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Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: Acadian on June 21, 2015, 09:03:32 AM

Title: Basic mortgage renewal question
Post by: Acadian on June 21, 2015, 09:03:32 AM
I'm a first time home owner. I'm 3 years in my 5 year term. I'm a little confused as to what to expect when the time comes for my mortgage renewal. If I am assuming that interest rates will be higher at the time of renewal, should I expect my payments to increase? Or, given that my principal has decreased with 5 years of payments, will my payments be less (given the total mortgage is less)? Of course, since the original mortgage was based on a 25 year term, was that already factored in to the calculation?

Anyhow, would love to wrap my head around this.

Title: Re: Basic mortgage renewal question
Post by: MDM on June 21, 2015, 09:08:45 AM
Is this Canada, USA, ...?

Wherever, monthly payment is a function of both principal and interest rate so it depends on "how much" each has changed.  See the Excel PMT function.
Title: Re: Basic mortgage renewal question
Post by: forummm on June 21, 2015, 10:19:32 AM
If you mean that you have an adjustable rate mortgage, and interest rates have gone up, then your payments will go up as well. But check your contract to see how they calculate the interest rate. On mine it's the higher of 3% or the 1-year LIBOR + 2%. So even though the 1-year LIBOR has increased slightly, it's still less than 1%, so my rate would still be 3%.

If it's an ARM, this might be helpful for you:
Title: Re: Basic mortgage renewal question
Post by: Acadian on June 21, 2015, 11:19:40 AM
Thanks for the answers to far. I'll add some more info to help clarify my question.

I'm in Canada.

Some more info:
Original mortgage - $220,000 at 3.09% fixed rate for 5 year term (25 year amortization)
Assumption - at time of renewal: 185,000 at 5.5% (undecided on fixed or variable).

When I use online calculators, I don't know whether to put 185K for 20 years amortization or 185K for 25 years (since that was the original amortization). If I took out a new mortgage for 185K, my payment would likely be less even with a higher interest rate because the principal is lower which is what confuses me with online mortgage calculators (they don't ask me if it's a brand new mortgage or if it's a renewal).

So, if my rate increase assumptions are correct, should I plan for an increase in my mortgage payment or would it be less given that I've paid off part of the principal?
Title: Re: Basic mortgage renewal question
Post by: forummm on June 21, 2015, 11:24:01 AM
I'm not familiar with any Canadian-specific aspects of mortgages.

But if it's like a US mortgage, it sounds like you would be putting in 185k for 20 years at the new interest rate. If you do that for the old interest rate, you should get payments that are the same as your current payments. Right?

If you were putting it in for 25 years, then that would give you a 30 year total term--which isn't what you originally signed up for, right?
Title: Re: Basic mortgage renewal question
Post by: Acadian on June 21, 2015, 11:40:08 AM
Since I've never been through this process before, I'm not sure either.

I assume that the mortgage system between Canada and US are similar. I can think of two exceptions (as I understand it): being able to deduct mortgage interest from income tax in US and not being able to take out long-term mortgages in Canada (I think a 10 year term is the max).

You do bring up a good point that doing a new 25 year amortization would bring the total to 30 years (which isn't what I am doing). So that probably answers my question that if interest rates rise then my payments would also rise at the time of renewal.

The main reason I am trying to understand this is to decide if I continue to only pay the minimum mortgage payment and put all my savings in investments (since 3% interest is so cheap and the additional time for compounding to do it's magic) or to put the money in a short term savings to use as a downpayment at the time of renewal so that I preserve my current cashflow (I will have less to invest if my mortgage payments go up). Again, I am assuming that interest rates will rise by a decent amount by the fall of 2017.
Title: Re: Basic mortgage renewal question
Post by: lostamonkey on June 21, 2015, 11:51:22 AM
Assuming you review your mortgage, yes if interest rates go up your mortgage payment will go up. You could always take out a new mortgage with a 25 year amortization period once your term is up to have lower monthly payments but this will mean that it will take you longer to pay off the house and there may be other upfront costs associated with this option.

Also remember that there is no guarantee that rates will have increased by fall 2017. It is likely in my opinion but defiantly not certain.
Title: Re: Basic mortgage renewal question
Post by: K-ice on July 22, 2015, 01:02:56 AM

When I use online calculators, I don't know whether to put 185K for 20 years amortization or 185K for 25 years ).

So you are currently paying around $1054?

As for what to use in the calculator you want to put in 20 years to keep paying at the same rate. Test the calculator with the exact same interest as your current mtg & the payments on your remaining balance for 20y should be the same as your current payments. I got $1034 so some rounding errors.

If you suspect higher rates & if you want to invest you my want to drag your mtg out for 25y again. This will also help soften a rise in rates. It all depends on your debt philosophy & how diciplined you are at investing. Even if you get another 25y you can probably increase your payments so you will pay it off in 20 but you are only on the hook for the 25y payment

185K at 5.5% for 25y --> 1136
185K at 5.5% for 20y --> 1273

At this point in time, if you are worried about future rates, you may want to look at paying it off faster. Find a good mtg spreadsheet. Generally putting $1000 extra today saves ~$1000 in interest too!
(I got one from the above site, it was slightly different but very motivating to see the extra payments.)

Renewing is less stressful than getting the mtg in the first place.
About 6 months out shop around. Get quotes from other banks. Look at NEVER take the rate the bank proposed in the renewal letter they send. You should be able to get at least 0.5% off of that.

Remember you are like a free agent at the end of 5 years so educate yourself & confidently get the mtg you deserve.

Title: Re: Basic mortgage renewal question
Post by: dess1313 on July 24, 2015, 09:31:41 PM
When i had to renew my mortgage (Canadian) I was able to change a few things.  They'll send you a document 3-6 months or so before it ends.  I changed my payment, and that changed my amortization.  I ramped up my payments as much as possible with my budget.  Usually they'll send a document and you will have choices of the banks current fixed or variable rates.  1yr, 2yr, 5yr etc.   You could keep the payments exactly the same or you could adjust to keep the amortization exactly the same despite the new interest rates. 

For this new contract i would treat it like it now is a 20 year since at that point you will have paid 5 down already.  Otherwise you'd never finish it.  Doesn't mean you couldn't go a bit lower or higher on your payments (if buget was too tight initially).  I told them i wanted X as a monthly payment (which was within my 15% change allowed) and the amortization was made to fit that.

If interest rate is higher, something will have to change if you want to keep your payment exactly the same, or keep it now to a 20yr mortgage. 

If interest rate is lower, your amortization may be shorter than 20, or your payment could be lower

Really when you sign a new contract it can be a blank slate depending on how much freedom your bank allows.  Mine allowed quite a few prepayment privileges.  Not all do.  Use a 20yr predictor with your 185k principle, and shop around.  some places will offer really good rates/bonuses if you switch, and also remember, if you do 5 year amortization the penalties to get out early will be nasty.  so be fairly certain you're wanting to stay for another 5 years.  Otherwise do something like 2 years.

There's a lot better rates than 5.5%  This is who i used.  They allow 15% prepeayments, 15% payment increases and double payments.  Your big banks usually screw you over compared to other places like this or independent companies that mortgage brokers have access to. (