What would happen if I were to lose all equity in my condo when it's time to renew the mortgage?
It doesn't matter.  You will just renew your mortgage at the prevailing rates.  That's part of the mortgage contract.   The problem that happens is if you want to move your mortgage to another bank for a better rate, they may not accept you.  Your re-negotiating position is limited. Most mortgages have a portability option where you can even transfer the mortgage to another property, but you'd have to buy a cheaper house.
"This seems to be a very emotional thing for people and there are a lot of conflicting answers.  I agree with JoeTaxpayer in general but I think it's worth coming at it from a slightly different angle. You are in Canada and you don't get to deduct anything for your mortgage interest like in the US, so that simplifies things a bit.  The next thing to consider is that in an amortized mortgage, the later payments include increasingly more principal.  This matters because the extra payments you make earlier in the loan have much more impact on reducing your interest than those made at the end of the loan. Why does that matter?  Let's say for example, your loan was for $100K and you will end up getting $150K for the sale after all the transaction costs.  Consider two scenarios: If you do the math, you'll see that the total is the same in both scenarios.  Nominally, $50K of equity is worth the same as $50K in the bank. ""But wait!"" you protest, ""what about the interest on the loan?""  For sure, you likely won't get 2.89% on money in a bank account in this environment.  But there's a big difference between money in the bank and equity in your house: you can't withdraw part of your equity.  You either have to sell the house (which takes time) or you have to take out a loan against your equity which is likely going to be more expensive than your current loan. This is the basic reasoning behind the advice to have a certain period of time covered.  4 months isn't terrible but you could have more of a cushion.  Consider things like upcoming maintenance or improvements on the house.  Are you going to need a new roof before you move?  New driveway or landscape improvements?  Having enough cash to make a down-payment on your next home can be a huge advantage because you can make a non-contingent offer which will often be accepted at a lower value than a contingent offer. By putting this money into your home equity, you essentially make it inaccessible and there's an opportunity cost to that.  You will also earn exact 0% on that equity.  The only benefit you get is to reduce a loan which is charging you a tiny rate that you are unlikely to get again any time soon. I would take that extra cash and build more cushion.  I would also put as much money into any tax sheltered investments as you can.  You should expect to earn more than 2.89% on your long-term investments.  You really aren't in debt as far as the house goes as long as you are not underwater on the loan: the net value of that asset is positive on your balance sheet.  Yes you need to keep making payments but a big account balance covers that.  In fact if you hit on hard times and you've put all your extra cash into equity, you might ironically not being able to make your payments and lose the home. One thing I just realized is that since you are in Canada, you probably don't have a fixed-rate on your mortgage.  A variable-rate loan does make the calculation different.  If you are concerned that rates may spike significantly, I think you still want to increase your cushion but whether you want to increase long-term investments depends on your risk tolerance." Consider that the bank of course makes money on the money in your escrow. It is nothing but a free loan you give the bank, and the official reasons why they want it are mostly BS - they want your free loan, nothing else. As a consequence, to let you out of it, they want the money they now cannot make on your money upfront, in form of a 'fee'. That explains the amount; it is right their expected loss by letting you out. Unfortunately, knowing this doesn't change your options. Either way, you will have to pay that money; either as a one-time fee, or as a continuing loss of interest. As others mentioned, you cannot calculate with 29 years, as chances are the mortgage will end earlier - by refinancing or sale. Then you are back to square one with another mandatory escrow; so paying the fee is probably not a good idea. If you are an interesting borrower for other banks, you might be able to refinance with no escrow; you can always try to negotiate this and make it a part of the contract. If they want your business, they might agree to that. One thing you may be missing is the possibility of a special assessment on the condo. If the foundation cracks, you may be looking at tens of thousands to cover it. This would largely depend on the condo board's reserve funds. Speaking of reserve funds, have you remembered to factor in condo fees? You may also be forgetting to factor in property taxes and closing costs (legal fees and realtor fees). The latter, you'll have to pay when buying and when selling. Now, ten years is a good length of time. If your mother really will live in the condo for ten years, there's a very good chance it does indeed make more sense to buy than to rent. It's very possible you already factored in everything I mentioned above. but the flat would be occupied all the time. Famous last words. Are you prepared to have a tenant move in, and stop paying rent? In the US, it can take 6 months to get a tenant out of the apartment and little chance of collecting back rent. I don't know how your laws work, but here, they do not favor the landlord.  The tiny sub 1% profit you make while funding principal payments is a risky proposition. It seems to me that even normal repairs (heater, appliances, etc) will put you to the negative.  On the other hand, if this property has bottomed in terms of price and it rises in value, you may have a nice profit. But if you are just renting it out, it feels like it's too close to call.  By the way, if you can go with a 30yr fixed, I'd suggest that. This would get you to a better cash flow sooner. A shorter mortgage simply means more money to principal each month.  EDIT - as far as equity goes, at the beginning it seems the equity build up is really from your pocket, definitely so by switching from the 30 to the 15. What is your goal? The assumption I may have made is you wish to be a real estate investor with multiple properties. Doing so means saving up for the next down payment. Given the payoff time even if the property ran a high profit, I imagine you'd want to focus on cash flow, minimize the monthly expense, maximize what you can take each month to save for the next down payment. It's your choice, years from now to have one paid property, or 3 properties each with that 30% down payment, and let time be your friend. You say you are underwater by $10k-15k.  Does that include the 6% comission that selling will cost you?  If you are underwater and have to sell anyway, why would you want to give the bank any extra money?  A loss will be taken on the sale.  Personally i would want the bank to take as much of that loss as possible, rather than myself.  Depending on the locale the mortgage may or may not be non-recourse, ie the loan contract implies that the bank can take the house from you if you default, but if 'non-recourse' the bank has no legal way to demand more money from you. Getting the bank to cooperate on a short sale might be massively painful.  If you have $ in your savings, you might have more leverage to nego with the bank on how much money you have to give them in the event the loan is not 'non-recourse'.  Note that even if not 'non-recourse', it's not clear it would be worth the banks time and money to pursue any shortfall after a sale or if you just walk away and mail the keys to the bank. If you're not worried about your credit, the most financially beneficial action for you might be to simply stop paying the mortgage at all and bank the whole payments.  It will take the bank some time to get you out of the house and you can live cost-free during that time. You may feel a moral obligation to the bank.  I would not feel this way.  The banks and bankers took a ton of money out of selling mortgages to buyers and then selling securities based on the mortgages to investors.  They looted the whole system and pushed prices up greatly in the process, which burned most home buyers and home owners.  It's all about business -my advice is to act like a business does and minimize your costs.  The bank should have required a big enough downpayment to cover their risk.  If they did not, then they are to blame for any loss they incur.  This is the most basic rule of finance. Better in terms of what? less taxes paid? or more money to save for retirement? In terms of retirement, it would be better for you to keep the condo you currently have for at least two reasons: You wouldn't incur the penalties and fees from buying and selling a home. Selling and buying a home comes with a multitude of fees and expenses that aren't included in your estimation. You aren't saddled with a mortgage payment again. You aren't paying a mortgage payment right now. If you set aside the amount you would be paying towards that, it more than covers your taxes, with plenty left over to put towards retirement. "It's a little unusual, but I don't think the financial terms are completely unreasonable on their face. What you describe is similar to an interest-only loan, where you make payments that only cover the interest due each month, and the entire principal is due as a single ""balloon payment"" on a specified date (in this case, the date on which the condo is sold).  Your monthly payment of $500 on a principal of $115K is equivalent to an annual interest rate of 5.22%, which at least is not completely usurious.  With a traditional mortgage you might pay a rate as low as 3%, if you had sufficient income and excellent credit - but I don't know, from what you've said, whether that's the case.  Did you make the current arrangement because you were unable to get a loan from a bank? The main difference here is that instead of the balloon payment being a fixed $115K, it's ""75% of the gross proceeds of the sale"".  If the condo eventually sells for $155K, that would be $116,250, so that's slightly advantageous to them (assuming that ""gross proceeds"" means ""before deducting commissions for either the buyers' or sellers' realtors or any other costs of the sale""), and thus slightly disadvantageous to you.  If the condo appreciates in value, that's more of a win for them and more of a relative loss for you.  But it's also possible that the value of the condo goes down, in which case this arrangement is better for you than a fixed balloon payment.  So this deal does prevent you from getting a larger share of any gains in the value of the property, but it also helps insulate you from any losses.  That's important to keep in mind. There's also the issue of needing their consent to sell.  That's potentially problematic - usually in a joint ownership scheme, either owner has the right to demand to be bought out or to force a sale.  I guess it depends on whether you think your parents would be likely to consent under reasonable circumstances, or to insist on holding the property against your best interests. It's true that you aren't building equity with this arrangement, and if you thought you were, you are mistaken or misled.  But let's compare it with other options. If you would qualify for a traditional 30-year fixed mortgage at 3%, your monthly payment would be slightly lower ($484), and you would be building some equity because your payments would reduce the principal as well as paying the interest.  But a 30-year loan builds equity very slowly at first - after 7 years you'd have only about $20,000 in principal paid down. If we assume that 5.2% represents the interest rate you'd otherwise pay based on your creditworthiness, then your monthly payment would be $631.  So compared to that, you have an extra $130 per month that you can save or invest in whatever you want - you're not forced to invest it in your house. Note that in either case you'd still be paying the condo fees, property taxes, insurance, and maintenance yourself.  So we might as well eliminate those from consideration.   It might be a good idea to find out what other options you would have - perhaps try to get an interest rate quote on a traditional mortgage from a bank, based on your income and credit history.  Then you can decide what to do, taking into account: your financial situation; how much of a monthly payment could you afford? your relationship with your parents; are they likely to be reasonable about renegotiating?  Do they in general tend to respect your wishes?  Would it harm your relationship if you tried to get out of the deal, and how important is that to you? To what extent do you actually want to pay for equity in this property? Do you really believe it's a good investment, and have evidence to support that?   Your options include: Try to renegotiate the terms of the loan from your parents Try to ""refinance"" the loan, by getting a loan from a bank and paying off some agreed-upon amount of principal to your parents Try to force the sale of the condo and move to another house, financing it some other way Consult a lawyer as to whether your agreement with your parents is legally enforceable.  For instance, do they have a lien on the property?" You could walk away from your mortgage.  When you signed the mortgage you and the bank agreed that if you stopped making payments the bank would get the house.  Give them the house.  Of course this would be a huge hit to your credit score and you would probably not be able to obtain another mortgage at a decent rate for at least 7 years.  You may have trouble obtaining other financing as well (i.e. auto loans).  If you plan on moving to an apartment and don't need to finance car purchases this may be OK. Every payment you make on your house will already be increasing your equity in it.  For that reason alone, I'd recommend moving additional savings into other long-term funds. You did borrow money for the downpayment.  When you apply for a mortgage loan on your new home, you will be required to list all your assets and all your liabilities. You must disclose the first mortgage as well as the second mortgage on your current condo as well as the monthly payment on each of these loans.  If you took out the second mortgage five years ago, you can truthfully say that you have not taken out any loans within the past year to get cash for the down payment when you apply for a mortgage for purchasing your new house. But, what the lender will be looking at is: Can  the applicants' current income support monthly payments of   $1000 for the first mortgage on the condo plus $300 for the second   mortgage on the condo plus $1500 for the proposed mortgage on the   new house? You might argue that you will be selling that condo soon, or will be renting it out and that the rental income will cover the mortgage payments on the condo, but will the lender give much credence to this? The condo may not sell easily, you might not be able to find a tenant right away, or be able to rent the condo at a high enough rental to cover the costs etc. If you simply save money from your current extra cash flow and use that to make the down payment, the lender will be pondering the question Can  the applicants' current income support monthly payments of   $1000 for the mortgage on the condo plus $1500 for the proposed mortgage on the new house? Which deal will the lender be happier with? If you are uncomfortable saving your extra cash flow in a savings account or CD or investing it in stocks and/or bonds until you need the money for the down-payment on your new house, put that money in a sock under your mattress (and don't smoke in bed!) "Your mortgage agreement probably gives you three options: Pay off your mortgage in full. Use the insurance company's deck-repair payment to fix your deck to be similar in quality to what it was when you took out the mortgage, allowing for normal wear-and-tear since you took out the mortgage. In other words, you can ""restore or repair the property to avoid lessening the Lender's security"". According to most American mortgages, if you can make the repairs for less than the insurance settlement, and the lender is happy with the work, you can keep the savings. Hand over the insurance company payment for the deck to your lender, and have them apply that amount toward the principal of your mortgage. If the repairs are not ""economically feasible"", and you are current with your payments, most American mortgages specify this use of the money. Here are some typical mortgage provisions in this regard.  This is an excerpt from the Fannie Mae/Freddie Mac form 3048, which is the form used by most banks for mortgages in the state of Washington.  (I have added paragraph breaks and bolding for clarity.)  Many states have different wording, but the intent is the same: In the event of loss, Borrower shall give prompt notice to the insurance carrier and Lender.  Lender may make proof of loss if not made promptly by Borrower.  Unless Lender and Borrower otherwise agree in writing, any insurance proceeds, whether or not the underlying insurance was required by Lender, shall be applied to restoration or repair of the Property, if the restoration or repair is economically feasible and Lender's security is not lessened. During such repair and restoration period, Lender shall have the right to hold such insurance proceeds until Lender has had an opportunity to inspect such Property to ensure the work has been completed to Lender's satisfaction, provided that such inspection shall be undertaken promptly. Lender may disburse proceeds for the repairs and restoration in a single payment or in a series of progress payments as the work is completed. Unless an agreement is made in writing or Applicable Law requires interest to be paid on such insurance proceeds, Lender shall not be required to pay Borrower any interest or earnings on such proceeds. Fees for public adjusters, or other third parties, retained by Borrower shall not be paid out of the insurance proceeds and shall be the sole obligation of Borrower. If the restoration or repair is not economically feasible or Lender's security would be lessened, the insurance proceeds shall be applied to the sums secured by this Security Instrument, whether or not then due, with the excess, if any, paid to Borrower.  Such insurance proceeds shall be applied in the order provided for in Section 2." i prepaid roughly $400 at closing into escrow. that's my minimum allowable balance. paid in all year, and now taxes and insurance are paid in december. after december, they're projecting a $200 balance, which is $200 too low. homeowners insurance hasn't changed, pmi hasn't changed, property taxes are virtually identical to estimate at closing. the difference is that the $400 initial payment didn't factor in timing of those payments out of escrow. pretty lame if you ask me. "Let's illustrate how typical mortgage and its insurance works, from the very beginning. few years pass You're at the last point now. The whole point of the insurance was to preserve value of bank's collateral, at least from its point of view. By making a claim you have testified that a damage has occurred and some value of the property was lost. It's only reasonable for the bank that it wants the value of the asset to be restored to the value of the loan. Or the other way around. Bank doesn't really care if your deck is repaired, it only cares to have right side equal left side in the books. By taking the mortgage you've agreed to preserve the value of the property. There are many ways out of this situation, but pocketing the money isn't one of them.  There is no need to fight the mortgage company, because they're right. Talk with them in good faith and walk through available options. If you feel that you can live with the deck as it is, then paying back part of the loan might be a good idea. You don't ""lose"" the money this way, you're still 2k ahead - just not now, but in 20 years.  Afterthought: it's possible that it would be ""enough"" to re-evaluate the house to ensure it's still worth its original value even with damaged deck (eg due to other improvements you've made over the years or general property prices rising in the area). I put quotes, because you have to count costs of reevaluation which may be too big to make it worth. AND it might turn out it's worth even less, eg if the prices dropped. Or add another collateral, but that means signing another lien which also costs money." Some options: See if the seller will sell to you on Contract.  With a significant down payment the seller may be willing to sell you the condo on contract.  This fill in the year or so you will probably need to go from contractor to full time employee with enough time on the job to get a mortgage.   Keep Shopping.  Be up front with the lenders with the problems you are running into and see if any of them can find you a solution.  You may need to take a higher rate in the short term but hopefully you can refinance in a few years to a more reasonable rate. Check with a local bank or credit union.  Many times local banks or CU's will finance high demand properties that may be out of favor with the super banks that have no ties to your community.  These banks sometimes realize that just because the standard spreadsheet says this is a bad risk the reality is the specific property you are interested in is not the risk that it appears on paper.  You will have to find a bank that actually retains its mortgages as many local banks have become agents that just sell mortgages to the mortgage market. Talk to a Realtor.  If you are not using one now it may be time to engage one.  They can help you navigate these bumps and steer you towards lenders that are more amenable to the loan you need. I know this is a little off the wall but I bought a rental property for my son's tuition. The tenants pay down the mortgage for the next 12 years and it (hopefully) also appreciates in value. Worst case scenario is I come out with a rental and a kid with no education.  He doesn't go then there's no skin off my back.