Top Ten Mortgage Myths
Top Ten Mortgage Myths,
Copyright © Ron Cirotto 2017, all Rights Reserved.
1. Compound interest is the bane of mortgages.
If all the blended payments are made on time, the borrower is only paying simple interest.
2. Mortgages are structured so that the bulk of the interest is paid up front.
The moment you leave the Bank an interest clock starts ticking, the longer you wait to make a mortgage payment the greater the interest. Your very first interest calculation (at the end of the first month) is based upon your initial Principal. There is no *structuring nonsense*.
3. Semi-annual compounding means interest is calculated every six months on a Canadian mortgage.
Monthly payment mortgages have an interest calculation performed at the end of each month whether it is a Canadian or an American mortgage. For the same annual interest rate (now called the APR) in Canada the monthly interest factor is a little smaller than an American monthly interest factor due to the *semi-annual compounding* criteria. The interest factor is multiplied by the outstanding balance to determine the value of the interest portion of that blended payment.
4. In some legal documents it is stated that Prepaying payments must go towards the principal. Nobody prepays interest.
Interest is due at the end of the month (or week) for the use of the money for that month. This just confuses novice borrowers.
5. Paying the IRD (Interest Rate differential) actually saves you money.
Paying the proper IRD calculation is like trading 4 quarters for a dollar. It saves you nothing because the lender gets the same amount of money at the end of the term.
6. Paying monthly payments along with an annual anniversary payment at the end of the year is as good as paying weekly.
Anyone that buys into this smoke and mirror idea obviously does not understand the time value of money.
7. Biweekly payment mortgages are just as good as weekly payment mortgages.
The sooner one reduces the balance the sooner the mortgage is retired.
8. Blending two mortgages or two loans is cost effective using a blended rate.
One requires three amortization schedules to verify if the blended rate is in the borrowers favour.
9. Missing a blended payment only requires you to pay the late fee.
Because of the deemed reinvestment principal both the principal portion and the interest portion must be paid back.
10. Your friendly Loans Officer is well versed in mortgage calculations.
This one is self explanatory as anyone who has had to deal with a Bank will attest to.