February 3, 2010
Book, Case Study, Employed Persons, First Time Home Buyer, Interest Rates
No Comments
Closed mortgages offer great rates and typically fit most people’s needs. Most people feel that they can stick to the term of the mortgage they have chosen. But like a wise man once said – life is what happens while you were making other plans.
Things happen – divorce, your job is moved to another city – your needs change. This is ok. Lenders will allow people to get out of mortgages that they have gotten themselves into – for a fee of course.
These fees are called Pay Out Penalties.
Pay out penalties are typically determined in two different ways:
- Interest Rate Differential
- Three Months Interest
Lenders take whichever of the two is greater.
The Alberta Mortgage Broker Association defines the how these are calculated as follows:
“You can calculate these two penalty amounts using the simple interest formula to five a borrower an approximation of the cost:
I = P x R x T”
I = Interest
P= Principal
R = Rate
T = Time
For the three month interest calculation the formula would look as follows:
I = Current Mortgage Balance x Original Mortgage Interest Rate x 3/12 (Since time is in years we only want to calculate 3 months)
So if you have a mortgage of $150k at a rate of 7.5% the calculation to determine 3 months interest would give us a value of $2812.50.
For the Interest Rate Differential calculation the formula would look as follows:
I = Current Mortgage Balance x (Original Mortgage Interest Rate – Current Mortgage Interest Rate) x Time remaining in contract
So if you have the same scenario as above and the current mortgage Interest Rate is 6% and you have 3 years left in the term the calculation to determine the Interest Rate Differential would give us a value of $6750.
In this case the lender would charge you $6750 for leaving this mortgage.
What I believe is important to note in this case are:
- The lender is not picking a number out of the air – there is a clear formula that they use.
- People need to know what the consequences are. This allows people to make educated decisions and educated decisions are good decisions.
If you have any questions regarding this please do not hesitate to contact me or another qualified Mortgage Broker.
January 28, 2010
Case Study, Employed Persons, Interest Rates, Uncategorized
No Comments
In my time as a mortgage broker 75% of all mortgages I have done have had 5 year terms. This means that the specifics of the mortgage (amount, property, interest rates and payments) are set for that entire period. So if a home owner decides to change some of these arrangements then a new mortgage is required and pay out penalties need to be paid.
But what if a home owner decides to move to another property before the 5 years is up?
The lender wants to hold onto good customers so they implemented a clause called “Portability”. What this means is that you can move your mortgage without penalty to another property.
For example if Jane and John own a townhouse worth $300k with a mortgage of $200k and want to move to a single family detached home worth $450k. What is the process to port this mortgage?
- Jane and John would need to visit their mortgage broker to confirm that they would qualify for the increase in mortgage amount.
- They sell their property.
- They put an offer on the new property.
- Once accepted key data is sent to the lender.
- The lender reviews that application, supporting data and the property.
- Once accepted a the lender takes the original mortgage of $200k at its current rate and blends it with the additional $150k at the best current rate – giving them a new mortgage balance and a new rate.
- Then the lender instructs Jane and John’s lawyer.
- Jane and John sign the docs at the lawyer’s office.
- They take possession of their new house.
So the important things to note from this example are:
- You can move your mortgage to a new property without penalty.
- Get a good mortgage broker who can help you work through this process with confidence.
May 23, 2009
Book, Case Study, Credit, Employed Persons, First Time Home Buyer, Interest Rates, Mortgage Insurance, News, Pre Approval, Proving income, Small Business, Switch
No Comments
Over the past few months I have confirmed something that I have suspected for the last several years – People need to know more about mortgages and the mortgage process.
So in an effort to address a number of the key issues I have began writing this blog.
Through this blog I have attempted to inform people about some of the basics of the mortgage terminology, products and process. The response has been outstanding to say the least. People really appreciate the straight forward information that I have been giving them.
I think that this is worth while and fun so I will continue to blog, but I want to do more. So I am officially announcing that I am in the process of writing a book for people who live in Alberta and who are looking to purchase or refinance a property. The working title of this book is “So you want to get a mortgage in Alberta”.
I am excited about giving Albertan’s clear information about mortgages.
The chapters and topics have largely been decided but feel free to leave a comment below to let me know what you would like to see included in this book.
If you keep reading then I will keep writing.
April 23, 2009
Case Study, First Time Home Buyer
No Comments
One of the common questions I get when working with my customers is “What is the difference between open or closed mortgages?”
These terms are thrown around alot and people sometimes are confused about them. I am not suggesting that the terms or what they describe are complex – just that people are not always aware.
Open mortgages are mortgages that can be paid off at any time without a penalty. The can either be for a set amount or can have floating balances (like a credit card). The two most common reasons a person would want an open mortgage is if they knew that they were about to come into some big money and wanted to apply it to the mortgage – like the sale of a house, a big bonus from work or winning the lotto. They may also have their mortgage as open if they have a line of credit that is secured against their property.
Closed mortgages are mortgages that if paid off before their allotted term incur a penalty. So for example if you were to win the lotto and pay off your house the next day then you would incur a penalty. Or in a more likely situation if you were to refinance before the term of that mortgage was up then you would likely pay a penalty.
So by the definitions – many people say, “lets go with the open option just in case”. Lenders want to encourage people to go with fixed terms so they increase the rates on open mortgages or reduce the number of terms that are available to use this product (for example 6 months and one yr instead of 1 yr, 2 yr, 3 yr, 4 yr, 5 yr, 7 yr and 10 yr that fixed mortgages offer).
I always suggest to my customers that if they are not expecting a large sum of money in the next 12 months but still want to make extra payments to pay down their mortgage faster then take advantage of the pre payment privileges that most lenders offer.
I will discuss those options further in a future blog post.
All the best and please feel free to call if you have any questions.
« Previous Entries