Mortgage Question: Acceptable Debt Load?

[geotag277]

Originally Posted by ranchlandsselling

Which is always the borrowers responsiblity. I always tell people borrowing money to make sure they've not borrower as much as they can because rates can change, your payments will be higher at renewal and being house poor sucks A$$! That said, in the end the borrower usually does what they want.

I thought even if rates go up most banks offer you a longer term for the mortgage instead of a higher payment.

[GP_Matt]

I did something similar with a builder.
I paid for some of the extras myself and the builder credited the cost as part of my down payment and worked it into the purchase price.
$450000 house with $50000 in extras.
I paid cash for the extras and the builder received $450000 from the bank.

[GP_Matt]

And back on topic...
Some banks will look at credit card limits and assume they could be maxed out when calculating debt ratios.
They may also use the credit card balance even if you intend to pay it off at the end of the month which was a pain for me as I usually have a ton of expenses through work that are paid before the bill is due. In this case I had just bought two ATVs so I showed a $20000 balance.

[ranchlandsselling]

Originally Posted by geotag277

I thought even if rates go up most banks offer you a longer term for the mortgage instead of a higher payment.

Lol, what like stretching out the amortization to make the payment smaller? That may seem helpful but it's just dragging out the repayment of debt and increasing the money you're paying to the bank. A banker or broker that wants you to max out what you can afford might suggest that so they can get a bigger commission/fee/bonus, but it's generally pi$$ poor adivce.

[geotag277]

Originally Posted by ranchlandsselling

Lol, what like stretching out the amortization to make the payment smaller? That may seem helpful but it's just dragging out the repayment of debt and increasing the money you're paying to the bank. A banker or broker that wants you to max out what you can afford might suggest that so they can get a bigger commission/fee/bonus, but it's generally pi$$ poor adivce.

What makes it poor advice? Mortgages should be managed as cash flow, and amortizing longer allows you to save/manage more of your money up front. You can always pay down the mortgage in lump sumps at the end of the interest term (typically 3 - 5 years), especially if the lower payment allows you to save more.

It's simply an option that should be considered by a borrower. If you are worried about rate hikes, it doesn't necessarily make your mortgage instantly unaffordable because you have the option to pay longer, and yes, pay the bank more interest.

[ranchlandsselling]

Originally Posted by geotag277

What makes it poor advice? Mortgages should be managed as cash flow, and amortizing longer allows you to save/manage more of your money up front. You can always pay down the mortgage in lump sumps at the end of the interest term (typically 3 - 5 years), especially if the lower payment allows you to save more.

It's simply an option that should be considered by a borrower. If you are worried about rate hikes, it doesn't necessarily make your mortgage instantly unaffordable because you have the option to pay longer, and yes, pay the bank more interest.

You are correct. There are situations in which that might be applicable however it my experience those are not the norm. I deal 99% with new buyers, people who are employees, not landlords or business owners who over the first 15 years of their mortgage will not be making substantial lump some payments and rely on the amoritzation to pay down their debt.

Take someone with a $350,000 mortgage, rate of 3.49%, amortization of 25 years. Let's say their stretched at $1,745 monthly payment but the bank says "don't worry, if rates go up will increase your amortization".

At maturity they'd owe approximately $302,000 If rates go up to 5.0% in 5 years, (which isn't even a lot), they'd need to bump their amortization back to 25 years and would owe $267,000 at the end of the term having paid $127,000 in interst over 10 years.

Consider if they didn't have to increase their amortization.

They'd owe $251,000 after year 10 (vs $267,000) and paid $125,000 in interest over the 10 years vs. 127,000.

You're basically paying $3,000 more in interest and $16,000 less in principle with an amortization extension (just over the first 5 years) and that's considering only using 5.0% as an interest rate. 6 years ago rates were 5.79%.

Now we're also talking about a $200 a month difference in monthly payment. So you're looking at $12,000. So your cost of extending your mortgage amortization is $7,000 for years 6-10 and it will keep increasing for ever additional year thereafter.

If in 5 years the average buyer can't handle a $200 increase in mortgage payments (but thinks wasting $7,000 in abitrary expense is ok) they should seriously consider a smaller mortgage.

If you're a landlord or business owner that values cash flow and assumes they'll be making lump some payments then you likely wouldn't need much of this explained to you.

[Deegee]

Originally Posted by fundmark19

Also the list of improvements you state you are doing before hand must be completed. I almost ran into an issue when I did not put in a fireplace like I wanted because the logistics didn't work out. Luckily my appraiser didn't pay attention that the fireplace I put in was a cheap electric one.

Also the program at least through BMO you have to have all quotes done before you take possession. This was extremely difficult for us to do as our sellers did not want to grant us access at all after the sale went through. I am sure this isn't the case with all sellers but just something to be aware of. Also quote your self 1.5 times more than the actual cost of your reno's since you can't get anymore money from the bank after without a lot of hassle. Don't want to find problems that cost more fixing leaving you with an 80% completed house like myself.

This is also due to CMHC and Genworth and government rules changes. You can only do purchase plus improvements on a high ratio deal when you purchase. Refinances through those programs do not allow for the "plus improvements". But yes, improvement costs should have cost overruns factored in.

[calgarywinning]

Buying a newer type vehicle while planning a long time investment/real estate purchase are in conflict with your intentions.

A vehicle is a depreciating asset which will directly effect your ability to pay towards your long term purchase which shouldn't depreciate.

I liked the one posters idea of purchasing a reliable older vehicle.

If you calculate the interest on the payments for the real estate with a new car purchase and then you calculate the interest payments on the same purchase with the money from the car going to the principle of real estate loan you will see that after five years, the interest savings alone will buy you the new car.

Mortgage is latin for Death Loan.