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Is a Re-Finance Worth it For You? See Here.
How to Check if Re-Financing Today Will Save or Cost You Money
Depending on your current interest rate, you may be thinking of looking into a re-finance to take advantage of todays low rates. Of course, as you probably know it isnt just as easy as switching your mortgage out for a lower rate, there are several costs and factors you need to consider. Things such as penalty to break your mortgage and closing costs on a new mortgage are all determining factors in the decision to re-finance or not. Were going to show you how to break down the costs and make an educated decision. Of course, the below is only to give you a guideline and although fairly accurate, should not be used as a quote or promise of any kind. (Seems obvious but we have to write that, youd be surprised). Now that the legal mumbo-jumbo is out of the way, heres what you do:
Determine what your penalty is. Unless your mortgage is open, then there will be a penalty to pay it off early. If your mortgage is a variable rate, then you will be paying 3 months interest only which is a simple calculation.
Mortgage Balance x Interest Rate = A
A 12 = B
B x 3 = 3 months interest penalty.
$300,000 balance at 2.30% (300k x 2.30% = $6,900. $6,900 12 = $575 x 3 months = $1,725
If you are on a fixed rate then your penalty will be the greater of three months interest (above) or Interest Rate Differential (IRD). IRD is where the lender takes your current rate and puts it against the rate being offered for the term that most closely matches the time remaining on your mortgage term. So if you have 2 years left on your mortgage, they would use the 2 year term. The math for this is slightly more complicated.
Current Rate Reinvestment Rate = A
Mortgage Balance x A = B
B 365 x Number of days left to maturity = IRD Penalty.
Lets see an example using a mortgage balance of $300,000 with an interest rate of 3.19% with 2 years left on the term and a current 2 year rate of 2.29%. Remember, these numbers are for example purposes only.
Ex. 3.19% 2.29% = 0.90%. $300,000 x 0.90% = $2,700 365 x 730 = $5,399.81 IRD penalty
You can also take into consideration your pre-payment privileges on the balance.
So now that you are able to calculate your penalty all on your own, lets move to step two
Get an estimate of any closing costs you are likely to incur. For this example we will use the IRD results from above and assume our mortgage balance is $300,000 at 3.19%, we will also estimate the following:
Appraisal cost: $350
Legal Fees: $1,500
Penalty using IRD method: $5,399.81
Now that you know what it will cost you to break your mortgage and close a new one, its time to determine your potential savings on a new mortgage. Again, we will assume our balance is $300,000 with our current interest rate at 3.19% and our potential new rate being 2.64%.
Over the last two years remaining on your term, you would be paying roughly $16,500 of interest at the 3.19%
and on the first two years of your new mortgage at 2.64% you would be paying about $14,500 of interest, a savings of around $2,000. Or you can look at your existing payments of $1,449.14/month vs your new payments of $1,364.90 a savings of $84.24/month. Over two years $2,021.76. This of course does not outweigh the cost of breaking the mortgage and would therefore be better to wait until your penalty is lower. In the case where you are paying three months interest, then it would be worth it to re-finance.
Keep in mind you should always double check with your mortgage broker to be sure what the penalty is. In a lot of cases, they may be able to get you a discount on the penalty or help you avoid legal fees and appraisals costs. If you are thinking about re-financing to get your rate lowered, check in with us and well let you know where you stand. Hope this helps you understand your mortgage a little better.
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Down Payment Rule Changes
Finance Minister Bill Morneau has announced rule changes to the minimum down payment allowed on insured purchases effective February 15, 2016. Leaving prospective home owners who were planning to purchase with the currently allowed 5% minimum, 2 months to purchase and have their mortgage approved.
The minimum down payment on new insured mortgages after February 15, 2016 will remain at 5% for the first $500,000 of the purchase price and 10% for the portion over $500k.
Example: $750,000 purchase price. 5% on the first $500,000 = $25,000. 10% on the additional $250,000 = $25,000. Total Down Payment = $50,000
Minimum Down Payment
Up to $500,000
$500,001 to $999,999
10% Minimum (5% on the first $500,000)
On purchases above $1 Million to minimum down payment required will still be 20 percent. There is no down payment rule change on this amount.
The Governments role in housing is to set and maintain a framework that is equitable, stable and sustainable. The actions taken today prudently address emerging vulnerabilities in certain housing markets, while not overburdening other regions, Finance Minister Bill Morneau.
It remains to be seen how much of an impact, if any, this new rule will have on the housing market. The main idea is to give home owners a higher equity in hopes of maintaining stability in the housing market. For the vast majority of Canadians their home is by far their greatest investment, and the governments goal is to help protect that. Whether or that this will be an effective measure is yet to be determined.
If you have been thinking about purchasing with 5% and have been on the fence or waiting until late winter, this may be incentive to act quicker and get yourself pre-approved. If you have any questions or need some clarification on todays announcement, please call us at 905-265-0246 or email us at firstname.lastname@example.org
What do you think of the rule change? Will this have a major impact, minor impact or no impact at all? Let us know your thoughts or concerns in the comments!
Have any questions, need any advice? Visit us at www.thefinancialforum.ca. Email us at email@example.com. Call us at (877) 335-4486.