Friday, August 8, 2014

BUYING HOME: Mortgages Basic Knowledge


PAYMENT FREQUENCY:
Semi-monthly = 24 payments per year
Accelerated bi-weekly = 26 payments per year
Accelerated weekly = 52 payments per year

Savings through Accelerated Payments:
* A shorter Amortization Term saves you money because you will pay less interest costs over the life of the mortgage.
* Save thousands of dollars in interest costs - while paying down your mortgage sooner!
Example:
  - save over $62,000 by paying $1,454 Accelerated Bi-weekly for 21 years
  - save over $63,000 by paying $727 Accelerated Weekly for 21 years   
  - no savings by paying $2,908 monthly for 25 years

Basis for Example:
Mortgage Amount: $500,000.00
Interest Rate Type: Fixed
Payment Amount: $2,908.03
Payment Frequency: Monthly
Amortization Period: 25 years
Interest Term: 5 years
Interest Rate: 5%


INTEREST COSTS:
Term Interest Cost = interest cost on a loan for a specified term (e.g. total interest at 4% fixed rate for 5 year term mortage)

Amortization Interest Cost = total interest cost of the loan for the whole amortization period (e.g. total interest for the entire 25 year amortization period)


VARIABLE INTEREST RATES
Variable Interest Rate = interest rates can change during the mortgage term depending on changes in market interest rates (bank’s prime lending rate)

Advantages of variable interest rate mortgages:
- interest rates on variable rate mortgages are often lower than fixed interest rate mortgages

Disadvantages of variable interest rate mortgages:

- unknown future, difficult to predict, changes with the politics, global news, war, etc.
- between 2000 and 2009, the Bank of Canada bank rate changed from 0.5% to 6%


FIXED RATE MORTGAGES
- interest rate is constant throughout the term (e.g. fixed 4% interest rate over the entire 5 year term)


CLOSED MORTGAGE

- fixed term mortgage

Advantages of Closed Mortgage:
- interest rates are generally lower than for open term mortgages
- savings on interest costs
- payoff your mortgage faster

Disadvantages of Closed Mortgage:
- prepayment charge if you renegotiate your interest rate
- prepayment charge if you prepay more than what is allowable


CONVERTIBLE CLOSED MORTGAGE

- same benefits as a closed mortgage, but can be converted to a longer, closed term at any time without prepayment charges


OPEN MORTGAGE
- open term mortgage

Advantages of Open Mortgage:
- sound decision if you are planning to pay off your mortgage in the short term (10 years or less)
- can be repaid either in part or in full, at any time, without prepayment charges
- can be converted to any other term, at any time, without prepayment charges

Disadvantages of Open Mortgage:
- interest rates are generally higher than closed mortgages because of the added pre-payment flexibility


FIXED MORTGAGE RATES (Aug 2014)
Convertible:
 
6 Month   3.140% 

Closed:
1 Year     3.140%
2 Year     3.040%     (can i get 2 year mortgage contract??, almost same as prime rate)
3 Year     3.750%
4 Year     4.540%    
5 Year     4.940%    
7 Year     5.750%
10 Year     6.750%    
25 Year     8.750%    

Open:
6 month     6.300%
1 year     6.300%


VARIABLE MORTGAGE RATES (Aug 2014)

Closed:
5 year     RBC Prime Rate + 0.000% ---> 3.030%
(based on today's Royal Bank of Canada Prime Rate of 3.000%)     

Open:
5 year     RBC Prime Rate + 1.000% ---> 4.030%
(based on today's Royal Bank of Canada Prime Rate of 3.000%)

      
Today's Royal Bank of Canada Prime Rate (08 August 2014):

RBC Prime Rate     3.000%
Date of change: 09 Sept 2010 
(subject to change without notice, at any time)

*** Rates are applicable to residential mortgages only


MY MORTGAGE PREFERENCE:
Closed Mortage --> 25 years amortization
Variable Interest Rate --> 3% Prime Rate  ---> get 2 year fixed rate @ 3.040% ??
Accelerated Weekly --> save over $63,000 by paying $727 for 21 years     


500 K, 3% variable, 5 yr, closed mortgage, 25 yr amortization
 

500 K, 5% fixed, 5 yr, closed mortgage, 25 yr amortization

 
500 K, 5% fixed, 5 yr, closed mortgage, 25 yr amortization -FCAC
 

500 K, 5% fixed, 5 yr, closed mortgage, 25 yr amortization --FCAC

 
400 K, 5% fixed, 5 yr, closed mortgage, 25 yr amortization -FCAC


400 K, 5% fixed, 5 yr, closed mortgage, 25 yr amortization --FCAC


700 K, 5% fixed, 5 yr, closed mortgage, 25 yr amortization


700 K, 5%, 5 yr, closed mortgage, 25 yr amortization -FCAC


700 K, 5%, 5 yr, closed mortgage, 25 yr amortization -FCAC
  

Mortgage Rates, 08 Aug 2014



Canada Prime Interest Rates 2004-2014

 
Canada Prime Interest Rates 1960-2014




References:
https://www.rbcroyalbank.com/cgi-bin/mortgage/mpc/start.cgi
http://www.rbcroyalbank.com/rates/prime.html
http://www.rbcroyalbank.com/mortgages/mortgage-rates.html
http://www.fcac-acfc.gc.ca/eng/resources/publications/mortgages/Pages/Understa-Comprend-0.aspx#attractive
http://itools-ioutils.fcac-acfc.gc.ca/MC-CH/MC-CH-eng.aspx


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