5/17/2010
Difference
Investing
Guessing ™
1
5/17/2010
Assumptions for Math
Current Prime = 2.25%
“The Difference Between Real Estate Investing…
And Real Estate Guessing!” ™
Realistic Pespective
• Prime was 6% in Jan 2007
• 5.25% in March 2008
“The Difference Between Real Estate Investing…
And Real Estate Guessing!” ™
2
5/17/2010
History of Prime Mortgage Rates
April 2010 Prime Rate: 3.25%
Sept
2008
Current
Source: [Link], Prime Rate, April 26, 2010
Predictions by the end of 2011
How Much Will Prime Go Up:
• BMO: + 3.00%
• CIBC: + 2.25%
• Scotia: + 2.75%
• TD: + 3.00%
• RBC: + 3.25%
• Average 2.75% rate hike in 19 months
“The Difference Between Real Estate Investing…
And Real Estate Guessing!” ™
3
5/17/2010
Scenario #1
Choosing New 5 Year Term
Mortgage
Lock vs Variable
“The Difference Between Real Estate Investing…
And Real Estate Guessing!” ™
Scenario #1 – New 5 Year Mortgage
• Deciding whether to go 5 year variable or
5 year fixed rate
• Prime - 0.5% for the variable vs 4.5% for
the 5 year fixed.
• Assuming a $300,000 mortgage over a 35
year amortization
4
5/17/2010
Strategy:
• Don’t lock-in - but make
locked-in equivalent payments
• Locking eliminates your options
and costs you money
“The Difference Between Real Estate Investing…
And Real Estate Guessing!” ™
Actual Payments if no strategy:
Fixed Variable
• Mortgage payment: • Mortgage Payment:
$1,412.05 $954.78
• Principal: $297.45 • Principal: $517.78
• Interest: $1,114.60 • Interest: $437.00
“The Difference Between Real Estate Investing…
And Real Estate Guessing!” ™
5
5/17/2010
Strategy: Match payments to $1,412.05
Fixed Variable
• Mortgage payment: • Mortgage Payment:
$1,412.05 $1,412.05
• Principal: $297.45 • Principal: $975.05
• Interest: $1,114.60 • Interest: $437.00
“The Difference Between Real Estate Investing…
And Real Estate Guessing!” ™
Total Interest and Principal Paid
over 5-
5-Year Term – Same Payments
Fixed Variable
• Mortgage payment: • Mortgage Payment:
$84,722.89 $84,722.89
• Principal: $19,951.48 • Principal: $36,559.65
• Interest: $64,771.41 • Interest: $48,163.24
“The Difference Between Real Estate Investing…
And Real Estate Guessing!” ™
6
5/17/2010
You will paydown mortgage by
$16,608.17 more with Variable
Which Means $16,608.17 Interest Paid!
“The Difference Between Real Estate Investing…
And Real Estate Guessing!” ™
Scenario #2
Lock-in Current Mortgage:
2 Years Into 5 Year Term
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7
5/17/2010
Scenario #2
#2 – Do I Lock In Current
Variable Started in 2008?
• Current Mortgage = Prime minus 0.4%,
(5 year variable rate in 2008). Near end of
second year of the term
• Is it better to lock into the 3 year rate of
3.85% or continue on the variable rate for
the remainder of the term?
• Assuming a $300,000 mortgage with 33 years amortization left
“The Difference Between Real Estate Investing…
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• Same Strategy – Increase payments to fixed
– without eliminating your options.
• $1,333.80 - $1,011.71 = $322.09
• Principal now being paid down is $873.07
“The Difference Between Real Estate Investing…
And Real Estate Guessing!” ™
8
5/17/2010
Comparing Your payment
with extra lump sum
Fixed Variable
• Mortgage • Mortgage
payment: Payment:
$1,333.80 $1,333.80
• Principal: $378.93 • Principal: $873.07
• Interest: $954.87 • Interest: $460.73
“The Difference Between Real Estate Investing…
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Total Interest and Principal Paid over the
Remaining 3 Years of the Term
Fixed Variable
• Mortgage payment: • Mortgage Payment:
$48,016.96 $48,016.96
• Principal: $14,429.65 • Principal: $23,602.39
• Interest: $33,587.31 • Interest: $24,414.57
You will pay $9,172.74 more principal
“The Difference Between Real Estate Investing…
And Real Estate Guessing!” ™