Module 4: Mathematics Flashcards
Two math concepts that interreact with each other in reference to mortgages?
Money and Time
What is simple interest?
Simple interest is calculated solely based on the principal amount borrowed.
What is compound interest?
Compound interest calculates interest/payments based on the principal balance and the previous periods interest. Interest on Interest
When dealing with compound interest, what is one of the most important factors to consider?
How many times interest will compound in a year and over the life of the loan.
What is the Federal Interest Act?
The federal interest act indicates that mortgages with blended payments can only compound interest “yearly or half-yearly, not in advance”. The term in ‘advance’ refers to the fact that you cannot pay interest before you have actually had the money. For this reason, mortgage payments are paid “in arrears” - your February 1st monthly payment represents interest accrued in Janaury.
When attempting to compare different rates with different compounding periods, what is the most effective method?
Converting them all to the effective interest rate. This is essentially converting all rates, no matter their compounding frequency to only compound interest once annually. This way you have an apples to apples comparison for all rates you may be comparing.
What is the formula for calculating the Effective Interest Rate?
[1+(i/m)]^m-1
Where:
i=Interest rate
m=compounding periods per year
What is the Annual Percentage Rate (APR)?
The APR measures the total cost of borrowing, therefore it is not simply the interest rate being charged on your mortgage. Besides the interest payments it also takes into account transaction charges or premiums for credit guarantee insurance.
Should mortgage brokerage fees be included in the APR?
In most provinces, mortgage brokerage fees must be included in the annual percentage rate (APR).
How do you convert the following payment frequencies:
-Monthly to Semi-Monthly
-Monthly to Bi-Weekly
-Monthly to Weekly
Monthly to Semi-Monthly: Divide by 2
Monthly to Bi-Weekly: Times by 12, divide by 26
Monthly to Weekly: Multiply by 12, divide by 52
Will changing from monthly to bi-weekly payments result in paying down a mortgage significantly faster?
No it will not. You will end up paying slightly less interest in the long run and pay down your mortgage slightly faster only as a result of paying down part of the principal balance slightly earlier each month.
If someone really wants to pay down their mortgage faster, what must they do?
They must switch from monthly payments to accelerated bi-weekly payments. Remember this doesn’t mean making payments more often but rather making larger payments.
Define an ‘equivalent interest rate’:
An equivalent interest rate means that for the same amount borrowed, over the same time period, the same amount is owed at the end of that period.
What is mortgage averaging?
Required when a property has two mortgages on it, with two different interest rates. Essentially finding the weighted average of the two interest rates for the two mortgages.
