Tuesday, January 4, 2011

The Acid Test

I've been wondering what would happen to my mortgage if my interest rate was to jump when I have to refinance with a new interest rate in 4 years. I locked my rate in for 5 years, unfortunately I don't keep if for the life of my mortgage (though that would be awesome!) The mortgage calculations are slightly different in the different countries, so I'd recommend finding a local calculator rather than using this link if you're outside of Canada.


I found a calculator claiming to be Canadian that talked about PMI and based it's tax rate on Massachusetts. Do I think it's calculations are accurate? Not likely. If you don't know interest rates from insurance, I'd suggest really wandering around the CMHC website. Do this before you even go into a bank! A mortgage is the largest loan most of us will take out in our lives, make sure you know what the bankers (or even better, mortgage brokers) are talking about before you sign anything! Even better, check out this site:


Their website is under reconstruction, so it doesn't look that great, but it is chock full of resources for people looking to buy their first (or second, or third) home.

Anyway, back to what I started rambling on about. My mortgage was ~$242,000 when I started a year ago. I pay on an accelerated biweekly schedule, so instead of making 12 months worth of payments I make 13 months worth per year (1/2 month payment every 2 weeks = 26 1/2 month payments = 13 months worth of payments)

Not counting taxes, my mortgage is ~$533 every 2 weeks on the accelerated schedule. This averages out to ~$1154 a month, and the lifetime interest cost of the mortgage is ~ $169,546. On a regular monthly payment schedule I'd pay ~$1065, and the lifetime interest cost of the mortgage would be ~$205,433. It's a small extra payment every month for a decent savings in interest.

But like I mentioned before, my interest rate will (most likely) be increasing when I renew my mortgage in 4 years. How is this going to affect my ability to pay for the house?

At the end of the first 5 years, at the rate I'm going, my balance will be ~$228,000. Not considerably less than what it is now, thanks to the wonder of interest payments (so much better when it's working for me, not against me).

Interest Rate: 5%    Monthly Payment: $1217    Interest Cost: $210,053
Interest Rate: 6%    Monthly Payment: $1356    Interest Cost: $260,231
Interest Rate: 7%    Monthly Payment: $1502    Interest Cost: $312,582

If the interest rate goes up a percentage, my monthly payment would only go up ~$63 from my biweekly accelerated monthly payment, not too bad. If it goes up 2 percentage points, the monthly payment increases ~$202 a month. Huh... If it goes up 3 percentage points, the monthly payment increases ~$348 a month. Ouch.

But what if I pay off the insurance costs? Then I'd only have ~$220,000 left owing on the mortgage. That should help, eh?

Interest Rate: 5%    Monthly Payment: $1174    Interest Cost: $202,683
Interest Rate: 6%    Monthly Payment: $1309    Interest Cost: $251,100
Interest Rate: 7%    Monthly Payment: $1449    Interest Cost: $301,614

That didn't really seem to help much. The monthly payment at 5% is close to what I'm currently paying on the accelerated biweekly rate, but the other two still kinda hurt. Lets say I really focus my efforts and chip away at this sucker after I dig myself out of the other debts. What would I be looking at if I can get it down to ~$200,000?

Interest Rate: 5%    Monthly Payment: $1067    Interest Cost: $184,257
Interest Rate: 6%    Monthly Payment: $1190    Interest Cost: $228,273
Interest Rate: 7%    Monthly Payment: $1317    Interest Cost: $274,194

That's looking a little more reasonable. What this tells me is that once I've finished taking care of the other debts, I need to really focus on chipping my mortgage down. That way once the economy stabilizes, and mortgage rates go up again, I'll be able to continue paying for it comfortably without needing a huge salary hike. I'm glad I looked at this now rather than 3 and a half years from now; time is still on my side.

Home Buying For Dummies, 4th Edition
100 Questions Every First-Time Home Buyer Should Ask: With Answers from Top Brokers from Around the Country
The First-Time Homeowner's Handbook: A Complete Guide and Workbook for the First-Time Home Buyer (Book & CD-ROM)


Anonymous said...

You might consider refinancing now to a fixed 30 year. With the fed rate at almost 0%, it won't get any lower (looks like rates bottomed in Novermber-ish). Rates are only going to go higher from here on. You won't see too much of a rate change until the fed board raises the fed rate, which no one knows for sure when that will happen. However it is a guaranteed occurrence, and from my reading most predict it will happen between now and year end 2012.

By waiting, you are gambling. It's possible that we could see some serious inflation which would cause rates to skyrocket and then you would really be sorry! If you do some research you will see that in the mid to late 1980's mortgage rates got as high as 15-18% interest. Today's current ~4.5% interest rates sure beat that! I originally got my mortgage at 7% back in 2006. I refinanced in 2008 at 5.125%. Believe me, 4.5% is a killer.

Cassie said...

You may notice that in the post I mentioned that I can not lock my rate in for the entire duration of the mortgage. The Fed's rate does not directly impact me, as my mortgage is based on the Bank of Canada Prime Rate, which has been increasing for 6 months now. You'll notice on the side bar that my mortgage rate is sitting at 3.95% currently, I'm in no hurry to refinance!