Which Amortization should YOU choose at Renewal? My mortg. column this week

[MortgageQueen]

Hi all.
This is my mortgage column to be published Thurs.. Thought I'd share. . . there's obviously a lot more to be said on THAT subject. . .but I'm only allowed so much space. . .



Which Amortization should you Choose on Renewal?
You’ve probably heard of ways to pay down your mortgage faster and cheaper.
One of the more common ways is to make what is called accelerated payments. This is basically what works out to be paying down an extra monthly payment annually. Another is increasing one’s payment by shortening the amortization. For example, your mortgage is up for renewal. Your existing mortgage amortization was at 25 years. Are you “required” to automatically go forward with a 20 year amortization, now that you have completed 5 years of payments? Well, no. The choice is yours and should reflect your financial situation.

Two questions one should ask before choosing an amortization are:
1. Can I comfortably afford my mortgage the next time I renew my mortgage term?
2. Is there a better way to use my cash flow then increasing my mortgage payments to pay down my mortgage faster?

If you answered yes to both of these questions, it’s possible your cash flow could be used in more useful areas. . . .or in other words, it may be better to choose a longer amortization and put that “extra”available income into areas mentioned below.

First and foremost, everyone should make it a priority to have a contingency fund. Three months of income is preferable. There are many possibilities where this could save the day, whether it be a job loss, a sudden illness, or a major unexpected expense.
In the instance of families, maintaining a contingency fund, paying off higher interest debt, topping off RRSP’s, and building their children’s education funds are other options they should analyze. Keeping in mind the extremely low interest rates right now, this may be the best time to address these areas.

For the Self-employed business people, re-investing in one’s business could mean the difference of the extent of future success. Of course, having professional advice in this area is also crucial.

Real estate investors can also use the longer amortizationto minimize their payments, and redirect their funds to necessary property improvements or further investments.

Investors who have access to investments that will give a higher interest return on their money also can benefit by freeing up that available income.

I would like to qualify myself that the aim of this article is not to encourage one and all to take a longer amortization. It is simply to point out that there are beneficial reasons for “some” to do so. As always, I encourage everyone to have a financial plan. In tough economical times, it just makes sense to utilize our income and assets to the greatest degree.

[tobiwobi]

I've got a 15 year amo and it's my 1st mortgage ever!

It's definitely punishing, vacation fund has taken a big hit since that 15 year mortgage got signed, and also the eating/drinking out...I get one beer and that's it. before I barely looked at the price of all cocktails I was ordering in multiples. But here I am saving $40,000 ++ because of that 15 year amortization, so I like to focus on that, and not the lack of frivolous spending.

I totally chose my amortization myself. I got out an interest calculator and looked at my budget, and decided for myself this is what I am doing. My broker thought I'm crazy...noone takes 15, everyone takes 30, I am crazy, am I sure?

You have to do the math and look at the numbers. I wasn't gonna coupon $1 off here and there, and bleed tens of thousands in mortgage interest. No way. At some point, when you do the math, you realize that if you take a slightly longer amortization, but take that cash that you were gonna put toward the mortgage if you were to take a shorter amortization and use it to prepay the mortgage, you pay less interest overall. But you do have to trust yourself that you won't spend that money elsewhere if you had a choice

[ashedfc]

You have to see the "time value of money".
Todays dollar & a dollar after 15yrs is a lot different in value...
Yes the future savings might seem significant as of today, but in reality when you reach 15yrs down the line this savings will be a lot less in value..

[Shwa Girl]

I've got a 15 year amo and it's my 1st mortgage ever!

It's definitely punishing, vacation fund has taken a big hit since that 15 year mortgage got signed, and also the eating/drinking out...I get one beer and that's it. before I barely looked at the price of all cocktails I was ordering in multiples. But here I am saving $40,000 ++ because of that 15 year amortization, so I like to focus on that, and not the lack of frivolous spending.

I totally chose my amortization myself. I got out an interest calculator and looked at my budget, and decided for myself this is what I am doing. My broker thought I'm crazy...noone takes 15, everyone takes 30, I am crazy, am I sure?

You have to do the math and look at the numbers. I wasn't gonna coupon $1 off here and there, and bleed tens of thousands in mortgage interest. No way. At some point, when you do the math, you realize that if you take a slightly longer amortization, but take that cash that you were gonna put toward the mortgage if you were to take a shorter amortization and use it to prepay the mortgage, you pay less interest overall. But you do have to trust yourself that you won't spend that money elsewhere if you had a choice

Yay tobiwobi!
You baffled the expert mortgage broker and you will probably beat the bank.

Don't think of it as deprivation, when the vacation fund is low. Think of it as being creative by taking different kinds of vacation. Cruise? No. Ferry trip to Centre Island in Toronto? Yes. Both are on a boat. Both are on the water. Both are a vacation.

Being funny but you get the idea.
Congrats!


I learned from my coworker years ago. He took his two weeks vacation and found any free outings in Toronto. His daughter loved it. When our company was laying off people, he was the only one that was not sweating about the mortgage. His was paid off in less than 15 years. He was also the lowest paid employee in the company. He was such a wise man and I learned a lot from him.

[ashedfc]

This should be taught in schools (right from primary school days), so people don't have to depend on coworkers to learn basic personal financial management.

[themortgageguy]

I've got a 15 year amo and it's my 1st mortgage ever!

It's definitely punishing, vacation fund has taken a big hit since that 15 year mortgage got signed, and also the eating/drinking out...I get one beer and that's it. before I barely looked at the price of all cocktails I was ordering in multiples. But here I am saving $40,000 ++ because of that 15 year amortization, so I like to focus on that, and not the lack of frivolous spending.

I totally chose my amortization myself. I got out an interest calculator and looked at my budget, and decided for myself this is what I am doing. My broker thought I'm crazy...noone takes 15, everyone takes 30, I am crazy, am I sure?

You have to do the math and look at the numbers. I wasn't gonna coupon $1 off here and there, and bleed tens of thousands in mortgage interest. No way. At some point, when you do the math, you realize that if you take a slightly longer amortization, but take that cash that you were gonna put toward the mortgage if you were to take a shorter amortization and use it to prepay the mortgage, you pay less interest overall. But you do have to trust yourself that you won't spend that money elsewhere if you had a choice

Good job !!!

If you can swing that amortization period its the smartest thing you can do. People often talk about what to do with their spare cash and paying the mortgage down should be top of the list. Some consider investing but the return is not a sure as the fact that you know you will be paying mortgage interest.

Some decide to take a longer amortization and utilize pre-payments to shorten the amortization period but few hit that goal as it isn't forced (and they want to take a vacation for example)

[Allan_]

Im not renewing but purchasing. Since, I am only putting 10% down, I can only get 25 years amort with my 5yrs/2.84% rate my broker got me. I wish I could put down 20%!

[MortgageQueen]

Im not renewing but purchasing. Since, I am only putting 10% down, I can only get 25 years amort with my 5yrs/2.84% rate my broker got me. I wish I could put down 20%!

Hey Allan. . .when you're getting such a great rate. . .you can put a lump sum payment down on mortgage if you get the chance. . .or can you? . . check with your broker to see what conditions and options are attached to your mortg.

[Shwa Girl]

This should be taught in schools (right from primary school days), so people don't have to depend on coworkers to learn basic personal financial management.

Actually, I was lucky in Grade 9 and Grade 11. Two teachers included small amounts of money management in our classes. One teacher even taught income tax, gave us various scenarios and awarded "prizes" for the best income tax return outcome -- identify the most deductions for the case study.

[ashedfc]

Actually, I was lucky in Grade 9 and Grade 11. Two teachers included small amounts of money management in our classes. One teacher even taught income tax, gave us various scenarios and awarded "prizes" for the best income tax return outcome -- identify the most deductions for the case study.

Yes, You are lucky (probably very lucky)
Commercial mathematics should be basics in the curriculum & an important component of teaching. Even parents should teach money management to their kids. But nowadays we see parents are too busy working longer jours, overtime work, commuting to work, etc, etc, that they barely have time to teach their kids...

[Shwa Girl]

Yes, You are lucky (probably very lucky)

I think some schools are embracing money management education today.
I worked with a group of Grade 11 students a year ago, and the phenomenal teacher incorporated business skills, marketing, math and personal finance. And, this was a rural school.

[marstec]

I guess a person needs to make the decision about whether it's a priority to pay off the mortgage. I don't want to generalize, but I think a lot of young buyers are looking for some degree of balance. When we first bought our house, we had a 25 year amortization. We paid weekly, so 52 payments...it was fixed for a couple of terms, and when rates went down, we kept up with the same amount. We switched to variable after the initial 5 year, then one year terms. We paid it off within 13 years.

We made a lot of sacrifices along the way, didn't go on nice vacations, and lived quite frugally. Some people are not willing to do that, and I can understand why. But, it feels great to be mortgage-free and be able to afford anything that pops up and to go on vacations when you want.

People aren't born with naturally good financial acumen...it helps if parents can model good money practices, but it is up to the individual to decide how they want to live their lives. Some people are willing to live hand to mouth if it means they get to have all their "wants" as well as their needs. My sister is living proof.

[Sunraven]

We attacked ours furiously, but I wanted to strike a balance with my RRSPs too. We'll be done in December of this year, 6 years start to finish, and I have also maxed out my RRSPs room at the same time. I feel very good about what we've sacrificed to achieve.

Now I'm starting to plan what I want to do from January onwards, I've decided to save for a downpayment on an investment property. I am hoping that within the period of time it will take me to save up a downpayment for that, that housing prices will soften.

[MortgageQueen]

We attacked ours furiously, but I wanted to strike a balance with my RRSPs too. We'll be done in December of this year, 6 years start to finish, and I have also maxed out my RRSPs room at the same time. I feel very good about what we've sacrificed to achieve.

Now I'm starting to plan what I want to do from January onwards, I've decided to save for a downpayment on an investment property. I am hoping that within the period of time it will take me to save up a downpayment for that, that housing prices will soften.

Considering how well you've done. . . I even hate to say it. . . BUT, you can also use your equity in your house for your investment property. Is there risk? Ya, a little. . but the actual "cost " of your money would be "cheaper money" then what mortgaging your investment property would be, if you mortgaged the majority of it with Inv. property as security.

[Sunraven]

Considering how well you've done. . . I even hate to say it. . . BUT, you can also use your equity in your house for your investment property. Is there risk? Ya, a little. . but the actual "cost " of your money would be "cheaper money" then what mortgaging your investment property would be, if you mortgaged the majority of it with Inv. property as security.

I've thought about it, but not considering it as an option because the investment property would be 100% my project and taking out the equity on our home would tie in my hubby. He's looking forward to being done with this house once and for all and I wouldn't do that to him.