Home Buyers Beware

Many people do not know, but there are changes happening in the mortgage business and the confusion is just beginning.  Taking effect March 18^th, 2011:

1. The longest amortization you will be allowed to use if you purchase after this date will be 30 years.

Why is this important?  Well if you were pre-approved some time ago, your application may have used 35 year amortization.   With the new change to 30 years, now you may not qualify for the same amount, and your payment will also increase.  See your broker agent or bank to be sure. 

2. If refinancing to pay off debts, do renovations, or invest some money, the maximum amount allowed, less your current mortgage is 85%.  This is a drop from 90%.  If approved before March 18, 2011, you can still use 90%.  If you have not applied for a refinance yet but are planning to soon,  call me ASAP.

I don’t represent the lender or the bank, I represent you!

Please don't hesistate to call if you have questions.

Bryan – 519-426-9842

Response to the New Rules

There has been a little confusion in regards to one of the responses about the upcoming rule changes because banks are discussing the savings one will have because of the shorter amortization period. (30 vs. 35 years).  But how is that possible?  Simply put, if you buy a house and amortize it over 30 vs. 35 years, naturally you are going to save interest because it takes 5 years less to pay for the house.  Don't be so concerned with the amount of weekly/biweekly/monthy payments, but with the concept of less interest.  Paying for a shorter period of time is just better.  A broker can always figure out your savings for you at the time of purchase.

The other change involving refinancing your current mortgage has also caused a lot of confusion.  It is better to return to the fundamentals of refinancing to explain.  Using the new change, here is an example:

A home worth 200K has a current mortgage balance of 120K.  According to the new rules, you can refinance up to 85% of the 200K, which is 170K.  Thus, you would have roughly 50K in equity.  When considering a refinance, you need to use your current mortgage balance and multiply the current value by 85% to see if you can refinance.  Please note, if you are trying to get out of the mortgage early you must remember there is a penalty and that will use up some of your equity.

Don’t forget the changes are taking place March 18^th, 2011, and that we are here to help expedite the process if you need us: 519-426-9842.

What the Heck IS Amortization?

am·or·ti·za·tion

 noun 

\ˌa-mər-tə-ˈzā-shən also ə-ˌmȯr-\

---

Amortization is the total time it will take to pay off your mortgage.  Traditionally, a mortgage begins with a 25 year amortization; however, over the last couple of years federal regulation has changed, allowing any number to be amortized, up to 30 years.

You must be aware that the longer the amortization:

a. The lower the payment

b. The higher the interest

c. The less paid off at the end of the term (typically 5 years) 

I recommend that the traditional 25 years is the best choice, except in one situation:

If you use 30 year amortization in the short term, and later take advantage of a pre-payment privilege by increasing the payment as much as possible each year, by increasing your payment you will decrease the amortization.  If you pay a little more per payment, you will pay off your mortgage rapidly.  

Tips to Pay Off Your Mortgage Sooner

Client's often don't realize the cost of principal and interest, and how it multiplies over the course of a mortgage - often amounting to more than the initial home purchase price.  The fact is, taking even the smallest steps now will make a HUGE impact in the long run.  

The following are some easy tips to be "mortgage-free, sooner:"

1. Accelerate your payment frequency.

• Choose a bi-weekly accelerated payment.  Instead of making 24 payments a year, you will make 26 - which can take off up to 6 or more years from your payments.  Accelerated weekly, even faster.

2. Amortize frugally.

• If you can afford higher payments, choose a shorter amortization period. 

3. Make lump sum payments.

• Making a $1000 prepayment in the first year on a $300 000 mortgage will save more than $4 500 in interest in the long run.  And making $1000 prepayment every year will produce long-term savings of over $50 000 and take off four and a half years off the amortization period.

4. Adjust your payment.

• If your term is nearing its end, right now interest rates are at "near-historic lows," now may be the time to increase your monthly/bi-weekly/weekly payments.  Every little bit helps.

As you can see, these are very simple, small steps that move you forward on your payments, so you can put your mortgage behind you!

These tips were taken from the Invis Home & Mortgage Magazine, "Tips for Reducing Interest Costs," edited by Ajay Soni & Steven Moyes. Volume 1 Number 1/2010.  Check out www.invis.ca for more information.