Calculating Mortgage Yields
Realtors and Mortgage brokers will especially appreciate the DISCOUNTING program as it makes YIELD tables a thing of the past. The examples below will demonstrate how simple it is to use the single screen program to quickly calculate many different scenarios. Why settle for approximations and interpolations when an exact calculation can be performed quickly. Actual examples were taken directly from a YIELD table booklet (white background image). It matters not whether you are an American or Canadian Realtor or Mortgage Broker as the software handles both, monthly compounding (American) and semi-annual compounding (Canadian). The program also lets you choose the accuracy and speed of the iteration. The user can quickly change + or – the Yield or the Discount term and save time and eliminating many tedious calculations.
DETERMINING THE DISCOUNT AT SPECIFIED YIELD
Software Answer:
Notice how the balance is automatically shown (A) after 4 years. Mr. Buyer pays (B) $8,741.78 to buy the mortgage and his discount is (C).
DETERMINING THE MONTHLY PAYMENT NEEDED TO FULLY AMORTIZE THE MORTGAGE
Software Answer:
By making the amortization period and discounting term the same (48 months) the monthly payment is calculated to be exactly $ 253.63
DETERMINE THE YIELD AT A SPECIFIED DISCOUNT
Software Answer:
ONE ANSWER TO THREE QUESTIONS
Question 1
For various reasons a buyer wishes to purchase this mortgage cash flow for the next 36 months but wants a yield of 7% instead of 11%. The buyer would purchase the 36 months of cash flow for $166,085.08 instead of $150,000 thus paying a premium of $16,085.08.
Question 2
A builder is having difficulty selling his $150,000 homes at 11% so he does a buydown calculation to make the homes more attractive. He raises the selling price to $166,085.08 and offers 7% mortgages. The builder gets the same return on investment and the new buyer thinks he is getting a great interest rate.
Question 3
A borrower has a current balance of $150,000 on his mortgage and is paying 11% but current rates have dropped dramatically for a three year term and the borrower wants out of the contract so that he can enjoy the low rates of 7%. This is a common situation in Canada. The lender asks the borrower to pay the “penalty” of $16,085.08 and charges only 7% interest for the remaining 36 months. The lender gets the exact same yield on the mortgage and the borrower changes four quarters for a dollar and is happy. In Canada this is called the IRD calculation, Interest Rate Differential calculation.