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Rates are at near all time lows and expected to rise soon. There's never been a better time to buy your dream home or investment property or refinance your house to pay off high credit card debt. Call me today and find out what your options are.

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IRD Penalty Comparison Rates

IRD-Mortgage-PenaltyThe much-unloved Interest rate differential (IRD) penalty is a mystery to most of the natural born population.

People loathe it, largely because they don't understand it. We continually come across folks who read their entire mortgage contract and are still confused by the IRD calculation.

Fortunately, federal disclosure guidelines are on their way later this year. These guidelines are supposed to standardize the explanations of IRD penalties to make them more comprehensible.

There is one element of the IRD calculation, in particular, that gets people all tied in knots. It's called the "comparison rate."

Here's a real-life example of how the comparison rate can spoil your day:  Customer fee to pay out mortgage doubles (CBC News).

The story features a regular guy (Mohsen Movahed) who learned how to calculate an IRD penalty...the hard way.

It seems Movahed relied on a penalty quote, only to find some months later that his penalty had doubled.

The culprit, says his bank, was the comparison rate used in the IRD calculation.

Comparison-Rate-IRD-PenaltyA comparison rate is the rate a lender compares to your current contract rate in order to calculate the IRD penalty on a fixed-rate mortgage.

The comparison rate is usually the lender's rate for the term that most closely matches your remaining term.

For example, if you have 22 months remaining on your fixed mortgage, a lender will typically (there are exceptions) use a 2-year term as your comparison rate.

The kicker is that banks often subtract the discount you received at origination from their posted (comparison) rate--which makes the interest rate differential and penalty even worse!

Some lenders use bond yields for their comparison rates (example). This method can sometimes be far more costly depending on yields and mortgage spreads.

Conversely, some non-bank lenders use regular discounted rates for their IRD calculations, which can be more favourable for the customer.

In any case, Mr. Movahed discovered that the comparison rate can drop considerably as time goes by. That drop can boost the interest rate differential and cost you thousands more.

As a sample test, we ran a quick penalty calculation for breaking a hypothetical $250,000 mortgage. Our example was based on actual historical and current bank rates. It assumed the customer had about 2.5 years remaining on their term and had received a 1.50% discount off posted rates.

Depending on the effective date of the penalty calculation, a bank could quote the penalty based on either a 2-year or 3-year comparison rate. That's relevant because the penalty difference between these two comparison rates (as of today March 24, 2011) is more than $3,700!

In other words, if our hypothetical customer waited until she had slightly less than 2.5 years remaining in her term, the bank could apply the lower 2-year comparison rate (instead of a 3-year) and her penalty would increase 28%.  (A lower comparison rate makes the IRD bigger.)

The moral is that timing matters when calculating an IRD penalty. A good mortgage advisor can help you plan properly to minimize the IRD, if and when you have to pay it.

Young Buyers Guide

First: Pay Off Your Debt

It's a common mistake for home-buyers-to-be: They focus on saving as much money as possible for a down payment instead of paying off other debts. A better approach is to use extra cash to eliminate credit-card and other high-interest consumer debt, even if that means you can put down less on your future home.

Why?

First, credit-card debt is expensive and limits your ability to save. Second, credit-card debt will limit how much you can borrow. That's because lenders won't allow your total monthly debt service which includes payments for credit cards, student loans and car loans, as well as homeowner's insurance, property taxes and a mortgage to exceed 40% of your gross income,

How Much Can You Afford?

The answer to that is a function of two things: How much you can borrow and how much of a down payment you can muster. As a rule of thumb, your annual mortgage payment, taxes and homeowner's insurance shouldn't exceed 28% of your gross income. Then determine how much cash you have for a down payment, leaving yourself enough left over to pay those pesky closing costs, which can add up to 3% to 5% of your total home's value (plus a little something extra for emergency repairs once you move into your new home).

Types of Loans

Now you're ready to start shopping around for the right loan. As we said, a first-time home buyer with a steady job and good credit can put down as little as 5% these days. These loans are more available, and more reasonably priced. The more money you can muster for a down payment, the more options you will have. A new "start-up mortgage" allows borrowers who can put down 10% to qualify for a loan on a smaller salary than with a 5% down payment. Private lenders are also coming up with their own programs to tap into the first-time home buyers' market. Program for buyers with a 10% down payment: Instead of charging for mortgage insurance, the savings-and-loan builds the cost into the interest rate, making it tax-deductible (which mortgage-insurance premiums aren't).

And if you really want to get creative and avoid paying mortgage insurance altogether, you can take out two piggybacked loans. These are also referred to as 80-10-10s. First, you need to put down 10% of the home's value. Then, you take out a primary loan, usually a 30-year fixed-rate mortgage, for 80% of the home's value. This interest rate should be competitive. For the remaining 10%, you'll need to take out a 15-year fixed-rate mortgage at a far less competitive rate as much as two points higher than the market. Combine the two monthly costs to come up with your total mortgage payment. Due to the complexity, a piggybacked loan is a bit more expensive than a traditional mortgage and carries higher closing costs. Still, they tend to be cheaper than paying private mortgage insurance.

Questionable Credit

Worried you don't have perfect credit? Thanks to Key Mortgage Solutions Inc. "expanded approval" program, consumers with slightly blemished credit can also qualify for mortgages at competitive rates. "These are people who might not qualify for fair-market value rates from traditional lenders," If your credit's still not good enough for one of Key Mortgage Solutions Inc.'s loans, you may yet qualify for our Rent to Own program. However, since these loans are higher risk, the interest rates shows to be slightly higher than a regular mortgage. When a candidate shows interest in owning his first house but do not fit regular standards, Key Mortgage Solutions Inc. offer a flexible credit repair plan that is custom made to fit each and everyone’s needs.

Visit Key Mortgage Solutions Inc. at www.keyms.ca and apply online to see which options suits you best.

An agent will be in contact with you in within the hour upon application. (During regular business hours, allow 24 hours on weekend, holidays and non-business hours)