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  • 2/28/2013 7:02 AM

    5 things to do before signing your mortgage papers

    New house

    The home-buying process can be stressful and confusing. It's easy to second-guess your gut or overlook important issues when your brain is swimming with conflicting questions: Do I love it? Can I afford it? Would this room look good in yellow? How long before the roof needs replacing? What's that smell? I'll get used to it, right?

    Smelly or not (preferably not), a beautiful house can become a credit-crushing investment if you don't find the right balance between your practical left brain and emotional right brain before you sign your mortgage papers.

    Here are five ways to find that balance:

    1. Price out those renovations.

      Unless you're buying a new or completely renovated house, you'll probably have some changes in mind—ranging from the small (painting a room, installing new shelving in a closet) to the big and expensive (redoing the kitchen, adding a sunroom).

      Do some online research or talk to an expert at your local home improvement store to get a ballpark on what these renovations could cost. Unless you're an expert handyperson, don't forget to include the cost of labour.

      Once you have a basic dollar figure, add it to the asking price and decide if you'd buy the place for that much. If the answer is yes, talk to your lender or financial institution to figure out the best way to pay for those renos.

      Here's a website that has a decent renovation estimate calculator
      Calculate the estimated return on your renovation investment

    2. Consider maintenance time and costs.

      A charming old Victorian on a big corner lot may sound like your dream home, but the maintenance may overwhelm you—especially if you're a first-time home buyer or moving from a condo.

      From a leaky foundation to outdated electrical to drafty doors and windows, authentic older homes are generally more expensive to maintain. Outside, that big yard will need mowing, those mature trees will drop leaves that need raking, and your corner lot sidewalks—yes, two stretches of sidewalk—will need shovelling.

      By looking at the practical aspects of home maintenance, you will find out if you can accommodate the lifestyle and cost. A rule of thumb is that maintenance will cost 1% of your home's value every year (e.g., for a $300,000 home, that's $3,000 per year).

    3. Assess the neighbourhood.

      House prices vary greatly by location, yet many homeowners have their hopes set on a favourite neighbourhood or two and are reluctant to explore other options. Pick a priority—close to work, great schools, or quiet streets, for example—and focus on locations that meet that requirement. If you want it all, expect to pay a premium for it.

      When you find a house in a location that you like, drive by in the evening, on the weekend, and during the work week if you can. You may discover a lack of on-street parking or noisy neighbours. These issues may not be deal-breakers, but the solutions (like renting a parking spot) may be costly and should be included in your budget.

    4. Think about your needs now, in five years, and in 10 years.

      Sure, a downtown condo may seem like a great idea now, but if kids are a possibility in the next few years, will you want to raise them in that environment? You could, and lots of people do, but you should think about that before you buy.

      On the flip side, if you're a single 20-something who works downtown, is a big house in the suburbs right for you? Consider the time and money you'll spend commuting, and you may decide that a smaller house closer to work is a better fit.

      Here's a simple commuting cost calculator

      What's so bad about moving every few years? It all comes down to interest, equity, and appreciation. Mortgages are structured so that you put more money towards interest early in your term. The longer you hold on to a property, the more you'll pay down your initial mortgage amount and the more equity you'll earn in your home. Also, home values tend to rise over time, so you should benefit from that appreciation the longer you hold on to your home.

    5. Listen to your real estate agent and your home inspector.

      You hire experts because they're experts, so get your money's worth by listening to their advice. You don't have to take it—after all, your opinion is important too—but their extensive experience gives them insights that you probably don't have.

      If they raise red flags, take this information into account when you're calculating the affordability—and awesomeness—of a property.

    Your new home should make you feel comfortable—emotionally and financially. If you're constantly stressed about your mortgage or the repairs you need to make, those original hardwood floors and stainless steel appliances aren't going to make you feel any better. By making an informed decision, you can help avoid new homeowner's remorse.

    Other articles you may be interested in:

    How to avoid (or lower) mortgage prepayment penalties
    6 mortgage terms you need to know
    The true cost of buying a home in Alberta