you should not pay penalties. This is called the portability option. When taking out a mortgage, ask the mortgage specialist with whom you are dealing to add this feature to your mortgage, just in case. If you need additional money, the lender will blend your existing interest rate with the present market rates and increase the amount of the mortgage. There are many cases in which the interest rate becomes lower after the term is negotiated.

Some people want to opt out of their mortgages, pay penalties, and renegotiate a new term based on the lower interest rates. If you choose to do so, make sure the penalties you will pay are lower than the savings you will have by changing your interest rate. Ask a mortgage specialist how much money you will save before the end of your term, then decide which way is best.

An open mortgage can be paid off early, in whole or in part, or renegotiated at any time and in any amount without interest penalties. The interest rate you have to pay is usually higher than with a closed mortgage-flexibility costs money! This type of mortgage is recommended when you need a very short term loan and you are expecting to pay it off within six months because you will avoid penalties and administration charges.

Mortgage payments are usually monthly. However, there are some lenders that have accelerated options for semi-monthly, bi-weekly, or weekly payments.

Just by choosing accelerated bi-weekly payments you will pay more towards your principle with each payment and, therefore, pay off your mortgage faster. If you paid get every two weeks, it makes a lot of sense to pay your mortgage lender something from each pay-cheque, rather than paying just once a month. For a mortgage balance of $100,000, with an interest rate of 5% amortized over 30 years, the average monthly payment will be $534, you will pay $92,129 in interest. If you switch to accelerated bi-weekly payments, they will be $267 every two weeks, you will pay $75,115 in interest (a saving of $17,014) and you will pay off your mortgage in 25 years. The reason is that a portion of each payment goes to the principle and you will be reducing you principle faster.

Increasing your payments is the other way to pay off your mortgage faster. Let's say you increase your monthly payment just for $50. Now you will pay $73,878 in interest and you will pay off your mortgage in 25 years. The total saving in interest will be $18,251.

Imagine what will happen if you choose to increase your monthly payment by more than $50 or make more frequent payments. Please don't be lazy. Check every year how much you can increase your payments. This could save you tens of thousands of dollars. Most of the mortgages have options to increase your mortgage payments once a year every year. The increase can be up to 20% or you can double your payments. Make sure you ask for such features when you talk to your mortgage specialist, it will make a big difference in the amount of interest paid and the length of the mortgage.

To switch from monthly to bi-weekly or other payments options is easy and you can do it more often, please check with your lender before you make a change.

Home Equity Line of Credit (HELOC)

A home equity line of credit is available to homeowners who have at least 20% equity in their homes or have a 20% down payment for a new mortgage. Basically, you can convert your mortgage into a line of credit, keeping your payments flexible with a minimum payment of interest only. You won't have to pay down the principle unless you want to do so. The interest rate on a HELOC should always be at the prime rate.

This product has the flexibility of allowing you to fix part or all of the balance in the line of credit in any type of term you want. For example, assume you have a HELOC with a limit of $100,000. You could have a $40,000 fixed-term mortgage at a certain rate, $50,000 variable portion, and the last $10,000 left in an open term. When you pay down your mortgage, you will have the portion paid to be used anytime you need it as available credit. As your mortgage balance decreases, your available credit increases. This is great because it allows you to be more aggressive with paying off your mortgage and you can still have a line of credit available to you if you need it.

A HELOC can provide you with a credit facility for life, as long as you have your house. It is also portable to another property if you sell what you own and get something new. There are fees associated with setting up a HELOC: about $500 in legal fees and $300 in other costs. You can have this waived by your bank if you have a good portfolio and good record. You can close a HELOC anytime if you do not have a balance. The only fee you have to pay is a $300 discharge fee.

I have a HELOC on my house and rarely use it, but it is there if I need to buy a car, pay tuition for my children, or I need to borrow for any other reason. It is my safety net and, of course, I did not pay any set up fees since I got the bank to waive them.

Rate Negotiation

Rate negotiation is important-you should be getting the best rate possible. The first step is to get familiar with the market. What kind of interest rates are out there? Prior to walking into a bank, research the posted rates on the internet or in the newspapers. The first stop should be your primary bank. You already know what the lowest rate on the market is, so ask the bank specialist what kind of interest rate they will give you as a valued client. If he gives you a higher interest rate than your research is showing for your chosen term and type of mortgage, just tell him that you are not happy with it. Ask him what the best he can do is. Tell him that you are shopping for a rate right now and when you decide who will be your lender, you will give that firm permission to check your credit record. (You have already checked your record and it is more than 680 points, right?)

Now, go to another bank and ask them for their lowest rate for the same term and same type of mortgage. Compare the rates. They will probably ask you what interest rate you have been given by your bank and I am absolutely sure they will come up with a lower rate. They will lower the rate they offer just to get your business.

Now you can continue checking several other banks. You may even want to go back to your first bank or one of the others to see if they want to make you a better offer. Once your think you have the best rate you can get, make your decision and sign the papers. Please do not forget to check the features and benefits with each bank. If you can get even an extra 0.05% off the interest rate, it can mean in thousands of dollars saved.

Most people spend more time planning their vacation or buying shoes than researching mortgage rates.

Perhaps you already have a mortgage and the end of your term is coming close. You can start searching for the interest rate four months prior to your renewal date. First, check the market and the interest rates. At the point when you renegotiate, you can change to any term and any type of mortgage you want. All you have to do is to stay in the same remaining amortization (unless you want to up the payments and shorten the amortization period). After you have chosen which type of mortgage you want, the first call you make should be to your existing lender to ask for the best rate they can offer. Then call the other lenders, telling them that you already have a mortgage that is approaching its renewal date and you are considering switching lenders. Ask each what the best rate is for the term they have chosen and also if there is any cost for you to transfer the mortgage.

There is NO cost for transferring your mortgage, so do not be loyal to your existing lender if they do not give you the best rate or some combination of features that are superior. If you choose to switch, the institution to which you are transferring your mortgage will do all the legal work with no cost to you. They will be happy to get your business. The only fee you should pay is a discharge fee to your previous lender, which is usually about $300. This is worth it if you are saving more with the lower interest rate. If you do not do anything before or on the renewal date, your mortgage will likely be renewed automatically and you will not obtain the best interest rate, though you won't have to pay a discharge fee.

Keep in mind when you are considering transferring your mortgage that the new lender will check your credit record and will ask for income confirmation. They will also check your mortgage history with different institutions to ensure that you are not in default or have not had late payments.

With a good income from a steady job, a high credit score, and history of on-time mortgage payments, trust me, everyone will fight to get your business.

Experiences with Mortgages

I have relatives who got caught in a housing market with falling prices. That was in Calgary in the early 1980s. They made what only later can be described to have been a classic buy high-sell low decision. Just after graduating from university, they were thinking that they would have trouble getting into the housing market if prices kept rising. They bought a condominium for about $80,000. Within a few months, prices started falling. At one point about three years later, the value of the condo was down to about $30,000. So, investing in a house is not always the path to riches. My relatives did keep living in their condo for several more years. Eventually, they sold for about what they paid. Ironically, about 15 years later the condo was worth over $150,000. Go figure.

That wasn't the first time in recent memory that housing prices have not treated owners well. In 1929, one of my relatives sold his house on Long Island to his neighbour for $1 and walked away to Canada. Neither was it the last. Since 2007, housing prices in the United States of America have been going down-the drop has been 30% on average already and it hasn't stopped yet. Nor will periodic downturns in the real estate market stop happening.

Regarding the size of the house you choose to buy, I really like a line I got from my sister-in-law. "I don't want any more rooms…they all have to be cleaned!" Sometimes a little restraint can really pay off in keeping you sane at a later date. She has never been saddled with so much housework that it got in the way of enjoying life.

Location, location, location…this can really affect your satisfaction with a home and determine whether you get financial gains from your investment in it. I had some friends who bought a house a few minutes walk from where she was going to be working. At first, they thought this was a great feature to the location. Only later did they find out her husband could not sleep with the all-night traffic noise from the six-lane main artery beside the house. As it turned out, it was hard to find other buyers who thought living so close to a main road was a good idea. They put lots of money into renovating the house, but were unable to get that back when it came time to sell a couple of years later.

Excerpt of Financial Hacks is courtesy of Vesna Milevska, copyright registration No. 1083320, registered January 7, 2011

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