It might seem that the best option for every homeowner is to pay off a mortgage as soon as possible and relieve some stress. A report by the Canadian Association of Accredited Mortgage Professionals released in May 2013 found that Canadians pay off their mortgages in about two-thirds of the time originally intended. However, there’s also another possibility — refinancing, which allows you to get lower interest rate, consolidate debt, or tap into home equity. Refinancing is the process of paying the existing mortgage and setting up a completely new one. This process can save a lot of money, but it comes with several expenses and can prolong your mortgage term. So it’s wise to compare the total costs of paying down the mortgage with changing to a new one. Here I give you a brief explanation of some of the possible costs and benefits of both solutions.

When Is it Smart to Refinance?

First of all, keep in mind that refinancing a mortgage doesn’t pay off the debt but restructures it. Refinancing when mortgage rates are low will allow you to decrease your monthly payments and save on the sum you pay during the loan. Apart from saving you money, reducing your interest rate also increases the rate at which you build equity in your home. If you’ve considerably lowered your interest rate and monthly payments, you can also decrease the length of your mortgage term by paying more every month. The amount you pay overall will still be lower than the sum you would pay with your original mortgage.

Refinancing allows you to choose a new mortgage product that will better suit your requirements. If you have an adjustable-rate mortgage and interest rates are increasing, then you should prefer to get out of the adjustable-rate mortgage. On the other hand, if you have a fixed-rate mortgage and interest rates start to decline, you should change to an adjustable-rate mortgage, with the periodic rate adjustments resulting in smaller monthly payments.

Houses by woodleywonderworks

Plus, refinancing can allow you to access up to 80 per cent of your home’s value that you can then use to cover expenses such as remodelling or investment. Another reason why homeowners refinance is to consolidate their debt. Refinancing allows you to replace a high-interest debt such as on credit cards or cars with a low-interest mortgage and at the same time consolidate a number of payments in one.

I recommend that you refinance your mortgage when you plan to stay in the house for some time. Charles Delaney, associate professor of finance and director of the real estate program at the Hankamer School of Business at Baylor University in Waco, Texas, suggested,

“You have to look at the savings relative to the cost, and then consider: How long am I going to be in this property?”

You have to consider different costs, like a prepayment penalty for breaking mortgage terms, an application fee, a loan processing fee, a document preparation fee, an appraisal fee, an inspection fee, legal costs, insurance, and additional costs associated with refinancing. It’s important to figure out how long it would take to recoup these costs. In his book The Mortgage Kit, Thomas C. Steinmetz recommends,

“The industry rule of thumb — ‘refinance when you can lower your interest rates by 2 per cent or more’ — no longer is correct… It makes sense to refinance if you can recover your costs and make a decent return on your investment before you plan to sell your house or pay off your mortgage.”

Plus, the right time for refinancing depends on the status of your current mortgage, as you’ll be starting all over again with a brand new mortgage. A general rule is, the longer you’ve had your present mortgage, the less advantageous it is to refinance — especially if there’s a small difference between the rates. If you’re extending the mortgage term with a lower interest rate, you can still end up spending more in interest. To find out whether it’s advantageous to refinance with a loan term extension, you should calculate the interest savings on the new loan with the same term as the old one as well as the interest savings on the new loan with the length of your planned refinance and compare the two figures.

Home Red by nikcname

Refinancing means undergoing the same process you went through when you got your current mortgage, so you have to get all your records together and make sure your credit score and report are respectable. A good payment history will increase your chance of successful refinancing.

When Should You Pay Off Your Mortgage?

The main reasons for paying off your mortgage as soon as possible are saving money and getting peace of mind. Whether you should pay off your mortgage depends on your goals. If you consider your house an investment that may appreciate, then you might want to continue borrowing money and investing if it brings you a higher return. However, if you consider your house your home — something more than an investment that may or may not guarantee you return — then you should pay off your mortgage and relieve yourself of the mortgage stress. Emily Larimer, a CGA (certified general accountant) who runs a Toronto-based sole proprietorship, remarked,

“Your biggest asset is your house. And you want to pay off that loan because you want to eventually pay yourself rather than the bank. And you’re building equity which you can eventually use to do other things.”

Many people claim that paying off your mortgage is worse than refinancing in the long run, since you lose money you could get from your investments. However, you’re not guaranteed to get a higher return on your investment. Paying off your mortgage is a safe bet that provides you the security of having a place to live. Most people buy a home so that they can live in it, and even if its value increases, they don’t want to sell.

Before you start spending extra money to pay down your mortgage, you should consider that there are other costs with a higher priority than your mortgage. Greg McBride, a senior financial analyst with Bankrate.com, pointed out,

“Paying off the mortgage becomes a higher priority later in your career, after you’ve amassed sufficient savings for emergencies, after you’ve paid off other debt, after you’ve put the kids through college, and after you’ve spent years accumulating your retirement nest egg on a tax-advantaged basis. All are higher priorities than pouring more money into a low-cost, tax deductible debt like a mortgage, particularly when rates are as low as they are today.”

Once you decide to pay off your mortgage, you have several options. First of all, you can accelerate your payments by switching from monthly to bi-weekly payments. Bi-weekly payments will allow you to pay down more of the principal each year, shortening the total repayment period of your mortgage. Another useful and harmless way is rounding up your mortgage payments. Rounding your monthly or bi-weekly payments to the next hundred won’t make a huge difference on your monthly budget but will be noticeable on your mortgage. If you have a closed mortgage, you can repay as much as 10 per cent of the borrowed amount at any time during each calendar year. Moreover, at each regular payment date, you can make an additional payment that’s equal to or less than your regular payment.

Deciding for Yourself

Generally, there isn’t a clear answer to the question of whether it’s better to pay down your mortgage or refinance. Both solutions have their pros and cons and whether the decision is right depends on your current circumstances. Continually refinancing your mortgage makes sense when you want to reduce your total payment and make more money in the long run. But if you find the comforts of your home more enjoyable if it’s you, not the bank, who owns it, then you should pay off your mortgage and sleep well at night.

Up-sizing is real easy to do….we start with very little and at each and every stage we add more…and more. Fast forward a few years and young or old….you look around and find yourself surrounded by THINGS (of course they are Family Heirlooms too)….but do we really need them?

Could we live in less space? Could we live in multiple locations at different times of the year by selling the larger home. Of course…but the enormity of the job ahead hits with major depression and the reality is that Downsizing Sucks!

I thought I would give you some ideas from my home-selling experience that might help you deal with some of the challenges of this new adventure: Downsizing with grace and style.

Click here to read our comprehensive guide to Rightsizing

When I start showing smaller properties to those downsizing, I watch their faces trying to imagine their new lifestyle in terms of their existing furniture, art, entertainment options, cooking, etc….I can see that they are taking all their possessions and mentally cramming them in to tighter spaces. Don’t even try! It will never ever work.

Keep what you must but start looking at apartment-sized furniture. Most clients go wrong by not differentiating full size and apartment size furniture when they decorate. A couple of times I’ve suggested to small space Sellers that we replace existing furniture with more advantageous sized staging and to their credit, they did at great benefit to them.

The issue is the same: When downsizing, try to visualize the smaller space with smaller scale minimalistic accouterments. Start looking at Magazines, TV Shows and websites that focus on living in smaller spaces

It is amazing what you can do….visit the IKEA store or website and look at what their designers do in managing space. I’ve been told that IKEA now features their staged designer rooms with the square footage noted… to help you grasp the reality of smaller spaces and what can be put in them. A great idea!

Start fresh, reinvent yourself, create a new look, change styles…make it a fun project and approach the next step of your life as a challenge. Don’t focus on what you are leaving but on where you are going and the new lifestyle you can create there. You may be very surprised!

More to come but feel free to leave your thoughts and comments!

Related Posts:

Real Estate: Downsizing with Style and Grace: Post Two

Real Estate: Downsizing with Style and Grace: Part Three

The Reality of “Rightsizing”

There are times when “Downsizing or Rightsizing” becomes a must and not an option. Sadly, the topic is often controversial with the person needing to “Rightsize”. The process means a lack of independence, and many will fight any suggestion to move to a more accommodating living space.

We live in a City where there are very few spaces, other than apartments, that can allow one to live on one floor. Bungalows only exist in certain areas and those are still mostly accessible by climbing stairs. Staying in your home also means having to maintain gardens, snow removal, and routine maintenance.

Click here to read our comprehensive guide to Rightsizing

My guiding rule when I counsel clients needing to move is “Is this the safest place for you to live?”

In Ontario we have community care access workers who can help you and your family make these decisions. They are trained professionals who can help you function in your own home for as long as possible and provide the guidance needed when it is time to leave. Sadly…most of us have a tendency to fight and rage against change and family becomes the target for that rage.

Until she passed a few years ago, my brother and I became the target of my Mom’s frustration as her independence diminished. We took different tactics: My brother was the realist and would point-blank tell my mom that she was in no physical shape to fly from Toronto to Edmonton for a Family event. That approach set my mom off in a rage…she was not interested in dealing with a point-blank “NO”.

My approach, wanting to avoid the argument, was to say that “YES”, I would take her from Toronto to Edmonton. Yes, we would have to drive out to the Airport. Yes, we would have to wait in a waiting room for at least an hour at the Airport. Yes, we would have to sit on the Airplane for almost four and a half hours. Yes, we would…At this point my mom would look at me, laugh and say…”I know that I can’t go…I just like to talk about it”. That would be the end of the discussion.

Restricting independence is a huge issue for everyone. However, staying in a home that is unsafe is worse.
Rather than telling someone, they can no longer live in their own home you might try to asking how they would manage if something unforeseen happened. Go through the scenario as I did and if they still are firm, then you must do everything you can to make the home safe.

Sometimes though you must make a unilateral decision in the interest of safety…if so, best of luck. That can be one of the most lonely and painful decisions you will ever make.

For more information:

Real Estate: Downsizing with Style and Grace: Part Two

Real Estate: Downsizing with Style and Grace: Part One

Thanks for the great response and ideas from the first post on Downsizing…before I add some more thoughts, let’s talk about some of the issues generated after Post One:

There seems to be a universal response to the negative naming of the difficult process: Downsizing. However, I remembered with some friendly prodding that Barry Lebow, Founder of  The Accredited Senior Agent Designation refers to it as “Rightsizing”, a term defined as “to undergo a reduction to an optimal size”. I like referring to it as it turns a negative into a positive, so that works for me….Barry’s website has some great resources for seniors who are rightsizing but remember that people rightsize for all sorts of reasons.

Click here to read our comprehensive guide to Rightsizing

Here are some of my further thoughts for today’s post:  I am a great fan of writing up the plusses and minuses of any major decision. Sit down with your partner and family and decide what rightsizing will mean to you and your lifestyle. With older readers, those with health issues or caregivers, much of the discussion should be based on safety issues. The ruling decision should be based on “Is this the safest place for me to live?”.

When it comes to what should stay and what should go, call a professional…and listen to them. The Real Estate business is full of third parties we use called “Stagers” . They pride themselves on showing our sellers how to make their homes look spacious, when they may not be and have a very good unbiased eye. Owners, Family and friends may have vested interest in pieces or history around them and may be tied to “Stuff”.

I also hear people say that they are “saving these possessions for their children”. As I child I heard that excuse used many times…strange that I was never asked whether I wanted those possessions or not. As my mom aged and passed those possessions on to me and my brother they occupied a large armour in my living room and his basement….they seldom got used, and when asked where they were, it became easier to say that they were in the dishwasher….course that never worked with chairs, a sofa or the dining table. The dishes were not dishwasher-proof so I got a further talking to…with a gracious helping of guilt.

Ask your children what they want and give it to them now…without an editorial or history…especially if they tell you they cannot use it. Remember that you went through the process at their age, but also remember that this generation is known for not being as loyal as we were and seldom care how long you have had it around. With the recent generation, we make a mistake branding ourselves with our History rather than our Services or recent successes. How long something has been around is not as important to them as its utility today.

Today’s tips:

• Hire a professional Stager and play “does it stay or does it go?” at home.
• Have new floor plans done and use your Stager to stage your existing place for sale making recommendations on the new space at the same time.
• Get sticky notes to place on what is to go… let your family or friends walk through the “to-go” group while you go for a short walk…if they want something in the “to go” group, it must go today. If it does not disappear, move it out as soon as you can but …don’t move it into a storage locker. Storage Lockers are often a cop-out!

At all times keep in mind where you are moving to and what the pluses of that new space are going to be. Get excited and get packing! Speaking of packing…at all times hide all packing boxes. There is little as depressing as half-empty or half-filled moving boxes. Always make your home a Moving Box FREE Zone!

Feel free to add your comments and suggestions below or read the earlier post at:

Real Estate: Downsizing with Style and Grace: Post One

Real Estate: Downsizing with Style and Grace: Part Three