Archive for category Retirement Planning
Skip a Payment and Rainy Day Options; How to use these Options Effectively
Posted by Top Home Loans in General Banking, Mortgage Advice, Retirement Planning on September 26th, 2009
When you get a mortgage, it could come with several different features and options, one of those options will most likely be the skip a payment option or the rainy day option; however, very few people know what this option is or how to use it effectively. When you get a mortgage, make sure you have this option because it may be critical to prevent missed payments or financial hardship in the future.
What is a Skip a Payment Option?
Skip a payment allows you to usually skip a months worth of payments (principle and interest) every year. In order to qualify for this, your mortgage must not be in arrears, and you have not missed any mortgage payments in the last 12 months. You will still be responsible for paying your usual insurance premiums and property tax installments, where applicable.
There is usually no fee to using this option, and your mortgage payments will not change during the course of your term. The interest that would have been paid will be added to your mortgage balance. When skipping payments, you can either skip one monthly payment, two consecutive bi-weekly payments, or four consecutive weekly payments.
Additional requirements apply for CMHC-insured mortgages.
If you decided to skip any payments through out the course of your term, then you can repay the interest that was added to your principle at any time using the lump sum payment option.
How to use a Skip a Payment Option Effectively?
There are several reasons why someone would want to skip a mortgage payment. Some of these reasons include the following:
Financial Hardship: If you have an unexpected major expense and you need the money to cover the expense, then this is the best time to skip a payment. Make sure you inform your bank before your mortgage goes into arrears. If your mortgage is in arrears, then the bank cannot proceed with the skip a payment request.- Lowering yourAnnual Mortgage Payments: If your monthly mortgage payments are $2000/month, and your budgeting suggests that you cannot afford that high of a mortgage payment, then you can use your skip a payment option to reduce your effective annual payments from $24,000/year to $22,000/year.
- Job Loss or Disability: If you cannot work for a short period of time, then you can use this option to avoid your mortgage payments until you get back to work. Make sure your mortgage is not in arrears if using this option.
- Renovations, Debt Repayment, or Major Purchase: If you know that in a month you have to make some renovations or major purchases, then you can skip a payment and use your mortgage payment to pay for these items instead of charging it to your credit card. Also, if you find your credit card bills are getting high, then skip a payment to pay down your credit cards instead of your mortgage payments.
If you plan your use of your skip a payment or rainy day options effectively, then you can ensure that you do not fall behind on your finances; however, the interest that you would have paid that month is added to your principle balance,s o it is in your best interest to pay off this interest as soon as you have extra money. This will allow you to pay off your mortgage faster and keep your finances in check.
Do you know any other effective ways to use skip a payment options? What are some other good mortgage options?
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Is Renting ever Better than Buying? Why is Buying so much better?
Posted by Top Home Loans in General Business, Investing, Mortgage Advice, Retirement Planning on July 5th, 2009
Home Ownership is very Expensive, shouldn’t I Rent?
When looking into home ownership, it is easy to consider that your monthly bills will be increasing. Sometimes the increase in your bills can be quite dramatic compared to where you are living right now; however, in order to see the full story, then you should consider looking at all the factors and your net worth.
Let’s look at an example of a one bedroom apartment in Toronto.
Renting a One Bedroom Apartment
Property Value: $200,000
Rent Fees: $1000/month
Annual Rent Costs: $12,000/year
Purchasing the Same One Bedroom Apartment
Property Value: $200,000
Mortgage Payment: $750
Condo Fees: $200
Property Taxes: $140
Utilities: $100
Total Cost of Ownership: $1,190
The increased monthly cost of home ownership is approximately $190/month; however, when we look at what is gained, then it is easy to understand how much home ownership will earn you in the long run.
In this example, let’s use today’s interest rates on a 5 year fixed mortgage rate at 4.5%. In this example, we will also use a low rate on return for the property value, we will only use 3%; however, on the investment savings rate, we will also use an inflated value of 4.5%. These are good numbers that are in favor of renting.
The Results after years of Renting vs. Owning
The following results are accumulated if the assumptions of the example remain constant:
Extra Money Earned by Owning after 5 Years: $28,991.86
Extra Money Earned by Owning after 10 Years: $62,406.34
Extra Money Earned by Owning after 15 Years: $100,904.67
Extra Money Earned by Owning after 30 Years: $255,034.69
It is easy to see that if it is only a few hundred dollars a month to purchase a home, then it is a really good choice to purchase a property instead of continuing to rent. This is because you are paying off your house, while your house is increasing in value. This allows your to increase dramatically; however, at what point is it a good idea to continue renting?
When is it a Better Idea to continue to Rent instead of Owning?
In this example, even if you were living at home with your parents, not paying a cent in rent, then it would still be better to buy your own home.
Why? If you buy for $234,792.68 (the maximum you would qualify for) you will pay down your mortgage of $224,792.68 by $27,432.83 over 5 years with your Principal and Interest payments of $1,244.17 per month, plus your property will increase in value by $37,396.39 for a total investment growth of $64,829.21.
This total is greater than your total investment growth from renting, which is approximately $22,460.30 after 5 years. This was calculated by growing the monthly savings from renting ($1,390) plus your current down payment of $10,000 at a standard after-tax rate of 4% per year.
With these sobering numbers, it is hard to believe that over 50% of people rent. In major cities, like New York, as many as 70% of people are renting properties.
So the question is, why are you still renting?
How can I Stop Renting?
If you have no savings, if you have bad credit, or if you have only been employed for a short period of time, then you can still get a mortgage. If you never thought you would qualify for a mortgage, or if you do not know where to begin, then send me a message, and I will help you get started.
How much You can Afford when Buying a New Home? Not how much You can be Approved for!
Posted by Top Home Loans in General Banking, General Business, Mortgage Advice, Mortgage Rates, Retirement Planning on June 11th, 2009
However, before placing your final offer, consider what you may be looking at in several years in the future.
How much You can be Approved for?
When getting approved for a mortgage, the bank will calculate the maximum mortgage payment that you can afford to be, at the absolute maximum, approximately 40% of your annual income. To describe this in actual numbers let’s use the following situation:
Your Annual Income: $40,000
Interest Rate: 4%
Amortization: 35 years
Your Property Taxes: $200/month
You have no outstanding loans, lines of credits, car loans, credit cards, etc.
You could potentially purchase a property for $300,000
Now you will be thinking ‘wow, I can buy a great house with such a little annual income’; however, this is definitely not the case.
Albeit, the bank may approve your mortgage, but let’s compare your take home dollars versus your household upkeep:
Total Mortgage Payment: $1,456.28
Total Monthly Property Tax Payments: $200
Monthly Home Insurance Payment: $62.50 approximately
Monthly Utility Bills: $300/month
Monthly Food Bills: $5/day or $150/month
Transportation: $200/month
Entertainment and Communication: $100/month
Total Expenditures: $2,468.78/month
Total Income: $40,000
Taxes and Other Deductions: $8,698.58
After-Tax Income: $31,301.42
After-Tax Monthly Income: $2,608.45
This means that you have a monthly surplus of $139.67 when living on an extremely light budget.
What Happens if Interest Rates go up?
When first applying for a mortgage, the bank is more than happy to approve your mortgage with a financial situation like this, but when you analyze what will happen if interest rates go up, then if some major financial improvements have not been made for the borrower, then the borrower could be in big trouble. Let’s see what happens if rates rise 50% and 100%.
Mortgage Amount: $300,000
Mortgage Rate: 6%
Mortgage Payments: $1,695.76
Payment Increase: $239.48
Mortgage Amount: $300,000
Mortgage Rate: 8%
Mortgage Payments: $2,102.48
Payment Increase: $646.20
These are incredible increases, and it will cause the borrower to go from a surplus budget to a deficit in a short amount of time. This will cause the borrower to have to refinance the equity from the property to keep up with the payments, or the borrower will have to have an ever increasing income.
Don’t think that these rates can happen? Take a look at a Historic look at Prime Rate
Why would the Bank lend like this?
The bank lends like this because they are assuming that the property value will increase, and that the borrower’s income will increase with inflation. The loan is based on today’s dollars, while the future payments are based on future dollars. Although, it appears to be a large increase in payments with the change in interest rates, but the bank is hoping that a portion of their clients will be able to make the payments, some will have to refinance to be able to afford the property, and a small percentage will default on the loan.
Even though some of the borrowers default, the bank is still expecting that the property values have increased, so they can sell the property at a profit.
Protect Yourself from Perpetual Debt or Default
By purchasing a house that has mortgage payments that are well within your means is a great way to prevent either of theses situations. By applying the additional surplus that you will have against the principle balance of your mortgage, then you will be able to pay your mortgage off quicker. As you pay down your mortgage, then you will be able to get away with lower monthly payments. In a few short years, you will be able to upgrade your property to a much bigger property with fairly low monthly payments as well.
By keeping your mortgage balance low, your payments low, and your budget surplus high, then you will be able to get debt free faster, and have more money to buy the home of your dreams without the risk.