Mortgage Guide 101 Blog

Home Staging: Home Decorating with a Purpose

2007-07-18T11:19:00Z

In a market that has prices on the slide, nothing is more important than doing the right things to get the right price. That's where home staging (also called "home fluffing") is becoming more and more interesting to many sellers. The good news is that home staging works; it's the art of home decoration to sell, and it can mean the difference in getting your price or not.

Most home stagers will insist it doesn't take too much money. I'd have to say that it depends on your definition of "too much". However, it is amazing what a few easy tricks can do to the price of your home.

In fact, home staging works because it really is all about the look of your property! You could have the best home on the block, but if your home is cluttered and the furniture doesn't match, you could end up with a lower price than you want. This is where a "home fluffer" can help you to see your home in a new light, and guide you make the right changes (at minimal cost) to help you to sell.

This isn't about having to paint your whole home's interior. It can be as easy as buying some rental storage and getting rid of some of your things! When I sold my first condo, that's exactly what we did. While I didn't consult a professional home stager, my spouse and I took a very critical look at our home and decided to get rid of everything that wasn't really necessary. Out went the library worth of books, the extra lamps (for good light to read), and anything which didn't quite fit in a room. We tried to leave behind the most attractive room configuration. For the monthly cost of a rental storage space, I ended up with at least a few thousand more than I might have otherwise (in my opinion). The home showed much better.

Another great tip: wash all the walls and make sure they are fresh looking. If you have leftover paint that you can use to touch up marks that won't come out, that will also help to raise the price on your home. If your home is in "move in" condition, that's a critical factor that a new buyer takes into account.

Professionals may go a bit farther. If you have the time and the money, they may suggest small renovations or upgrade projects that will add the most value to the selling price. They may suggest small decorator touches that help a room to look its best: perhaps a new arrangement of the furniture, or some inexpensive "art" (I've seen pictures from a glossy magazine framed nicely and put on the walls) to show off the room better. Heck, my mother-in-law has done amazing things with "found" items around her place, like pinecones and fallen twigs, in an artful display that really makes the room look tied together. (Don't know how she does it. Maybe she should become a house stager.)

The other primary trick is "depersonalizing" the home. A wall of your diplomas could easily become a wall of inexpensive prints, for instance.

House stagers will work with your budget. So be sure to get a quote up front. It's not all that different than shopping for the right mortgage: you get your mortgage quotes first; you select the right lender who is willing to work with you and gives you the best price; and then you get ready to buy your next home. In the case of home staging, you'll get ready to sell your next home.

Michael Chantrel

Online Real Estate Research Booming

2007-07-16T12:32:00Z

While the housing market is cooling, the national obsession with real estate and real estate topics has not. In fact, even the big players like Yahoo and Google are now pushing real estate information. If you go to Yahoo's real estate portal, you can find everything from for-sale and for-rent listings to user-posted real estate classified ads, to home valuations to school reports with test scores so that you can evaluate a future neighbourhood. With a simple search by city and state, you can find virtually any location in the US. There is even a Zillow competitor in the Yahoo Real Estate portal, that will allow you to look up housing values.

It's all about getting the right house, and helping you to do it.

Google's Real Estate product is still in beta, but if the new Google Earth product is any indication, it will likely be bad news for many other players in the field. Analysis by reviewers indicates that the search functionality (that allows the buyer to find real estate listings) looks very good.

This could be really bad news for smaller players that are already established, but are no where as big as Yahoo and Google. Portals such as Cendant, Move.com, HouseValues and ZipRealty may have to increase their functionality or reduce any associated costs in order to compete with the better-known Google and Yahoo. The other challenge is that Yahoo and Google are becoming "one stop shopping", which keeps users on their sites, regardless of the user's need. Specialty players can't compete on that front, and will have to develop target niche's in which they excel and Yahoo or Google can't.

It's all good news for the consumer. We'll have more and more places to get information on home, mortgage loans and real estate listings while more competition should bring down prices. (Mortgage lenders clearly see the benefit in being online, and are flooding the market with options.) As prices drop for online real estate services, we may see a real surge in online listings. It may make selling a home yourself even more attractive than it is currently -- especially if you can list on Google or Yahoo at a very reasonable price.

Michael Chantrel

Lawsuit Alleging Racial Bias at Countryside Financial

2007-07-15T00:18:00Z

If this is true, there could be a lot of people affected: an article on Reuters reports that a lawsuit has been launched against Countryside Financial Corp., alleging racial bias in how the company writes mortgage loans. The lawsuit accuses Countryside of marking up interest rates or tacking on fees after agreeing to lend based on objective criteria such as credit histories or home values. In other words, once Countryside sees who the borrower is, the rules change. The legal action is seeking to be certified as a class action.

Given that Countryside makes 1 out of every 6 home loans in the US, the potential for a large class action suit is significant.

This is not the only legal action accusing Countryside of racial bias. Just two days earlier, the NAACP accused Countrywide (as well as 13 other lenders) of steering blacks into higher-cost "subprime" loans, while offering white borrowers better terms.

This isn't the only incidence of bias in the lending industry. In fact, I blogged earlier this year on the fact that some borrowers have been paying subprime when they didn't need to. It's also been shown that women may not get the same treatment as men when shopping for mortgage loans. Whether lenders like it or not, their agents are still human and subject to some bias. That bias can show up in patterns in lending practices.

Time for lenders to either monitor their own business better, or for the government to step in and do it for them.

Michael Chantrel

Going Green: Natural Home Building

2007-07-14T15:01:00Z

I'm going to finish up my series on environmentally-friendly building practices with an overview of "natural building".

Natural building is a term used by Wikipedia to encompass the wide variety of practices in the eco-friendly building movement. I've covered only a few of the interesting options that you can use to either build or renovate your home. There are many other kinds of natural building that could work for you, your family, your climate and your geographical region.

If you live in the US southwest, you've likely seen homes that incorporate adobe. Adobe is an old form of building material that's been around for many centuries. It's also simple: mix clay and sand, with a bit of straw if desired, and add water. Adobe is often formed into bricks, which are then used to make the home's structure. Traditional adobe homes work well for hot climates, but you might want something with better insulation if you don't have a very moderate climate.

If so, upgrade to Cob building. Cob takes the traditional components of adobe -- clay, sand and straw -- and builds the home without forms, bricks or wooden framework, from the ground up. While a simple and inexpensive building material, this kind of dwelling is very labour intensive. However, you can end up with a very unique home, as cob's versatility can allow for free-form innovations that wouldn't be possible with other types of building materials.

What about using earth as a building material? While it might seem that such a structure would have a very short life, you'd be wrong. "Rammed earth" is a building technique that employs easily available local earth and wooden forms to construct buildings that can last centuries. In fact, once the structure has properly "cured", it is extremely durable and long lasting. This kind of building has good "thermal mass", which means that it will absorb heat in the day and release it at night. However, it is not a good insulator, so it often is combined with insulation when used in colder climates for home building.

One of my favourite forms of environmental building is straw bale construction. What could be more environmentally friendly than building with straw, which can be renewed in a year or less? However, this building method has definitely gone high tech. While you could use a simple bale made by a farmer with his baling machine, nowadays more and more are turning to higher density "recompressed" bales that can increase the load-bearing capabilities of the walls, as well as the insulating and fire-retardant qualities of this kind of structure.

So, if you are going green, you have to keep a lot of factors in mind: what kind of environment you live in; what kind of building materials you have easy access to; and what kind of home or design you want. It can be a complex choice!

Whatever your choice in home, don't forget to shop smart for your mortgage. Always do your research into rebates, grants, or "inexpensive" money that might be available through your local, regional or federal government, or utility companies. Don't underestimate how much help there is out there! For instance, if you want to build a straw bale or "Eco-nest" home and need a lot of available labour to do it, you could find folks who will work for free in order to learn the method.

Be sure to look into mortgages that give you better rates or more money, such as the EEM mortgage.

Don't forget to get your mortgage quotes as early as possible in the process. And always get at least 3 quotes. It's a must.

Michael Chantrel

Going Green: Selling Your Eco-Friendly Home

2007-07-12T12:18:00Z

Here's something new: I stumbled across a site from the UK that specializes in the rental and sales of exclusively eco-friendly homes! Now this is one way to properly showcase a home that's helping to preserve the earth while providing you a comfortable living space.

The site is international in its focus; so you can actually find properties listed in North America, including a couple of rental units in New Mexico.

I think this is a business who's time has come. Frankly, I'm surprised that we haven't yet seen "green" real estate brokerages specializing in this new niche. It would seem to me that an eco-literate real estate agent would do a much better job of selling the special features of the eco-friendly home, and that would result in better prices and better profile to the prospective buyer. I can only assume that as these kinds of properties become more commonplace, you'll see more real estate agents advertising there expertise in this property.

It's well worth the time and effort to research available grants and low cost money from your utilities, your state and the federal government. Many of the programs that are actually in existence are poorly publicized (I don't suppose the government would just prefer to keep our money in the governmental pocket, do you?) so don't be surprised to find out that there are many opportunities you didn't expect.

Of course, I'll also expect more folks to take advantage of the additional benefits of an eco-friendly home, like EEMs. In some cases, you may have to educate your lender, but don't despair! If you do some research into EEMs, you may even be referred to a lender who already knows the drill.

When you go to get your mortgage, even though you have a "special" home, don't expect special treatment! Get more than one quote, and compare carefully.

Michael Chantrel

Going Green: Eco-Friendly Bamboo Floors and PET Carpets

2007-07-09T11:42:00Z

My "Going Green" series has been focusing a lot on what to look for if you are building new. But what about the homeowner who wants to renovate and still save the earth? Well, if your renovation includes a new floor for your room, consider bamboo instead of hardwood, or PET carpet instead of nylon or wool.

Bamboo instead of hardwood? You bet! Bamboo floors are actually harder than conventional maple hardwood, and yet conserve our dwindling hardwood forests. While bamboo works like hardwood for your floors, you are actually using a "grass" and not a wood. Fast growing bamboo goes from shoot to full length in a few months, and will mature to its hardness in about 5 years. That's quite a difference compared to the decades spent growing a mature hardwood tree! Another advantage is that bamboo, despite growing so quickly, is harder than hardwood, and so makes a better floor. Despite the quality finish, most bamboo floor products are actually less expensive than hardwood, although installation costs would run about the same.

If you are a hardwood floor installer, get on the bandwagon with bamboo! You don't need any additional training in order to install this eco-friendly floor.

Another environmentally friendly flooring is made from your PET plastic pop bottles. No kidding -- pop bottles! While PET carpeting keeps plastic out of our landfill sites, it also has all the advantages of other synthetic fiber carpets, with a few additional benefits. In fact, you'll get better stain resistance and better indoor air quality because of less out-gassing. You'll also find that this flooring, despite its humble beginnings, is actually heavier and more luxurious underfoot than nylon carpeting.

So, if you are in the midst of creating that perfect kids playroom in your basement (as we are), consider these innovative floor products. And if you need money, consider adding an energy efficient bathroom with a low flow toilet. You could get a few nice rebates from the US government, your state or local utility! You might just qualify for an Energy Efficient Mortgage (EEM) in the process, to help pay for your renovation.

You'll also add to your home's value. And when it comes time to negotiate that next mortgage loan, that could help -- especially if your home's value has dropped in this soft housing market.

Michael Chantrel

Going Green: LEED Certification Means Eco-Friendly Home

2007-07-07T14:15:00Z

The newest thing in eco-friendly building is -- you guessed it -- certification.

An article in the Toronto Star showcases a number of green development projects, from homes to condos, and introduces the LEED certification to the home-buying consumer's real estate lexicon. What's LEED? It stands for Leadership in Energy and Environmental Design, and it was developed in the US. However, it's now been adopted by many jurisdictions, including the Canada Green Building Construction Council.

Much of the LEED certification is not rocket science: in fact, providing bicycle storage for a condo project will provide the builder with a "credit" towards a project certification. There are 6 benchmarks, which provide a project with up to 70 points in six categories of enhancement, from sustainable site development, to water and energy conservation, through to selection of building materials. There are 4 classes of certification: certified, sliver, gold and platinum.

LEED certified projects, from homes to condos, don't necessarily scream "green" as you park out front. A condo project in downtown Toronto will go for LEED gold, and yet looks like a trendy condo complex suitable to a trendy downtown neighbourhood. In another article, a platinum home will open in Guelph, Ontario and yet blends in perfectly with its suburban counterparts.

Simple changes like solar panels and drought-resistant landscaping go a long way to help the platinum-rated home be friendly to the environment and yet easy on the eyes. The biggest changes to in many cases are actually behind the scenes, either underground or in the basement. There you might find a rainwater harvesting system which will supply water to toilets, laundry and dishwashers. This is not high-tech folks; the basis of the system is a "cistern" that collects rainwater run-off and then puts it through a filtration system. However, the cistern is an old-fashioned innovation made new -- when I was a kid, our farmhouse had a cistern, and we used the water for our non-drinking purposes too.

Now, there are high-tech gadgets like a geothermal solar loop and other fancy stuff that keep energy costs down. But in some cases, the best innovations are just the conserving know-how of our grandparents.

How much can you save yearly on energy and water if you buy a platinum rated home? A family of five could see as much as $1,150 in their pockets if they buy the Webster home in Guelph.

Don't think you have to move to Canada to get an LEED platinum certified home. LivingHomes built the first LEED platinum home in the US last year in Santa Monica, California. The 4 bedroom modular home is factory-built, with 1/4 the waste of a traditionally constructed home.

To go along with your environmentally friendly home, you could get an environmentally friendly mortgage loan! If you buy an LEED certified home, you could also qualify for an an Energy Efficient Mortgage or EEM. The EEM is an innovation that allows you to qualify for more home with less downpayment. Ask your lender if you can get an EEM. If not, you may have to take your business and negotiating powers elsewhere.

Be sure to negotiate smart. I blogged recently on the right questions to ask when you are getting a mortgage. Do keep in mind that you can't go wrong by asking for more! And your lender might just surprise you and compete for your business.

Michael Chantrel

Going Green: Money for Eco-Friendly Upgrades from Uncle Sam

2007-07-06T13:14:00Z

Money from Uncle Sam? Yes, indeed! According to the Alliance to Save Energy, you could save $500 on your 2007 taxes with the right renovations to your home. Alliance President Kateri Callahan says, “Homeowners who make certain energy-efficiency home improvements by December 31 can cut their 2007 federal income taxes by up to $500.” I actually suspect that she underestimates what you can save; however, she may be assuming that the majority of us in the market for renovations aren't ready for really big ticket items.

However, there are some upgrades that you might already be considering, like that new air conditioning system. You might want to include a few tweaks that make your upgrade as energy efficient as possible, and get some money in your pocket as a reward.

According to NeutralExistence.com, you can get tax credits for all of these renovations:

$50 for an advanced main air circulating fan;
$150 for a highly efficient furnace or boiler;
$200 for energy efficient windows;
$300 for a highly efficient central air conditioner, heat pump or water heater.

Your biggest bang for the buck? If you install solar panels, solar water heating, or fuel cell power plant equipment, you can qualify for a 30 percent rebate up to $2,000.

You should also look into your state and utility rebate programs. Often, for fairly simple changes, you can see some money in your pocket. Many utilities now offer money to the homeowner for upgrading to a programmable thermostat, for instance. It can save you money, keep your home more comfortable and get you a rebate check from your electrical company. It's a nice combination.

Another innovation is the Energy Efficient Mortgage or EEM. An EEM is still a mortgage loan; you can get one for either new home purchases or to refinance an existing home. However, EEM's can add an additional 15% of your home's appraised value to the principal of a new loan or refinance, often at no additional cost and sometimes at a better rate. I've actually blogged about these before, as a way to get a bigger or more expensive home and still qualify for the mortgage.

Another way to go if you need to finance your renovation upfront is a home equity loan. I recently blogged on these as a method of getting into the stock market and have an interest deduction. In the US, if you are getting the home equity loan for a qualifying home renovation, the interest will already be tax deductible. However, another approach with a green renovation is to take any savings you get and put that directly into the loan. It's a great way to pay it off more quickly.

Going Green: The Earth Sheltered Home

2007-07-04T15:36:00Z

I'm just back from a family driving holiday (next time, we won't take the kids), and it certainly got me to thinking about greener building. I'm amazed at the amount of green space that is lost each year to a sea of houses. Why couldn't our building blend into our natural environment better?

Well, the earth-sheltered home could definitely fit that bill. You won't get a conventional-looking home with this kind of construction! This is the next best thing to living in a cave -- and if you know anything about caves, they are often cool in summer and warm in winter, if you go far enough into them. What better than good old fashioned rock and earth to protect you?

The earth-sheltered home is one step up from the earth-bermed home. You can find information on both these kinds of building all over the internet. However, so you don't have to go anywhere, let me give you a short, succinct definition: an earth-bermed home has the sides of the home covered with earth, but retains a conventional roof. The earth-sheltered home has both the top and most of the sides covered with earth. Both earth-bermed and earth-sheltered construction may be found under the term "earth sheltered", but I'll distinguish between the two because I think the advantages to the "true" earth-sheltered are significant.

Earth-sheltered homes are very energy efficient. This type of construction can save as much as 85% on your home's use of fossil fuels for both heating and cooling. In fact, you can even incorporate passive annual heat storage, that effectively allows you to save heat in the summer to use in the winter! Surprisingly, you also can save on lighting. Most designers of these homes recommend a south or south-east exposure, which guarantees a lot of light, as long as the home has a window for most rooms on the exposed side. Any additional needs for natural light can often be addressed with tubular skylights that can actually funnel light to the place where it is needed.

I was surprised to find that you also save a bundle on maintenance. Because your walls are pored concrete, you don't have to do a lot of upkeep. In fact, an earth-sheltered house won't need a new roof or many other kinds of regular upkeep to either the exterior or interior. If you pick the right interior finishes, you could have a virtually maintenance-free home.

Some sites claim that you will actually have increased safety from both fire and tornadoes, especially when comparing the earth-sheltered homes to other types of homes. (Maybe we'll see a new building trend for Tornado Alley? It might even save you some money on your tornado insurance.)

Keep in mind that if your home is underground, you really have to have good drainage. If anything is necessary with this home, drainage would be key. Be sure that any builder that you work with provides a "passive" drainage system that does not depend on electrical pumps or other powered interventions. You don't want to be flooded just because the power was off for an extended period. (While great in Tornado Alley, it might be less suited to Florida's Gulf Coast.)

This probably sounds expensive. It certainly can be. However, while you might think that you'll spend a lot of money for the home, and never see it back, you'd be wrong. I found a list of 25 reasons to build an earth-sheltered home and this list includes a number of ways that you can save money from this kind of home.

And with all that money in pocket, what do you think you should be doing? Why, paying off your mortgage! I can give you at least 5 reasons why you should do that, but the best is that you'll be piling savings on savings. What you save on your running and maintaining your home, can be applied to saving you money on your interest.

Now that's the best kind of double-dipping I can imagine.

Michael Chantrel

Going Green: The Eco-Nest Home

2007-06-28T12:35:00Z

This is the first in a series of blogs in which I'm going to cover some of the most interesting and cost effective innovations in the greening of our homes.

I've done some blogs in the past on green building, from renovations that you can make on your existing home to reduce its "footprint", to reducing your energy usage in your current home without renovating, to building green from scratch, including such things as radiant heat and other new technologies that save energy and resources. Now I'm going to bring together lots of ideas and thinking in one series, to help you when you are mulling over your next renovation or your next home.

Over the next couple of weeks, we'll review what you can do to save both money and the planet, and what's coming in new construction and new home designs.

We'll start off the series with a bang: I may just have found the ultimate eco-friendly home! The developers of the Eco-Nest took inspiration from birds' nests -- literally. The home is made with walls built from clay, straw and timber. The combination is incredibly resilient and very energy efficient, while also allowing for a number of stylish and comfortable designs.

While it may seem similar to straw bale construction at first glance, this is a whole different kind of building. In addition to the many other benefits of the Eco-Nest approach, the home controls humidity and dampness if built correctly. The clay in the walls has the ability to keep water away from the wood and straw, and can later release moisture back into the air when humidity is low. In fact, the Eco-Nest walls act as a climate control network throughout your home to attract, hold and then release moisture. All this happens in the first couple of inches of the wall so that no significant amount of dampness ever penetrates. So, your walls stay dry but your internal environment is balanced and comfortable.

Like many green upgrades or renovations, using the Eco-Nest approach is not cheap. However, it is a construction built to stand. According to Econest.com, this is the kind of house to build if you want to hand it down to the next generation because it's built to last for centuries.

The developers of the Eco-Nest host seminars to teach people how to build these homes, and can work with you to design the home of your dreams. You do need to live in an area with a reliable dry season, and with local clay, in order to build these homes. However, since that describes a wide swath of North America, this really could be the kind of home that the environmentally-friendly will look to.

There are still questions about getting insurance on homes with new building techniques. If you decide on a home like this, you could have to educate your broker and your insurer. You may also have to educate your banker or lender -- since you will most likely need a construction loan and a mortgage later on. But if you do, you know that we can help you out with good information on anything related to mortgages!

Michael Chantrel

Ask the Right Questions To Get The Right Mortgage

2007-06-26T23:42:00Z

How do you win at the mortgage game? You've got to ask the right questions. According to an article on Realty Times, the right questions are open-ended questions, as opposed to closed questions.

How do you know you've asked a closed question? Any closed question can be answered with a "yes", "no" or very short factual answer. Open-ended questions require the other person to provide more context and details. You'll get a narration, instead of a single sentence. As a result, an open-ended question will generally reveal much more than any closed ended question.

Why would this make a difference? Especially when you are in a situation that you've never been in before, it's likely that you need information that you don't even know about yet! Open ended questions can help you find out what you don't know and help provide you with the most important information that you'll receive.

Here's a great example: when negotiating for a mortgage loan, we have a tendency to ask which interest rate we'll qualify for. After all, it's the single most important thing for most borrowers. However, if you ask a closed question, you'll get a one word (in this case, one number) answer. You could get a lot more information (and be able to improve your bargaining position) if you ask how your mortgage lender determines what rate you qualify for. That question requires the answerer to provide you with a real perspective on the lender's process. You can always ask the question about the rate you'll qualify for, but that question can wait until after you ask the more important open questions.

The technique of asking open questions doesn't just work for finding out information when shopping for a mortgage or getting mortgage quotes: this approach will work in any situation where you ned to collect comprehensive information in order to make the right decision.

Michael Chantrel

Housing Fraud Up Again

2007-06-25T19:19:00Z

Despite crack downs by law enforcement and more awareness in the market, housing fraud continues to be an attractive crime according to an article on Realty Times. In fact, the crime is up by almost a third in just the last year according to the Mortgage Bankers Association of America. The new study makes use of both FBI and private mortgage industry data, which provides a better overall picture of the true nature and volume of fraud in the housing market.

Mortgage fraud isn't just a phony mortgage. The data show that mortgage fraud runs the gamut from bogus property appraisals to borrower lies about employment and income. While many don't think about it, the "little white lie" to get your mortgage loan is fraud -- pure and simple.

As jurisdictions get smarter about mortgage fraud, the crime is moving from state to state. The most cases are now reported in Florida and California respectively, whereas Georgia had previously topped the national fraud rankings for most of the last decade. However, after state legislative and federal enforcement, the incidence of the crime has dropped.

It's no surprise that the most common type of fraud is still lying on the mortgage application. If a subprime loan was found to be fraudulent in the study, the vast majority had false information on the application. The most common problem continued to be lying about financial status of either the borrower or the borrower's assets, including financial assets, income, employment status, taxes and inflated appraisals for properties.

The study says to watch for more housing fraud, as the lending market tightens up and there is pressure on lending agents to generate sufficient "volume" of loans. So buyer beware as you get your mortgage quotes (so you know what your budget is) and go home shopping: don't get suckered into a fraud. Like your mom always said, tell the truth.

Michael Chantrel

Making Your Mortgage Work For You: Home Equity Loan for Investment

2007-06-22T12:25:00Z

This approach is not quite the Smith Maneuver that I blogged about earlier this week, but does allow you to bank on the equity in your home to get more invested in the stock market. It also lets you deduct the interest of that loan.

In effect, you use your home as collateral. That's what a home equity loan is. In this case, rather than getting a home equity loan and then putting on that addition or renovating the basement, you take that money and put it in the stock market. Be sure to purchase good quality investment vehicles, since any losses here will put you in the position of paying off the loan, without investment that's worth at least the original value of the loan.

You may have to look outside of your regular lender to get a loan like this. You may also have to pay a higher interest rate than you do on your conventional mortgage. That's one of the downfalls of the approach. The advantage is that you can decide exactly how much loan you want and can custom design a combination of mortgage and investment loan that you can handle on your income stream.

Given that loans for investments are tax deductible, you will get a tax deduction on this loan. (This can help with the bite of the higher interest rate.) You can either pay off the loan completely over time, and fully retain the investment, or at some point you can cash in your investment to pay off the loan, and have some profit left over. (At least, that's the theory!)

This is less risky that the Smith Maneuver and the re-advanceable mortgage, because you pick the amount of loan that you think you can handle, including the loan payments, and you only risk this limited amount in the stock market. You get a tax break too, which you don't get if you hold your mortgage inside your RRSP. The loan itself is secured by your home, so you can potentially roll this debt into your mortgage, if the unthinkable happens and you lose your shirt. And, as long as you haven't negotiated too big a loan, you will retain the ownership of your home, even if you do have a problem.

Always ensure that you are borrowing a percentage of your equity that will allow the value of your home to float down at least 20 percent, without jeopardizing your ability to use your home as collateral on the loan. As we've seen recently, even the housing market is prone to rising and falling, if the foreclosures currently predicted are any indication.

Given the tax laws in both Canada and the US, it should work in both countries. In the US, there are deductions that are allowed for home equity indebtedness. In Canada, there are deductions allowed for investment purposes. But, as with all investing, you need to know if it is right for you. Consult an investment professional if you are thinking about a home equity loan for investment purposes. Not only can they help you determine amounts to borrow and help you find potential lenders, they can also help find the right investment mix for your money.

Michael Chantrel

Making Your Mortgage Work For You: RRSP and Your Mortgage

2007-06-20T17:36:00Z

Here's a way to help out your retirement savings, and make sure that your home mortgage works for you: be your own lender!

How the heck can you do that, you might wonder. Well, this approach requires you to have enough in assets in your RRSP so that you could buy your own mortgage. You'll need a self-directed RRSP in order to do this, as well as a financial institution to administer the mortgage for you. Unfortunately, you'll end up paying both for this administration as well as private mortgage insurance in order to go this route, but the benefits in a well-balanced RRSP portfolio and a guaranteed return can often balance this out.

This is a particularly good fit if mortgage interest rates are going up. Even though you become your own lender, you are required to charge the going interest rate on your mortgage loan. Therefore, if interest rates are going up, you are paying those higher rates to yourself! So, while others are whining about interest, you can be cheerily watching the cash in your retirement savings go up.

If you use this strategy, you may not want to pay off your mortgage early. After all, the longer you hold your mortgage, the more interest you pay yourself.

This is a very safe investment approach. If anything happens and you actually default, the mortgage insurance that you purchase will pay off the debt to your RRSP. So, you are covered in case of problem. (In fact, you buy insurance on your own mortgage to protect your own RRSP. It's one case when insurance benefits you, no matter how you slice it.) However, don't think that you can miss a payment anytime you want; the administrator of your mortgage will put your mortgage into default if you miss payments.

When thinking about this strategy, be sure to compare the costs of administration across a number of lenders. Also be sure to compare quotes on mortgage insurance.

While the Smith Maneuver can make your mortgage tax deductible, holding your mortgage inside your RRSP does not make it tax deductible. It's simply another investment you can have as part of your RRSP portfolio. But if you want to diversify your RRSP, especially if stocks haven't given you the returns you want, this could give you both some safety and a reasonable return.

Michael Chantrel

Making Your Mortgage Work For You: The Smith Maneuver

2007-06-18T12:08:00Z

In the US, mortgage interest is tax deductible. So, your home is considered a straight-forward investment, and you end up paying capital gains on your property when you sell it. If your property doesn't gain value, you don't pay any tax when you sell it.

In Canada, you can't deduct mortgage interest. Your mortgage loan is simply the vehicle to help you buy your home. However, when you sell your home, your capital gains is all yours, without tax. Keep in mind though, if your home doesn't increase in value, you don't get a tax break then either.

In most cases, I'd have to say that the US system works better. The tax deduction is "up front", as you pay for your home, rather than at the "back end" when you sell. Therefore, you get to keep more money in your pocket as you go along, rather than getting a windfall when you sell. Frankly, it works against those who want to stay in the family home in retirement, and don't want to sell. After all, if you don't want to sell, then your only option to get your money out of your home is a reverse mortgage.

But I digress. What I really want to talk about today is how Canadian readers can make their mortgage tax deductible now, and still have the advantage of available capital gains exemption when they sell. The approach is called the "Smith Maneuver". (You can also find this strategy under the Canadian spelling of "Manoeuvre".)

The Smith Maneuver is not a straightforward swap of mortgage for tax-deductible investment loan, as some folks think. In fact, it is based on something called a "re-advanceable" mortgage, and it means that you stay in debt! In fact, as you pay off your mortgage, you increase your debt load. It basically works as follows: keep making your regular mortgage payments but; after each payment, borrow back the principal reduction (or the amount that your mortgage actually goes down); use the money you borrow to invest in the stock market, to create a loan that is tax deductible.

The idea is that once you have your mortgage paid off, you have a big loan that you've been using to invest in the stock market. However, your high-quality investments should more than pay off that loan -- and leave you with "money in the bank". Of course, this only works if you've actually managed to make more interest on your investments than you've had to pay in your loan. Given the highs and lows of the stock market, this is definitely not a sure thing. Particularly when markets are very low, it would be tempting both for the lender on the readvanceable mortgage and the owner of the home, to panic.

In a worst case scenario, what if both home markets and stock markets decide to "correct" at the same time? You could have a devalued home and a devalued stock portfolio and a big loan to pay.

So, while some financial planners think that this can work, I think you are again in a situation where you have to have both good luck and the right market conditions.

I did see an analysis that showed a homeowner being much better off by paying off their mortgage as quickly as possible, rather than jumping into the Smith Maneuver. Personally, I'd have to agree. Just 15 years ago, I went through a period where both my stocks and my home had depreciated, and I had to hold tight. I think this could be a real possibility.

In my opinion, if you are a Canadian that has a good sized RRSP (known as a 401k in the US), you might be much better off to try to hold your own mortgage from within your RRSP! But more on that in my next entry.

Michael Chantrel