BC Sunshine Coast real estate by Menno at Royal lePage Real estate on the BC Sunshine Coast

Most people know exactly what their mortgage is worth when they’re just buying the house and put a fresh mortgage on it. How much would your mortgage be worth after a few years? I think you should know this.

Mortgage math is complicated enough. You make payments, interest accumulates, the principal gets paid down - it's not quite a straight-forward calculation.

When there’s a lot of “life” left in a mortgage, it’s a good idea to know what’s what. In other words: what exactly are the remaining values, when are the due dates and most importantly: how much is left on YOUR mortgage in Dollars and Cents?

Most people (more or less) forget about the mortgage once it’s all signed up. The monthly payments come out of the bank account and that’s that. Usually, you’re good for many years to come since most mortgage terms in Canada run for five years.

As you make your regular payments, you are contributing to your own wealth building because part of the payment goes towards the principal of the mortgage. Each month, you get a bit “richer”, or less poor whatever the case may be. Most people have no idea how much of their mortgage payment goes towards principal or interest. Since many people also pay their property taxes in monthly instalments with their mortgage payments, the math gets even more complicated.

An amortization table will show you exactly what you owe on your mortgage payment days, assuming you're precisely up-to-date on your mortgage loan.

HOW MUCH DO YOU REALLY OWE?

Just like you should know how much money you have in your savings account, you should have an idea of how much equity you have in your home. For that, you’d take the value of the home and deduct the current mortgage balance. Many lenders now have an on-line tool that tells you exactly where your mortgage stands. Otherwise, you can get an amortization schedule that’ll give you a month-by-month overview of mortgage loan developments.

Several mortgage amortization calculators are available on-line and they are simple to use, although they’re not always as precise as they could be. One you could use runs as follows:

http://www.calculatorz.com/united/amortschedule.cgi

Another is available here:

http://www.canadamortgage.com/webcalcs/realtorlink/amortschedule.cgi

Your own bank probably also has an example schedule available, even on-line. None of these calculators are exact, as far as I can see. For instance, they don’t all give the same precise results. They also ignore leap years, which would have the mathematical effect of spreading amounts a bit differently throughout the year.

Still, the differences are relatively minor and these calculators are great for giving you an overview of what you owe and where your money is going. Do note that there are also some differences between Canadian and US amortization schedules; this is due to certain government regulations pertaining to industry standards of interest compounding.

If you know what you have and if you know what you owe (and naturally: know how much you're making), you're best equipped to start making wise financial decisions.

USING THE INFORMATION TO YOUR BENEFIT

You can use this information well at mortgage renewal, when it’s all about the difference between the mortgage amortization (its life) and its term. There are usually several terms that come up during the life of the mortgage. Each time, you have various options.

Obviously, you can usually also break a mortgage at dates other than the mortgage renewal date. However, this incurs mortgage penalties that are different at every bank in how they get calculated. Something else to look into at another time, perhaps?

Usually, when your mortgage term is almost up, your lender will probably contact you to try and sign you up for another period of time. This may be your cue to jump to action! A rule of thumb is that you renew your mortgage about every five years (that’s what most people choose but shorter or longer is available).

Your mortgage loan is actually a kind of bank account to which debits and credits are made. It should never be a secret how that account of yours is doing.

IT’S SIMPLE AND IT’S NOT

The math is very basic in principle. If you signed up for (in this example) a 25-year mortgage (amortization) on a 5-year term, then you’ll be looking at a remaining 20-year mortgage amortization when the term is up (on renewal). However, since renewing your mortgage is like a fresh start, you could take a good look at all the conditions of your mortgage loan at that time. What has changed since you first signed on to this mortgage loan? Are there things you would’ve done differently, or that you would like to do differently, this time around? Here are some questions you may ask yourself, when that renewal statement gets slipped into your mail box. After all, there is no requirement to just “sign it” to get on with things.

A mortgage renewal, you have options, you can shop around and you can negotiate quite a bit. If you’re at that point and you just sign it to send it back to the bank, then you might be leaving money on the table in possible negotiations. The next time your mortgage is up for renewal, you should also look at the other attractive mortgage terms that you might be able to get. You could work with the same bank under the umbrella of your original mortgage contract (a renewal). Or you could even look at switching banks (a refinance).

Most people are loyal to their bank for reasons that are important to themselves. Even then, there’s nothing wrong with shopping around to force your own bank to do some price-matching. Your current bank won’t be mad at you that you’re looking out for your own financial interests. In fact, they may respect you even more because of it. Guaranteed, when they know you’re shopping around, they’ll do their utmost to retain you as a mortgage client. After all, mortgages are a very profitable part of bank business. Usually also: those that bring mortgage business to the bank will bring other business as well. In other words: you are a prized client.

As a mortgage borrower, you are obviously not a helpless customer, there are many initiatives you can take when it's time to deal with your mortgage.

THIS IS WHAT YOU COULD DO

1. Explore other options. There are many mortgage products out there that you may have never even heard of, up to now. Would you like to switch to a home equity line of credit? Shorter term? Accelerated payments? Talk to a specialist and let them run some scenarios for you.

2. Increase or lower payments. In case you would like your payments lowered, there are options. Conversely, if your income has gone up, you may want to take advantage of paying down your mortgage faster. At renewal time, you have an excellent opportunity to explore the options.

3. Take out some cash. Major life changes happen: a child’s university education, a career change, a major purchase, a renovation … you may have “room” in your mortgage loan, particularly if you’ve made pre-payments during the past terms.

4. Fixed or variable? The major decision (to go for variable rates or fixed) can come up, each time at renewal. It’s a good time to freshly decide what your risk tolerance is and what your financial horizon looks like; ask your financial specialist for help on this.

5. Consider selling your home? Then don’t sign up for 5 years. Consider an “open” mortgage, one that you can pay off without a significant penalty if and when you need to. Mortgage penalties can be costly and they are fairly easy to avoid with smart financial planning.

6. Take a look at the future. Would you perhaps like to speed up your mortgage (or slow it down)? Pay down a major chunk of it now? You can be mortgage-free sooner (or later) than you think, let your mortgage specialist run some scenarios for you.

7. Consolidate other loans. It could be a strategy because mortgage money is cheap money. Refinancing now can be a way to free up cash you need for other things, which could even include buying another property or paying down high-percentage loans of various kinds.

8. Insurance and rates. Your financial situation must have changed over the years. Do you need the same level of mortgage insurance? Your credit history probably got better over the years. The mortgage market is so competitive, there are money-saving options for you.

How do you get a mortgage to work for you as opposed to the other way around. Below are some further mortgage links you might enjoy.

TO READ MORE

It’s fun to read more about mortgages. Actually, the more you know about it, the more interesting it all gets:

Mortgages and retirement debt: http://www.mennorealty.ca/Blog.php/debt-free-retirement

Mortgage and credit score: http://www.mennorealty.ca/Blog.php/mortgage-connection

A purchase without talking to anybody: http://www.menno.ca/?p=20137

Fixed of variable mortgage? http://www.mennorealty.ca/Blog.php/eternal-mortgage-question

Mortgage loan help from CMHC: http://www.mennorealty.ca/Blog.php/cmhc-can-help