Wednesday, 18 November 2015

Different Calculations, Different Payments...

Have you seen the movie Office Space? You know the one, where the guys devise a plan to 'skim' the extra decimal points off all of the bank transactions. If you haven't seen it, go watch it now! It's a personal favourite of mine, and if you must pick only one scene watch the one with the fax machine...enough said.

Anyway, getting back on track here. The point is, the extra decimal points seem unimportant and like they wouldn't add up to much. In reality, if you add enough of those decimals together over time, they can become a huge amount of money!

Did you know some banks might be doing the same thing with your mortgage payments???

Now, it's not like they're taking your money and absconding(word-of-the-day) with it, but it is something fundamental about your mortgage payment that you should understand and be aware of. If your mortgage professional can't explain this to you in great detail, then it might be worth considering their level of education and/or experience.

Depending on your lender, they may choose to either calculate your semi-monthly payment "correctly", or they may choose to simply divide the regular monthly payment in half. The issue with dividing your payment in half is that you are making a larger payment, vs. actually calculating the interest owed with each payment.

Here's an example:

Assume a $300,000 mortgage at 2.79% interest, amortized over 25 years.

Your regular monthly payment would be: $1387.61
By simply dividing that payment in half, your semi-monthly payment would be: $693.81

This calculation actually costs you more, because it assumes you should be charged the interest for an entire month.

The correct calculation takes into account that you actually make your payments twice per month, meaning your interest paid is lower. It looks like this:

Semi-monthly, with interest calculated each payment period: $693.40

Take Back Control!

Now you might say to me "Ryan, why should I care about this 41 cents???", and I would say to you "Mr./Mrs. Client, I care because it's YOUR 41 cents and YOU should decide where it goes and how you use it. Over the average 5-year mortgage term, that adds up to $49.20 in extra payments, and an extra $246.00 over your 25 year amortization. And while your lender should be adding this extra in as a prepayment(thus reducing your amortization by about a month, woohoo!), wouldn't you rather be in control of where and when you choose to put that extra money???

Going back to what I said earlier, I understand that this may not be a game-changer for everyone. Having said that I also want to make sure my clients best interests are always first and foremost, and knowing the ins and outs of your mortgage interest calculations is not only my responsibility, but also something I take great pride in.

So next time someone asks you how you'd like to make your payments, be sure to ask them when and how they calculate those payments and the interest owed. If they can't explain it, give me a call and I will!

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