Amortization Problem - I must be losing money ..right?

[kahoots]

I'm currently negotiating a mortgage and the lender wants a 35 year amortization (which of course betters my debt:income ratio).

Since I want an amortization of 25 years my broker told me that I can up the monthly payments to reflect an amortization of 25 years. Since the mortgage is compounded semi annually it only makes sense to me that I'm losing money. Am I right ? Will I lose money money this way?

Heres a few tables:

5 year 3.9 fixed 25 year ammortization ($2405 /month)
2010 $17,735.86 $11,129.18 $449,870.82
2011 $17,295.14 $11,569.90 $438,300.92
2012 $16,836.95 $12,028.09 $426,272.83
2013 $16,360.64 $12,504.40 $413,768.43
2014 $15,865.45 $12,999.59 $400,768.84

5 year 3.9 fixed 35 year ammortization ($2011 /month)
2010 $17,821.18 $6,309.50 $454,690.50
2011 $17,571.35 $6,559.33 $448,131.17
2012 $17,311.58 $6,819.10 $441,312.07
2013 $17,041.56 $7,089.12 $434,222.95
2014 $16,760.80 $7,369.88 $426,853.07


Now I know that since Ill be paying an extra 395 a month to principle that the 35 year table will change , but since its calculated semi annually am im losing money to interest which in the end will hurt the princple balance at end of term?

Bonus question: can anyone calculate the difference between these 2 scenarios? IE how much will I lose? ballpark figure?

If the interest was compounded daily then would be a wash?

I should be able to get a 3.99 or better with another lender at 25 years which would cost me approx 3000 over the 5 years. So I'm trying to determine if this 35 year problem cost me more than 3000.

Thanks in advance.

[simms]

The question is, can you afford a 25-year mortgage? The lender will want what's best for them.. which is to make money.

Pay down as much of your principle as fast as you can. That's the way to save yourself the most money.

[kahoots]

The question is, can you afford a 25-year mortgage? The lender will want what's best for them.. which is to make money.

Pay down as much of your principle as fast as you can. That's the way to save yourself the most money.

Yes I can afford it. Obviously the bank wants to make the most ie the 35 year amortization.
The question is whats the difference between a 35 year amortized mortgage "compounded semi annually" plus the difference between the monthly payments of a 35 year vs a 25 mortagage ( in this case with an original principle of 461K = 395/month) going towards the principle each month AND a 25 year amortized mortgage at 3.89% after 5 years.

My broker says this difference is zero. I disagree, I'm just not sure how much this will cost me.

[netwise]

Year Total Pmt Int Paid Ending Bal Accel Pmt Int Paid Ending Bal
1 $24,060.48 $17,723.06 $454,662.58 $28,800.48 $17,638.09 $449,837.61
2 $24,060.48 $17,473.48 $448,075.58 $28,800.48 $17,198.51 $438,235.64
3 $24,060.48 $17,214.07 $441,229.17 $28,800.48 $16,741.62 $426,176.78
4 $24,060.48 $16,944.47 $434,113.16 $28,800.48 $16,266.75 $413,643.05
5 $24,060.48 $16,664.24 $426,716.92 $28,800.48 $15,773.18 $400,615.75

That's on 35 year at 3.9% for 461K with and without the 395/monthly prepayment.

1 $28,800.36 $11,162.27 $17,638.09 $449,837.73
2 $28,800.36 $11,601.84 $17,198.52 $438,235.89
3 $28,800.36 $12,058.73 $16,741.63 $426,177.16
4 $28,800.36 $12,533.59 $16,266.77 $413,643.57
5 $28,800.36 $13,027.17 $15,773.19 $400,616.40

That's on 25 years at 3.9% for 461K with no pre-payment.

It works out pretty much the same.

[JWL]

Your broker is right. Compounded semi-annually doesn't mean what you seem to think it means. Interest is still calculated monthly.

An interest rate of 5% compounded semi-annually actually works out to:
(1 + 5%/2)^2) = 5.0625%

Interest of "i" compounded semi-annually is still calculated monthly at a rate of:
((1 + i/2)^2)^(1/12)-1

[sslinn]

Take the 35 year amortization and increase your monthly payment to reflect the payment amount of a 25 year amortization.

If your debt ratios are high this may be suggested to make the deal easier to push through.

At the end of the day if you can increase your monthly payment by 20%. Your broker can answer this for you. That is a good rate.

There is absolutely no difference!

[GSRee]

Since I want an amortization of 25 years my broker told me that I can up the monthly payments to reflect an amortization of 25 years. Since the mortgage is compounded semi annually it only makes sense to me that I'm losing money. Am I right ? Will I lose money money this way?

There are a couple ways you could lose money:

- If you put less than 20% down, I believe a 35 year amortization period will incur a higher CMHC premium compared to a 25 year amortization (very likely).
- If you have very limited prepayment priviledges, then putting an extra $395/mo might not be an option for the 35 year plan (not very likely).

[kahoots]

There are a couple ways you could lose money:

- If you put less than 20% down, I believe a 35 year amortization period will incur a higher CMHC premium compared to a 25 year amortization (very likely).
- If you have very limited prepayment priviledges, then putting an extra $395/mo might not be an option for the 35 year plan (not very likely).

Thanks to everyone for all the great responses.

I think you are right about the CMHC. I did notice that the number ended up being about 8% more (approx 1K) than I was figuring which isn't a deal breaker for me.

My broker is assuring me that the prepayments will allow me to put the extra 395.

Thank again to all who replied! I guess I was just a little paranoid.