Always Ask an Expert!
2021-01-22 | 06:19:07
Yesterday, our local newspaper, The Milton Champion, printed an article titled ‘Dangers of Your House Mortgage’ by Peter Watson. Having been in the mortgage industry for over 20 years I couldn’t help but read the piece.
Mr. Watson references a homeowner with a $1-million mortgage at 2% interest. At the end of the article he asks us to assume that interest rates have doubled to 4% when the mortgage is up for renewal. He erroneously states that the carrying cost on the house has now doubled and asks if the homeowner would have sufficient cash flow to cover their increased expense.
If you were to take out a $1-million dollar mortgage at 2%, amortized over 30 years, the monthly payment would be $3,692.05. In 5 years the balance remaining is $871,896.24. This amount, now amortized over 25 years as 5 years has gone by, would cost you $4,586.35 / month. Certainly an uncomfortable jump, but at less than a 25% increase in payment, is nowhere near ‘double’. And if that increase in payment wasn’t viable, you could re-extend the amortization if you absolutely had to back to 30 years, reducing the monthly payment to $4,146.03.
I should also add that with the adoption of the Mortgage Qualifying Rate introduced in 2016 and expanded in 2018, the same homeowner would have needed to prove that they qualified for the original $1-million mortgage as if the payment was $5,212.19, so even if mortgage rates were to double, you would still be within the very small c conservative government guidelines for the size of mortgage. Hardly ‘dangerous’.
To use a more realistic example, let’s assume you have a more average mortgage size of $400,000. In the same example as above, the monthly payment would increase from $1,476.82 to $1,834.54. An increase of $357.72. Again – not insignificant but it should be manageable for someone who qualified for the mortgage based on being able to pay $2,084.87 at the Mortgage Qualifying Rate. And certainly not double.
So: catchy headline - preying on the fears of homeowners, but highly inaccurate. Don’t believe everything you read, and contact me if you have any questions about your mortgage. I have a mortgage calculator. Come to think of it, I have two – I may send one to Mr. Watson.