Mortgages

A mortgage is a loan that is secured by property. Mortgages are large loans, and the money is generally borrowed over a large amount of time. The amortization period is the actual number of years it will take you to repay the entire mortgage –Generally this is between years!

Mortgages - Vocabulary The principal is the amount of money you borrow. –Initially the difference between the selling price and the down payment. –You are not allowed to borrow the down payment on a house; you must have some money of your own.

Mortgages - Vocabulary The interest is the amount you will pay to borrow money. The mortgage payment is a regular instalment, usually made up of principal and interest.

Mortgages - Vocabulary The term is the length of time that a specific mortgage agreement covers –Generally between six months and 10 years. –When a term expires you renegotiate the terms of your mortgage.

Mortgages - Vocabulary Equity is the value of the property over and above what you owe for it. –When you first buy a home, you have very little equity. –Every payment you make the principal amount is added to your equity.

Mortgage Loan Insurance Provided by Canada Mortgage and Housing Corporations (CMHC) Required by lenders when homebuyers make a down payment of less than 20% of the purchase price.

Mortgage Loan Insurance Why? –protect lenders against mortgage default –enables borrowers to purchase homes with a minimum down payment of 5%, without paying higher interest rates.

Closed Mortgages Interest rates are locked in for the entire term. –You commit to a set time, so they offer you a slightly lower rate. Prepayment charge/Breakage fee applies if –you want to renegotiate your interest rate –prepay more than your mortgage allows –pay off your mortgage balance prior to the end of its term

Closed Mortgages Good choice if –better choice if you're not planning to move or pay off your mortgage in the short term –you suspect interest rates are going to rise

Open Mortgages Can be repaid either in part or in full at any time without prepayment charges –Interest rates are generally higher due to added flexibility. Good choice for buyers –who plan to move or pay-off their home in the immediate future

Convertible Mortgages Gives you the same security of a closed mortgage, but for a shorter time –Can be converted to a longer term if you feel interest rates are going to rise.

Fixed Rate Mortgages Interest rate is for a fixed percentage and is locked in for the full term of the mortgage. Payments are set in advance for the entire term –You know how much payments will be throughout the entire term. Fixed rate mortgages can be open or closed

Variable Rate Mortgages Mortgage payments are set for a term of one or two years. –Interest rates will change during the term, but payments remain the same If interest rates go down –you owe less interest –more of the payment is applied to reduce the principal If rates go up –you owe more interest –more of the payment is applied to paying the interest.

Variable Rate Mortgages Variable rate mortgages may be open or closed. Flexibility to take advantage of falling interest rates and to convert to a fixed rate mortgage at any time

Mortgage Calculations –For our questions we will use fixed-rate, closed mortgages. Overview: Finding Monthly Payment –Use the amortization table in your text –You need to know Principal (Principal = purchase price – down payment) interest rate term of the mortgage. –The table value is per $1000 borrowed, so multiply by # of thousands borrowed.

Example If you take out a mortgage of $75,000 from the credit union for 25 years at a rate of 6.75%, find the monthly payment

Mortgage Calculations How to....find Interest Paid in one Month –Determine monthly interest rate Rate given is annual... So divide by 12 to find monthly rate! –Determine the outstanding principal –Multiply outstanding principal by interest rate as a decimal!

Example If you take out a $45, mortgage for 20 years at 8.25%. –What is the monthly payment on this mortgage? –Find the interest for the first month.

Mortgage Calculations How to.... finding unpaid balance and Owner’s Equity –Payment Amount – Interest = Amount applied to principal. –Each month, the payment on the principal is subtracted from the unpaid balance, and added to your equity.

Example A mortgage has an balance of $23, –The owner’s equity last month was $18, –The total payment per month is $ –The interest payment is $ Calculate the new unpaid balance and the new owner’s equity.

Assignment WS – Assignment 3