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October 7, 2009
The Good, The Bad and The Ugly

Greetings to you as we enter our fall season! I do hope that you had a terrific summer…

As we leave a recession and focusing on the economic recovery, I thought it might be prudent to view the many angles of mortgage market while we experience the guideline changes, and historical low interest rates. Read on and have a look at; The Good, The Bad, and the Ugly…
THE GOOD
It goes without saying but let’s put it in writing anyhow; because really, it just feels so darn good to write these four words: “Historical low interest rates”. Yup, that’s the GOOD! And whether you’re looking to get into your first home, a homeowner that’s looking to refinance your mortgage, or looking to renew an interest rate that’s maturing; these historical low rates are a sheer blessing! Well…for the majority they are – but some others it is anything but a blessing…we’ll discuss further on.
THE BAD
Although the rates would suggest that you’d have to be crazy not to think about getting into the market, or refinancing your current mortgage – the truth of the matter is that not everyone is going to get the chance to obtain these rates. Why? Well, it all started about a year ago with the banks tightening up their guidelines (you may have heard about itJ). For the last year, we’ve been hearing about “the credit crunch” and “lending holds” that the banks have on us. True. Yes, I’ll be the first to say that I’ve seen many, many individuals and couples watch their dreams collapse in front of them because maybe their old collections that acquired from their lackadaisical youth have finally caught up to them…OR, for whatever the reason – their credit “wasn’t good enough” all of a sudden. The bruised credit that used to pass in the system is now being looked at from a different angle and perhaps being negotiated with a larger down payment from the customer, or perhaps being asked for a co-signor to accompany the mortgage application. Whatever the case with the credit, it’s not always good news that is reported back to the customer. {If it’s a credit problem, all hope is not lost; maybe you just need someone in your corner that can assist you back to better credit health (?). Let me know, or visit http://www.canadafirstmortgage.com/credit-recovery.html }
THE UGLY
What could be worse than “bad”? You guessed it; the “UGLY”. And we’re talking downright disgusting in some cases. What could it possibly be??
Well, if you’re a homeowner and you want to refinance your mortgage to catch the wave of the historical low interest rates – you may have found yourself with a nice BIG surprise. It’s called “Interest Rate Differential” – or IRD for short. “What is it, and why would it scare me”, you ask? I’ll give you the low-down as to when you’re faced with it …
The IRD on a mortgage is what you could be faced with if you decide to payout your mortgage early. Let’s say you’re with ABC bank and you want to get a new and lower interest rate at XYZ bank. That means you’ll have to ‘break’ the current mortgage that you hold with ABC bank. No problem, right? Well – maybe…maybe not. Likely you’re aware of a 3 month interest penalty on MOST mortgages. Some of you may be surprised to learn that it’s not simply JUST a straight-forward 3 month interest penalty – it’s actually the GREATER of either the 3 month interest payments, OR the Interest Rate Differential. So what exactly is an IRD?
The IRD is essentially the difference between the cost of the money “then” (when you took the mortgage out), and the cost of the money “today” (when you decide to break the mortgage). Moreover, one of the variables that goes into the equation in determining the difference of cost is “time”. Let’s give you a real example and show you the difference on how 3 months interest and IRD is determined:
Let’s say your mortgage balance is $250,000.00
Your current interest rate is 5.50%
You’re 2 years into your 5 year mortgage term and you want a better rate, or to refinance some debt into a better rate; let’s say a 3.99% interest rate.
1.           To estimate the Three Months' Interest Costs:

 2.           To estimate the Interest Rate Differential Amount (with most lenders):

 **NOTE: Please keep in mind, this is not an exact science to figuring out the IRD…always contact your lender for exact figures)
As you can see, the IRD is going to be the lenders choice as they state “the greater of the two will be in effect”. We’re talking about a different of almost $8,000.00 in penalty fees. That’s a lot of money. So after the cardiac arrest dissipates and you catch your breath, one of our roles as a mortgage associate is to inform you if you can effectively get your interest payout penalty BACK over the course of the next mortgage term, in interest rate SAVINGS. If the answer is ‘no’, then we’ll simply advise you that it’s not worth doing a refinance or transfer to a better rate. If the answer is ‘yes’, then we will show you how this is so by providing you with the math.
The point here is that if there is an ugly side to historical low interest rates – we just found it…
The silver lining to the IRD is that they rarely rear their ugly head. Essentially the time we see them is when interest rates go DOWN. What’s the key to refinancing and not getting nailed with an absorbent IRD penalty? TIMING. Stay in close contact with your mortgage associate so that you are always informed of the market!!
So there you go; The Good, The Bad and the Ugly. There are certain shades of color to every market, and whether you find yourself in the Good, the Bad or the Ugly – make sure you’re well informed from your mortgage associate! I invite any questions that you may have – thanks!
Sincerely,

DAN MASS, AMP Broker/Agent

Canada First Mortgage
direct: 403.294.0033 cell: 403.710.1505 fax: 866.902.4910
email: dan@canadafirstmortgage.com
website: www.canadafirstmortgage.com
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