9 Dec

PRINCIPAL & INTEREST

General

Posted by: Moreen Perimal

 

 

 

 

 

 

Principal and interest are the two components that make up a mortgage payment.  The principal is the portion of your payment that goes towards paying down the outstanding balance of your mortgage.  Interest is the other portion of your payment which goes directly into the pockets of your lender and does not contribute to paying down your mortgage balance.

What some people may not realize is that a compounding interest rate (what the majority of all mortgages are) is weighted differently depending on how many years you have left on your mortgage.

If a young couple were to purchase their very first home, let’s say $500,000 for example, and they had a $100,000 down payment, their mortgage would be $400,000.  If they had today’s interest rates, their mortgage would be around 3%, compounded semi-annually, over 25 years with their interest rate re-negotiable every 5-years if they keep the same term.  Assuming they were able to get 3% for the entire 25-years, their monthly payments would be $1,892.98 a month for the life of their mortgage.

Their first payment, however, is not $1,892.98, with 97% of it going to paying down the $400,000 balance and 3% going towards interest.  The very first payment would actually be broken down as $993.81 of interest and $899.17 going towards paying down the principal balance of $400,000.

Now, it won’t stay like this forever, the very last payment before the first 5-year term is up would be broken down as $854.62 going towards interest and $1,038.36 of the $1,892.98 going towards paying down the principal.  It wouldn’t be until year 10 where the interest portion dips below $500.

If you can, any pre-payments you make each month will directly pay down the principal balance outstanding.  This will also, in turn, allow for less interest to be charged as interest is always calculated based on the current balance outstanding.  In the later years, it may not be as advantageous, but in the first 5-10 years, it can be extremely beneficial.

If you want to see the break down of principal and interest portions inside your own mortgage, feel free to reach out to me!

9 Dec

PAYMENT FREQUENCY

General

Posted by: Moreen Perimal

 

 

 

 

One of the decisions you will need to make before your new mortgage is set up, is what kind of payment frequency you would like to have.  For many, sticking to a monthly payment is the default, however, different frequencies may end up saving you less interest over time.

Monthly Payments

Monthly payments are exactly as they sound, one payment every month until the maturity date of your mortgage at the end of your term.  Took a 3-year term? You will make 36 payments (12 payments a year) and then you will need to renegotiate your interest rate.  5-year term?  You will make 60 payments.

$500,000 mortgage

3% interest rate

5-year term

$2,366.23 monthly payment

$427,372.90 remaining over 20 years

$69,346.70 paid to interest

$72,627.01 paid to principal

Semi-Monthly

Semi-monthly is not bi-weekly.  Semi-monthly is your monthly payment divided by two.  That means, you are making 24 payments every year, but each payment is slightly less than half of what the monthly payment would have been.

$500,000 mortgage

3% interest rate

5-year term

$1,182.38 semi-monthly payment

$427,372.99 remaining over 20 years

$69,258.59 paid to interest

$72,627.01 paid to principal

Bi-Weekly

Bi-weekly, you are not making 2 payments every month.  With 52 weeks in a year, you are actually making 26 payments, 2 more than semi-monthly (2 months a year you make 3 bi-weekly payments).  The interest paid and balance owing is slightly less than the others, but mere cents.  You will still need to make payments for another 20 years.

$500,000 mortgage

3% interest rate

5-year term

$1,091.38 bi-weekly payment

$427,372.36 remaining over 20 years

$69,251.76 paid to interest

$72,627.64 paid to principal

Accelerated Bi-Weekly

Just like regular bi-weekly, you are not making 2 payments every month.  With 52 weeks in a year, you are actually making 26 payments, 2 more than semi-monthly.  However because this is accelerated, the payment amount is higher.

$500,000 mortgage

3% interest rate

5-year term

$1,183.11 accelerated bi-weekly payment

$414,521.40 remaining over 17 years 4 months

$68,325.70 paid to interest

$85,478.60 paid to principal

You have increased your yearly payment amount by $2,384.98, $11,924.90 over 5-years.  That extra $11,924.90 has decreased your outstanding balance at the end of your mortgage term by $12,850.96 because more of your payments went to principal and less went to interest.  Also, you will now have your mortgage paid off more than 2.5 years earlier.

The same option is available for accelerated weekly payments which will shave another month off of time required to pay back the whole loan as well.  If you can afford to go accelerated, your best option is to do so!  Especially in the early years where a larger portion of your payments is going towards interest, not paying down your principal.

If you have any more questions, please do not hesitate to reach out to me!

4 Dec

5 MISTAKES FIRST TIME HOME BUYERS MAKE

General

Posted by: Moreen Perimal

 

 

 

 

Buying a home might just be the biggest purchase of your life—it’s important to do your homework before jumping in! We have outlined the 5 mistakes First Time Home Buyers commonly make, and how you can avoid them and look like a Home Buying Champ.

1. Shopping Outside Your Budget
It’s always an excellent idea to get pre-approved prior to starting your house hunting.  This can give you a clear idea of exactly what your finances are and what you can comfortably afford.  I will give you the maximum amount that you can spend on a house but that does not mean that you should spend that full amount.  There are additional costs that you need to consider (Property Transfer Tax, Strata Fees, Legal Fees, Moving Costs) and leave room for in your budget.  Stretching yourself too thin can lead to you being “House Rich and Cash Poor” something you will want to avoid.  Instead, buying a home within your home-buying limit will allow you to be ready for any potential curveballs and to keep your savings on track.

2. Forgetting to Budget for Closing Costs
Most first-time buyers know about the down payment, but fail to realize that there are a number of costs associated with closing on a home.  These can be substantial and should not be overlooked.  They include:

  • Legal and Notary Fees
  • Property Transfer Tax (though, as a First Time Home Buyer, you might be exempt from this cost).
  • Home Inspection fees

There can also be other costs included depending on the type of mortgage and lender you work with (ex. Insurance premiums, broker/lender fees).  Check with your broker and get an estimate of what the cost will be once you have your pre-approval completed.

3. Buying a Home on Looks Alone
It can be easy to fall in love with a home the minute you walk into it.  Updated kitchen + bathrooms, beautifully redone the flooring, new appliances…what’s not to like?  But before putting in an offer on the home, be sure to look past the cosmetic upgrades.  Ask questions such as:

  1. When was the roof last done?
  2. How old is the furnace?
  3. How old is the water heater?
  4. How old is the house itself? And what upgrades have been done to electrical, plumbing, etc?
  5. When were the windows last updated?

All of these things are necessary pieces to a home and are quite expensive to finance, especially as a first- time buyer.  Look for a home that has solid, good bones. Cosmetic upgrades can be made later and are far less of a headache than these bigger upgrades.

4. Skipping the Home Inspection
In a red-hot housing market, a new trend is for homebuyers to skip the home inspection.  This is one thing we recommend you do not skip!  A home inspection can turn up so many unforeseen problems such as water damage, foundational cracks and other potential problems that would be expensive to have to repair down the road.  The inspection report will provide you with a handy checklist of all the things you should do to make sure your home is in great shape.

5. Not Using a Broker
We compare prices for everything: Cars, TV’s, Clothing… even groceries. So, it makes sense to shop around for your mortgage too!  If you are relying solely on your bank to provide you with the best rate you may be missing out on great opportunities that a Dominion Lending Centres mortgage broker can offer you.  They can work with you and multiple lenders to find the sharpest rate and the best product for your lifestyle.

4 Dec

5 REASONS YOU MAY WANT TO CONSIDER A RENT TO OWN PROPERTY

General

Posted by: Moreen Perimal

With the real estate market continuing to hold steady, many young families are looking for other options to afford a home.  Many millennial families still are holding onto the dream of owning a detached home or their own townhouse/condo one day…but the task of moving on from a rental can seem daunting and impossible.  This is where a Rent To Own (RTO) property can offer a solution.  Here are 5 reasons you may decide to look for an RTO property.

1. RTO allows you to have set savings plan to put towards one day owning the property you are currently living in.  How this works is by setting up a contract with your Landlord (seller) and agreeing to pay an amount each month that is above what your rent is currently for a set amount of time.  For example, if the property you are currently renting rents for $1.000 you would agree to pay the landlord $1400.  The additional $400 would go into an account the landlord has set up for you and towards your future down-payment.

2. RTO will allow you to make lump-sum payments during the course of the RTO contract.  It’s common with most RTO contracts to have the option to pay a lump sum payment to the down payment by giving the landlord a larger rent cheque.  Keep in mind that the down payment is non-refundable which is why it is crucial to involve a mortgage professional and lawyer in the process.

3. RTO’s will require you to be pre-approved prior to the contract going through.  This is an ideal situation as being pre-approved allows you to fully understand the other factors that contribute to you getting a mortgage.

For example:
• Your current income level
• Your current credit score
• Your current debt owing
• How much you are pre-qualified for

Knowing these numbers can highlight other areas that you may need to work on or improve during the time you are saving up for the down payment and set you on the right course for when you are ready to purchase.

4. You can pre-establish a great team of professionals working with you.  As with any mortgage product, an RTO will require you to work with a team of professionals including a mortgage broker.  Building this relationship early can help you alleviate any further speed bumps you might have down the road.  They can work with you for the entire process and make it run smoother and help you stay on track.

5. The setup is simple and offers a unique solution.  Setting up a Rent to Own starts with a contract.  The lawyer or solicitor will write this for you and should work closely with your mortgage professional to accommodate lender policies and guidelines.  Here are some of the important elements that need to be included in the RTO contract are:
• The Purchase Price
• Purchase Price negotiations formulated based on the market trends of the area in which you are buying
• The term and length of the RTO agreement
• Exit and/or assignment clauses

The RTO must be registered on the title of the subject property and RTO down payments collected through the contract must have a clear and full banking history that is supported with bank statements.  These down payments must not be spent by the seller at any time.

Once you agree on the RTO you can agree on the future purchase price and timelines as well.  This will give a target and allows one to know that once they’ve hit x amount of years over RTO payments, they will have enough of a down payment to purchase the property at the originally agreed-upon purchase price.

Now, what happens if things change and a party wants out of the contract? For the Landlord, they are required to honour it until the term is over. For the tenants, they are able to “sell” their contract to another buyer who will assume the contract to recoup your down payment. The price is usually the down payment amount that you’ve already paid to the Landlord.

The contract can also include the fact that the tenant (buyer) can purchase at certain intervals at a certain price but does not have the right to recoup your down payment.

One final thought on Rent To Own properties; There are many RTO companies and solicitors out there.  Choose wisely who you opt to work with.  Many do not fully understand the setup of an RTO contract and the contracts that need to be followed by Lender guidelines.  It is always best to have the solicitor work hand in hand with me to ensure that the contract lines up and nothing is missed during the set-up process.

This unique solution could be the answer for someone who is renting currently but is having a hard time getting their down payment together.  RTO’s are becoming more and more popular due to the high housing prices.