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Posted on July 14, 2007 by Gregory van Duyse | Posted under Finance
How do lenders calculate Mortgage Penalities (hypotheque)
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(Note: This article is part of a series of articles on the subject of mortgage penalties. It may be that your question on penalties may be better answered in another article. The list of all the articles in the series on penalties can be found at the end of this article.) Two ways are used to calculate mortgage penalties that a lender is going to use for a mortgage. Since there are two ways, the bank will surely choose the one that yields them a higher earnings. 1. Number of months interest penalty (2, 3 or 6 months). It is necessary to separate the interest segment of your mortgage payment from the principal and then multiply it by the number of months designated for the penalty. Example: If a borrower has a 25 year, $200,000 mortgage at 5.4%, and he pays it off after 30 months. His monthly payments are $1,209.17, and the interest for the 30th month is $846.18. If the penalty is three months, the total penalty will be $2,538.55 ($846.18 X 3). 2. The difference between the rates for the rest of the term. (Also know as the rate differential.) This method is a little complicated but it is used only when the effective rate (when you break your mortgage contract) is lower than the rate that you have negotiated on your mortgage contract. The penalty equals the difference of the interest payments between the two rates for the rest of the term. It may be easier to understand this with an example. Example: Let us take the same scenario; you have a $200,000 mortgage amortized over 25 years with a rate of 5.4% for 5 years and a payment of $1,209.17 per month. After 30 months, you have to break your mortgage contract (pre-payment) and the lender will impose a penalty. The rate at that moment (30 months later) is 4.75%. Here is how it is calculated: a. The lender anticipated receiving a certain amount for the original loan, which was at 5.4%. Using a financial calculator, this amount is calculated at $25,447.16, representing the payment from the 30th month through the 60th month (5 years). b.The amount of interest that that lender can receive today if it lent the money at the rate of 4.75% for the 31 month period (30th payment through 60th payment) is calculated, again using a financial calculator, at $22,250.74. c.The difference between the interest payments received by the lender is $25,447.16 less $22,250.74 or $3,196.26. There is your penalty! Borrowers have some difficulty understanding this system. No borrower feels that it is fair to pay a penalty on his home loan. However, except for some unusual types of open mortgages, all mortgages have prepayment penalties. This is a complex subject, requiring clear explanations and can usually be better understood with examples. About The Author: Gregory is an Accredited Mortgage Professional (AMP). To get more information on mortgage rates - taux hypothécaire, please visit: Hypothèque - Get a loan |
Tags: MORTGAGE BROKER, MORTGAGE, HYPOTHEQUE, TAUX HYPOTHECAIRE
