Variables Still Play Second Fiddle

By Rob McLister, Canadian Mortgage Trends


Will we ever stop writing about which rate is better: fixed or variable?

It's doubtful.

And the answer will probably always be: “It depends.”

Yesterday, Rob Carrick from the Globe & Mail ran this story on why variable-rate mortgages should not be written off. Its main arguments are that rate risk has declined and historical studies support variable rates.

Well, in our books, Carrick is one of the best tell-it-like-it-is writers in personal finance. But this particular story needs at least a teaspoon of perspective.

The premise of the article is that variable-rate mortgages are worth a second look, for the following reasons:

1) Because rates won’t rise much

David Larock, a good broker and an equally good blogger, is quoted as saying “(Will rates rise anytime soon?) I just don’t see it, no.”

But there lies a problem. Apart from the very short term, we all know rates are entirely unpredictable. When the Bank of Canada (with its virtually unlimited resources) cannot consistently forecast economic activity, we as laypeople and brokers have absolutely and unequivocally zero chance of doing so.

The economy surprises analysts almost every single year.¹ There’s always something we didn’t foresee that moves interest rates in ways we didn’t predict. Yet, because we’re emotional creatures who overestimate our own abilities, we insist on forming rate opinions (and those opinions are invariably either too optimistic or too pessimistic).

The point is, while our gut may point to low rates for longer, we don’t know:

• how low
• for how long, and
• how the timing of future rate changes will coincide with our mortgage renewal date(s).

Even if we expect only a few BoC hikes, it wouldn’t take much of a jump for fixed rates to prove cheaper. Just a modest rate increase (e.g., 0.75 of percentage point in 2015 and nothing more) could a make today’s 2.99% five-year fixed less costly than a prime – 0.40% variable-rate.²

Note: A 75 basis point increase to prime rate would still put us 35 bps below the 10-year average (not that averages have significant predictive power).

2) Because variable rates have won in the past

The story cites a statistic (presumably from Moshe Milevsky’s research) that variable-rate mortgages have been cheaper 90% of the time.

That stat is easily the most misinterpreted statistic in the mortgage business. The actual research shows that assumptions are everything. (Here’s more on that: Fixed/Variable Research)
In brief, that 90% figure is based on an environment that no longer exists, one of posted rates and a long-term rate-downtrend.

Milevsky found that a simulation based on discounted mortgage rates (instead of posted) makes fixed mortgages come out on top roughly one-quarter of the time.

And, if you wanted to take it a step further, you could backtest rates using today’s tiny 39 basis point fixed-variable spread. If you did that, you'd quickly see that the fixed vs. variable decision becomes a statistical toss-up.

********

The takeaway here is that it’s a tad early to declare "variable-rate mortgages are back."
For most people, especially younger borrowers, going variable today is like betting on red or black. You’ve got to pick your gambles in life and, for new mortgages, the variable-rate odds simply aren't enough in your favour.

Of course, rates could theoretically fall from here (or go sideways for years) and make floating rates a winner. But that wouldn’t mean that variable rates are the right choice based on the information we have today.

If you do need a short-term mortgage, go with a 1-year fixed instead. They’re cheaper upfront, more flexible and a 1-year potentially lets you renew into a variable rate with a deeper discount.

---

Some Footnotes:

¹ The Citigroup Economic Surprise Index compares analyst expectations to actual economic readings. It shows how often the pros over- and under-estimate economic activity—and in turn, interest rates.

² This analysis measures interest cost only and assumes: (a) a 25-year amortization, and (b) that the variable- and fixed-rate mortgage payments are made equal (this compares cash flows on an apples-to-apples basis).

Monthly interest isn’t the only determinant of borrowing cost. Fees, penalties, amortization and a slew of other factors must also be considered. That’s why telling everyone to lock in is like telling everyone to buy bonds instead of stocks. It's not appropriate since personal circumstances affect suitability.

If, for example, you’re quite financially stable and already in a deeply discounted variable (like prime – 0.80%), you’re likely better off riding it out. (Here are some additional fixed vs. variable suitability criteria.)

For the reasons above, the fixed-rate commentary in this post is primarily aimed at people who are:

• suited to either a fixed or variable mortgage
• getting a new mortgage (as opposed to someone in an existing variable rate)
• unlikely to make significant mortgage changes in the next five years.

Many people don’t meet these criteria. For those folks, a competent mortgage professional can provide the best feedback on term selection.

Bank of Canada pins hopes on the New Year

By Kevin Carmichael, The Globe and Mail


The Bank of Canada is looking past weaker economic growth, holding to a projection that Canada’s economy will gather pace next year.

Policy makers appear little moved by a report last week that showed Canada’s gross domestic product grew at an annual rate of 0.6 per cent in the third quarter, a poor showing that fell short of the Bank of Canada’s already dim projection for growth of 1 per cent in the July-August period.

The central bank acknowledged Tuesday that the third-quarter number was “weak,” but attributed part of the slump to “transitory disruptions” in the energy industry. Policy makers held to their view that ultralow borrowing costs will stir enough household consumption and business investment in the months ahead to avoid a prolonged slump. The Bank of Canada in October predicted the economy would expand at a rate of 2.5 per cent in the fourth quarter.

“Although underlying momentum appears slightly softer than previously anticipated, the pace of economic growth is expected to pick up through 2013,” the Bank of Canada said in a statement, as it held its benchmark interest rate unchanged at 1 per cent at the end of its latest round of policy deliberations.

The central bank’s response to the third-quarter growth figures suggests Bank of Canada Governor Mark Carney and his deputies on the governing council remain more inclined to raise interest rates than to lower them, although a change in stance is unlikely for some time.

Policy makers left in place their guidance on the likely path for interest rates, reiterating their view that “over time, some modest withdrawal of monetary policy stimulus will likely be required” to keep inflation from topping the central bank’s 2-per-cent target. “The timing and degree of any such withdrawal will be weighed against global and domestic developments, including the evolution of imbalances in the household sector,” the statement said.

Canada’s central bank finds itself in the unique situation of having to confront an unstable global economy while having to look over its shoulder at an uncomfortably large burst of household debt. On the opposite side of the world, faced with a resource boom that appears to have peaked, the Reserve Bank of Australia Tuesday cut its benchmark lending rate to 3 per cent, its level during the financial crisis, in a bid to spark domestic industries, including a lacklustre real estate market.

Canada’s overnight target stayed where it has been for more than two years. That’s an extremely low level, and it’s unusual to leave policy unchanged for such a long period; the last time the central bank left borrowing costs unchanged for this long was the early 1950s. As a result, murmurs that Mr. Carney is fuelling an unsustainable expansion of household debt and a housing bubble likely will persist.

The Bank of Canada noted that the housing market is beginning to cool, and the growth of credit is starting to slow. “It is too early, however, to determine whether the moderation in housing activity and credit growth will be sustained,” the statement said.

Some analysts said Canada’s central bankers should stop worrying about a housing bubble and focus on a deteriorating economy. Paul-André Pinsonnault, senior fixed-income economist at National Bank Financial in Montreal, said the economy’s problems extend beyond temporary issues in the energy industry. Corporate profits are declining, and hiring is stagnant. “We continue to see no reason for any rate hikes before 2014,” Mr. Pinsonnault said.

The Bank of Canada isn’t exactly sanguine. It reiterated that weak global growth – accentuated by a recession in Europe and a “gradual” recovery in the United States – is impeding exports.

Predicting where the global economy is headed is extremely difficult right now. The Bank of Canada said the deceleration of China’s economy has “stabilized,” which is a positive sign. At the same time, strained budget negotiations in Washington are holding back the U.S. recovery by making it impossible to predict tax policy. Until that cloud lifts, it also will be difficult to set Canadian monetary policy.

Reasons to Celebrate: Smart Consumers and Low Unemployment

Article written by Boris Bozic, Merix Financial


For some time now, finding positive news about the mortgage industry and the real estate market in general required a Sherpa Guide and a donkey. “I think I just heard something positive about mortgages… OOPS, my bad, it’s just Big Foot.”

It hasn’t been easy but over the past couple of weeks there’s been news which leads me to believe the Four Horsemen of the Apocalypse may not be on the way.

CAAMP’s Annual State of the Residential Mortgage Market in Canada (love those short titles) was released just prior to Mortgage Forum 2012 in Vancouver. It’s a must read for everyone in the industry. All the major media outlets have picked up the report and there’s been a significant amount of coverage based on the report. One aspect of the report that bodes well for the industry, and should give regulators some degree of comfort, is how responsible Canadian borrowers are. I found it striking that 32% of borrowers either increased their monthly payments or made principal reductions over the past 12 months. It is estimated that $3.5 billion in additional monthly payments were made, and a further $20 billion in lump sum payments. Yes, consumers are taking on more debt but they’re looking at paying off their debt sooner. When stories are written about consumer debt levels, a word or two should be dedicated to how responsible Canadians are in attempting to eliminate their debt.

Here’s another indication that consumers maybe be smarter than the press give them credit for. Over the past 12 months there’s been a high level of ARM conversions to 5 year fixed terms, and the product of choice today is 5 year fixed. Maybe, just maybe consumers are smart enough to know that now is not the time to gamble. They’re looking at five year terms and saying the rate is competitive and it’s worth the peace of mind for the next five years.

As far as I’m concerned, the only stat that matters to our industry is the unemployment rate. Everything else, where prime is going etc., is secondary. Our industry, our entire economy will rise and fall with employment numbers. It’s simple, if borrowers are working and they have access to cheap money, like they do now and will have for the next few years, there’s less reason to dump a property. A home owner may not get the price they’re looking for but because the home is affordable there is less reason to discount the price.

If a home owner loses their job a completely different set of circumstances arise. That’s why there’s reason for optimism over the most recent employment numbers. According to Stat’s Canada, 59 thousand new jobs were created in November. On a year over year basis 294 thousand new jobs have been created, and hours worked have also increased. These numbers are critical, not only to our industry but to our economy. Anytime we see a reduction in the employment rate it’s a reason for a high five or fist bump. So turn around and give your work mate a fist bump because our unemployment rate has been reduced to 7.2%.

There’s more good news that will be readily available when the full Maritz survey becomes public in January, another must read. But even if we only take into account the data available today there’s reason for optimism, and lessons to be learned. For instance, consumers do not require regulators to legislate responsibility. Consumers are miles ahead on that one.
Until next time,

Cheers.

Buying a Rental Property? How the Financing Game has Changed.

Robert McLister, Special to the Globe and Mail

Just four short years ago, you could buy an investment property with nothing down and get the best interest rates in the market.

That was then. Today, rental financing is night-and-day different. To mortgage a small (a one-to-four unit, non-owner occupied) rental property now, you need to plop down one-fifth of the purchase price. And even then, you don’t always get the lowest rate.

With a tipsy housing market and the credit crisis still fresh in memory, regulators and lenders are putting higher-risk borrowers under a microscope. That includes real estate investors.

As a result, it’s now trickier to qualify for a rental property mortgage – especially compared to the days before April 19, 2010. (That’s when federal legislation put an end to insured rental mortgages with less than 20 per cent down.)

So if you are considering a small rental property and need a mortgage soon, here are some things to remember.

You’ll need an ample down payment

If you buy a rental home that you won’t live in, almost every lender in Canada will want at least 20 per cent down. That’s $72,000 on the average $360,000 residential property.

And if you’re purchasing a condo or buying in a “higher-risk” city (like Vancouver), many lenders will want an additional 5 per cent.

Picking the right lender matters more than ever

If you want to be approved, your “total debt ratio” must fall within lender limits. At the risk of oversimplifying, your “total debt ratio” is generally your total monthly expenses divided by total monthly income from all sources, including rentals.

That sounds simple, but it’s not. A borrower’s ability to qualify often depends on how much of her rental income the lender recognizes.

You’d think that if a tenant pays you $1,000 a month, you could add that $1,000 to your income when qualifying for a mortgage. But in many cases, lenders will credit you with only 50 per cent of the rental income you receive, making it harder for you to qualify.

In all, there are four ways that lenders calculate your debt ratios, which are beyond the scope of this column. Suffice it to say, any competent mortgage adviser can point out lenders with borrower-friendly methods.

And there’s one last thing to keep in mind about debt ratios. Different lenders have different limits. Some lenders let you have a 42 per cent total debt ratio. Most others permit just 40 per cent. That extra 2 per cent can make a big difference , especially for folks with mortgages on multiple properties.

The moral here is that the lender you pick can have a major impact on your approval chances. If your qualifications aren’t perfect, you’ll need a lender that is open to some common sense underwriting exceptions, and those are getting harder to find.

Multiple rental properties = headaches

Many lenders prohibit you from owning and/or financing an unlimited number of rental properties.

Even if they don’t explicitly forbid it, the inability to count all your rental income in debt ratio calculations can make approvals challenging, and sometimes impossible. In fact, it often forces people with big rental portfolios to renew mortgages with their existing lender at unfavourable rates and terms.

So if you plan to finance a small rental empire, find a broker that has several clients with 10 or more rental properties. They’ll need that experience to help you know which lenders to use, and in what order.

The key to remember is that lenders with the best rates often have the tightest rules. If you want the best terms, you’ll want to use the more restrictive lenders early in your empire building and save the flexible ones for last. That ensures you don’t run out of competitive lenders when your portfolio gets big.

More paperwork

A few years ago, it was easier to use an appraiser’s estimate of a property’s rental income in lieu of a signed lease. Today, more and more lenders want to see a signed written lease or other proof of rental income.

It also helps to have two years’ tax returns available. That’s because using tax returns to show your net gain or loss on a property can make it easier to qualify, as opposed to using other standard debt service calculations.

The rate is often secondary

Rental mortgages are higher risk so many lenders now charge rate premiums.

Fortunately, you can still find lenders that extend their best rates on investment financing. The question is, do they offer the other features you need?

In keeping with supply and demand, the most flexible mortgages usually cost more. That’s especially true for investment property financing. Be prepared to pay a little extra if you need a lender that satisfies more than a few of these criteria:

• has highly flexible rental income rules
• allows you to carry a greater debt ratio
• lets you put a property in a company name for liability protection
• lets you finance more than four or five properties
• doesn’t impose a minimum net worth requirement
• allows 30– to 35-year amortizations to maximize your cash flow
• lets you prove rental income with “market rent” appraisals
• allows a gifted or borrowed down payment
• allows you to add a second mortgage
• will lend on large mortgages (e.g., $750,000+)
• has a low minimum credit score (e.g. 600 versus 650)
• allows rental income from suites that don’t conform with current municipal bylaws
• provides cash back (sometimes handy for improvements and closing costs)
• allows you to add a vendor take-back mortgage (this is where part of your purchase is financed by the property seller)
• offers a line of credit with your rental mortgage
• pays for your switching fees (this is far less common with rental mortgages than it is for regular mortgages)

Choose your broker carefully

If you want the best rental rate and most flexibility, an experienced no-fee broker is the way to go.
Rental financing is truly a specialization and probably only one in 10 mortgage professionals are actually proficient at it.

Rick Robertson, founder of the lender comparison firm Mortgage Mentor, says one way to screen brokers is to ask how many properties they’ve financed in the last year. If the number is less than 10 or 15, find a more experienced broker.

And Mr. Robertson adds, “Deal with a broker that uses a lot of lenders. Each lender has its own niche and no two lenders in Canada have the same rental policy.”

Robert McLister is the editor of CanadianMortgageTrends.com and a mortgage planner at VERICOintelliMortgage. You can also follow him on twitter at @CdnMortgageNews.

Cooler Canadian housing market may be good for parts of economy: CIBC

By The Canadian Press, as reported in the Vancouver Sun


TORONTO - One of the country's big banking groups has issued a report saying that a cooling in Canadian house prices may not be all bad news.

The CIBC World Markets says the slowing of Canadian home sales will "take a bite" out of economic growth but adds there could be "winners as well as losers across the economy."

CIBC economist Avery Shenfeld recognizes that a home owner may have to lower retirement spending if the property brings in less money when it's sold.

On the other hand, Shenfeld says, first-time buyers may welcome a letup in home prices and may have more money available for retail spending.

It's the latest in a series of CIBC reports that downplay some of the concerns about the potential for a devastating U.S.-style crash in residential real-estate.

More pessimistic analysts have warned some types of Canadian real-estate in some markets are overpriced and at risk of tipping into a rapid decline.


Read more: http://www.vancouversun.com/business/real-estate/Cooler+Canadian+housing+market+good+parts+economy/7627311/story.html#ixzz2EPpOeyma

Downsize thoughtfully

By Jim Yih, Edmonton Journal, as reported in The Vancouver Sun

 
Over the past 15 years, we have seen debt rise across the nation, and more and more Canadians are retiring with debt. According to a recent survey by CIBC, 59 per cent of retirees are carrying debt in retirement and the trend may continue as more baby boomers head into their retirement years.
What happened to the notion that we had to be debt-free before we retired?

Over the past 20 years I've been asked an increasing number of questions by attendees at my retirement seminars. "Can you still retire if you are not debt free?" "Is it OK to have debt in retirement?" "How do you pay down debt in retirement?" "Are reverse mortgages good?"

A common solution is to downsize. For most people, this simply means selling a large, family-style home and buying a smaller house that is more suited to retirement. While downsizing may appear to be an intuitive solution, it may not help with the finances as much as you think.

I recently met a woman who wanted to sell her bigger home and move into a condo, but she soon realized that despite being smaller, the condo would actually cost more. The condo designed for retirees was new, with lots of upgrades, compared to her 20-year-old house. It was a real reality check to discover that her downsizing retirement plan was not going to save her any money.

CONDO FEES IN RETIREMENT

Retirement communities are becoming increasingly popular for the lifestyle benefits they offer, such as lower maintenance from smaller houses and yards, and travelling with peace of mind knowing your place will be looked after.

It's important to be aware, though, that these communities usually involve monthly condo fees or strata fees, which can really impact finances in retirement.

While it's not always a solution, I've met many people for whom downsizing has been financially rewarding. Some have prepared for retirement by buying vacation property, then downsizing from two homes to one. Others have sold homes in more expensive cities to move to quieter ones and have saved money that way. Others have utilized traditional downsizing to their advantage by moving from a bigger home to a smaller one.

There is no cookie-cutter solution . The lifestyle you want in retirement - including family, hobbies, climate and health - will strongly affect the house you choose.

For some, downsizing brings the opportunity to clean out years' worth of collected household items and start fresh. But many struggle with throwing things away and selling a family home that is filled with memories.

If you are looking to downsizing as a way to reduce debt in retirement, make sure you plan ahead and explore your options early.

Jim Yih (twitter.com/jimyih) is a financial expert. Visit his award-winning blog , RetireHappyBlog.ca


Read more: http://www.edmontonjournal.com/homes/Downsize+thoughtfully/7072165/story.html#ixzz2EJt5xGlX

Housing downturn may help young buyers

Dana Flavelle, TheStar.com


A cooler housing market isn’t all bad news, a major Canadian bank says.
Lower prices could benefit young couples struggling to save for a down payment and also retirees who dream of moving to British Columbia, the report by CIBC World Markets predicts.

While slowing home sales will “take a bite” out of Canada’s economic growth, “less well understood” is the fact there will be winners and losers across the economy, the report released Thursday said.

“What of the young newlyweds scraping by on mac and cheese in order to save for their first home? A slip in prices could ease that task, freeing up spending power in the process,” CIBC chief economist Avery Shenfeld wrote in a note to clients.

It could also benefit cities like Toronto and Vancouver that have been priced out of many immigrants’ and retirees’ reach, the report said.

Overall, slowing home sales will have a negative impact on the economy, the report acknowledges, chopping nearly a percentage point from Canada’s already tepid economic growth.

Fewer housing starts and related sales of furniture and appliances will cause most of the drag, the report said. As well, Canadian home owners who were counting on selling their homes to fund their retirement might find themselves with less spending money, the report said.

But Canada is not in danger of the type of housing crash seen in the U.S. and Ireland, Shenfeld wrote.
Falling prices weren’t the cause of the problem in those economies; rather, it was the accompanying wave of mortgage defaults that was the issue, Shenfeld wrote.

“Canada hasn’t lent as aggressively to its lower-income home buyers,” he noted.

Historically, most declines in wealth coincided with other economic problems, such as rising unemployment or high interest rates, he noted.

A gradual retreat in home prices now is preferable to a harder landing from higher prices down the road, he added.

“As a home owner, I’d prefer that one particular Toronto street stays insulated from any house price declines,” Shenfeld joked, referring to his own address. “But to look on the bright side, a gradual cooling in house prices, one early enough to avoid a larger financial sector shock, will look good in hindsight if Canada gets more support from global growth in the next two years.”

The report is the latest in a series by CIBC to downplay the potential for Canada to experience a U.S.-style crash in residential real estate.

6 Ways to Make your Home More Enticing to Buyers

Investopedia.com


There's little doubt that the housing market is finally showing signs of a measurable recovery. The recent Case Schiller Index, a report that tracks the selling prices of homes nationally, showed a 1.2% increase in home prices from July 2011. The authors of the report cited stabilizing home markets and slight increases in household wealth as reasons for the encouraging data. This is positive news for the real estate market but for homeowners still struggling to sell their homes, this data is of little value. Homeowners face stiff competition from the many other similar properties on the market. How do you make your home stand out among the many other homes prospective buyers will see before making an offer?

Make a Video

Before listing your home, switch roles. Make a detailed video that shows the interior and exterior of your home. Include closets, areas behind doors, the fence and all of the other less visible features. Then, view your video and think like a buyer. What do you see that would cause you to lose interest if you weren't the owner of the home? Show the video to friends and family, and ask them to give you candid comments. The smallest details are sometimes the difference between a buyer making an offer or moving on to the next home.

Renovate

If your home isn't catching the eye of buyers, it might need more some work. A high-priced kitchen remodel to entice buyers probably isn't a great idea, but replacing damaged base boards, worn carpet and dead shrubbery are essential renovations in today's real estate market. If the video uncovered some eyesores, fix them. Luckily, these types of renovations don't have to be high-dollar projects.

Weekday Open House

The weekends are full of open houses. Not only are there more weekend open houses than there are prospective buyers, an increasing number of people work on the weekends to produce extra income. A weekday open house reduces the competition, and the evening time may allow parents to view your home when their kids are at a sports practice or other activity. Open houses cost nothing, so trying it on a weekend will only take some of your time.

Find a Better Agent

The economic downturn that resulted in millions of people losing their jobs produced a class of new real estate agents looking for additional income. If your agent is new to the real estate market, he or she may not have the professional network to get your home in front of large amounts of buyers.

If you're desperate to sell, find a high-volume agent in your area. To ensure the agent gives your home priority over his or her other listings, offer a bonus or higher commission for a quick sale. Make sure he or she adds it to the Multiple Listing Service (MLS) so other agents know that your house comes with a higher payout.

Don't Take a Backseat Role

Even if your realtor is advertising your home and working hard, two people marketing your home is better than one. Put your home on your Facebook page, Craigslist, Twitter and other social media sites. Post flyers on company-approved bulletin boards and talk to local family and friends. Most people would rather buy from somebody they know and respect. You'll still have to pay your realtor a commission, but if you're desperate to sell, take an active role in the marketing process.

Lower Your Price

If your home isn't producing offers or interest, it's probably time to lower your asking price. Realtors will help you to set your initial price based on comparable homes in your market, but in the end, their analysis is just an educated guess. Always keep the price higher than the lowest price you're willing to accept. This allows for room to haggle.

The Bottom Line

According to the National Association of Realtors, the average number of days to sell a home in July 2012 was 69 - down nearly 30% from July 2011. This is encouraging news for homeowners, but selling a home is still difficult. It will take meticulous attention to detail and a strategy to make it stand out from the many other homes that prospective buyers will see before making their choices.

Read more: http://www.investopedia.com/financial-edge/1012/6-ways-to-make-your-home-more-enticing-to-buyers.aspx#ixzz2E2S93Jnx

The Pros And Cons Of Home Additions

Investopedia.com

 

 

 

All homeowners have, at least once, been challenged by the question, "Should I add to my home or purchase a new one?" There is no absolute right or wrong answer, and the best choice is always one that fits your situation and strong preferences. Before making this major financial and emotional commitment, weigh these pros and cons of building a home addition.

Pros of Building a Home Addition

Enjoy a high cost-value ratio

If built correctly, your sparkling new addition may improve your home dollar-for-dollar, resulting in a higher sales price when you finally put it on the market. This, of course, assumes a "normal" real estate market. A depressed home market may or may not warrant building an addition if you plan to sell in the near future. In that case, you might want to concentrate on home shopping  to take advantage of depressed prices.

Additions are cheaper

Even in a depressed home value market, building an addition will be a less expensive option than buying a new home with the floor space you want. Should you be strongly attached to your current home, this pro becomes even more significant. You might create your dream home right where you are.

Express creativity

Unlike purchasing an existing home, a new addition can be whatever you want it to be and look however you want it to look. It's like designing your own new home without all the expense of building an entire house from the dirt up.

Cons of Building a Home Addition

You risk "over improving" the home

Every neighborhood or location, regardless of how desirable it may be, has an upper price ceiling. Adding a fabulous addition can come back to bite you. For example, if your home becomes the most expensive home in the neighborhood, you may have trouble attracting buyers when you decide to sell.

Disrupted living quarters

Once you've decided to build your exceptional new addition, you are filled with excitement and enthusiasm. However, the construction noise, worker conversations and disruptions to your living space can destroy your positive emotions. You may just want the dirt, noise and construction to stop.

Extra costs and change orders

If you start with a tight budget, cost overruns and last-minute changes can destroy your carefully constructed financial plan. These events tend to happen whether you're building a medieval castle or simply adding an extra bedroom. Try to closely monitor progress and communicate regularly with your contractor to avoid this fate.

Additions shrink yard space and add utility costs

Homeowners sometimes have an unpleasant "ah-ha" moment when they realize that their prized lawn or yard has mysteriously shrunk because of the new addition. A similar unwelcome surprise is the realization that you're going to need to clean, heat and cool the new room(s). Only then do you realize that you should have given this more thought before the first nail was driven.

The Bottom Line

In most cases, if you like your home and neighborhood, it's wise to build the addition you want to get the space and look you crave. Be careful not to over improve your property and be aware of the other cons. This will help you have a relatively stress-free and enjoyable project. Don't forget, choosing to build an addition in lieu of buying a new home also eliminates the pesky costs that come with moving.

Read more: http://www.investopedia.com/financial-edge/0512/the-pros-and-cons-of-home-additions.aspx#ixzz2E2QznUdh

Five Ways to Make Your Home Renos Pay Off

The Globe and Mail


Remodeling a home can be a very costly venture. Homeowners looking to add value to their homes may try to add upgrades or renovate entire sections of their homes to make them more marketable. Not all home upgrades and renovations are worth spending your hard-earned money on, though. Here is a look at five ways to make your home renovation worth the money and effort you put into it, along with some pitfalls to avoid along the way.

Repair What Needs to be Fixed

The renovations that will yield the most value for your home are repairs. Focus on fixing the areas of your house that are in desperate need of attention from a contractor or handyman. According to an article released by Realtor.com, you will be more likely to get the best value from handling repairs than any other renovation. Whether you are planning to sell or stay in your home, handling repairs is most certainly worth the effort. Examples of repairs that go a long way include fixing a leaking roof, replacing broken kitchen tile and having an electrician rewire a faulty outlet. Even the smallest of repairs can increase your home value.

Plan to Stay a While

If you are going through with your plans to renovate, it is likely that you are either deciding to stick around for a while or you've decided to move. While at one time homeowners could expect to get back what they put into their home renovations, either out of use or when they sell their home, in today's still stabilizing housing market, there is no guarantee. This is called ROI, or return on investment, and the amount you get back all depends on the type of renovation project that you have decided to take on.

Forget the Add-On

When it comes to larger renovations, ditch the add-on plans and instead opt to remodel and upgrade the structure you already have. Additions can be very costly, and the amount that is added to your home value is not likely to come anywhere close to the amount you paid for the remodel in the first place. Rather than shelling out a lot of cash on an addition to your house, work with what you have and upgrade your home where feasible.

Go Green

A smart move to make when remodeling is to include energy efficient appliances, windows, doors and more. Not only will these add-ons help you save money on energy, but there may also be tax breaks that you can take advantage of to make going green a financially and ecologically smart move.

Focus on the Kitchen and Bathroom

Two areas of the house where a remodel would most benefit you is the kitchen and the bathroom. According to an article released by HGTV.com, kitchens and baths are the most expensive rooms to renovate. They are also the most frequently used, however, so the remodel will definitely be well appreciated. Additionally, by renovating these rooms, you typically get a 100% return on investment. Regardless of whether you sell or remain within your home, the upgrades you make in the kitchen and bathroom will be well worth the money and effort you put into them.

The Bottom Line

Home remodels and renovations can definitely pay off if you plan carefully. Repairs, along with upgrades in the bathroom and kitchen, far outweigh other renovations and add-on projects you would undertake. By planning ahead and understanding how your renovation project will affect your bottom line, as well as home value, you are protecting your investments and hard-earned money in the process.