Module 4 Workbook IntroductiontotheCanadian
MortgageIndustry
Module4Workbook
Copyright 2012 1 Module 4 Workbook Reminder:KeyFormulas
SimpleInterest



Remember!
Itismoreimportantto
understandthe
CONCEPTS
ratherthantheactual
mathematicalformulas.
Theprincipalbalance(theamountborrowed)(P)
Theinterestrate( )
Thenumberofyears,orsimply“time”(n)
Theformulassimplyillustrate
theconceptsusingnumbers.
CompoundInterest(Annual)



P=Theprincipalbalance(theamountborrowed)
=Theinterestrate
n=Thenumberofyears(totalagreement)
CompoundInterest(multiplecompoundingperiodsperyear)




P=Theprincipalbalance(theamountborrowed)
=Theinterestrate
n=Thenumberofyears(totalagreement)
m=Thenumberofcompoundingperiodsperyear
EffectiveInterestRate


=Theinterestrate
m=Thenumberofcompoundingperiodsperyear
Copyright 2012 2 Module 4 Workbook DeterminingPayments–PracticeQuestion
UsetheCAAMPonlinepaymentcalculatorasagroup(oronyourownathome)to
determinethemortgagepaymentamountsbelow.
www.caamp.org>MortgageIndustry>Resources>MortgageCalculators>PrepaymentCalculator
1.
-
Mortgage
Amount
$325,000
Term
5year
Interest
Rate
5.75%
Amortizati
on
Frequency
Payment$
20years
Weekly
Clickon“Compute”toseethepaymentamount.
Clickon“CompleteAmortizationSchedule”toseeexactlyhoweachpaymentisallocatedtoprincipaland
interest.(ViewFullSchedule)
2.
-
Mortgage
Amount
$665,000
Term
3year
Interest
Rate
3.25%
Amortizati
on
Frequency
Payment$
25year
Bi‐Weekly
Clickon“Compute”toseethepaymentamount.
Clickon“CompleteAmortizationSchedule”toseeexactlyhoweachpaymentisallocatedtoprincipaland
interest.(ViewFullSchedule)
3.
-
Mortgage
Amount
$295,000
Term
2year
Interest
Rate
2.99%
Amortizati
on
Frequency
Payment$
20year
Monthly
Clickon“Compute”toseethepaymentamount.
Clickon“CompleteAmortizationSchedule”toseeexactlyhoweachpaymentisallocatedtoprincipaland
interest.(ViewFullSchedule)
Copyright 2012 3 Module 4 Workbook ConvertingPayments–PracticeQuestions
Frequencies
Monthly=
Bi‐Weekly= Weekly=
12
Semi‐Monthly=
24
26
*AcceleratedBi‐Weekly= 26
52
*AcceleratedWeekly=
52
Conversions
MonthlytoSemi‐Monthly:
Monthly
MonthlytoBi‐Weekly:
Monthly
MonthlytoAccel.Bi‐Weekly:
Monthly
MonthlytoWeekly:
Monthly
MonthlytoAccel.Weekly:
Monthly
÷
×
÷
×
÷
÷
÷
Usethemonthlypaymentslistedbelowtocalculatethedifferentpaymentfrequencies.
Bi‐Weekly
*Accelerated
Bi‐Weekly
$4,319.26
3.
$3,488.22
4.
$4,466.26
5.
$1,440.82
Monthly
1.
$1,727.81
2.
Semi‐
Monthly
*Accelerated
Weekly
Copyright 2012 Weekly
4 Module 4 Workbook MortgageAveraging
Ratesarenotthewholepicture!Insomecases,asecondmortgage(evenatahighinterest
rate)maymakemorefinancialsensethanrefinancing.Insomecases,penaltiescanbe
blendedintonewrates…
Step1 Calculatetotalfinancingrequired
Step2 InterestRateofMortgageA
a
Financing
Step3 InterestRateofMortgageB
b
Financing
a b
Step4 WeightedAverage
Copyright 2012 5 Module 4 Workbook MortgageAveraging–PracticeQuestion
Janinecurrentlyownsahomethatwasrecentlyappraisedatavalueof$499,000.Shehas
anoutstandingmortgageof$272,000witharateof3.25%compoundedsemi‐annually
notinadvance.Janinehasdecidedsheneedstotapintotheequityofherhomeand“clean
up”someofherfinances.Shewantstopayoffallhercreditcardsandlinesofcredit,
repairtheroofandmakeaninvestmentintoherRRSP.Shehasdeterminedthatshewill
needatotalof$183,000tomakethishappen.Janineisfacedwith2options:
Option1:
Refinanceherexistingmortgage.Getanewmortgageforthetotalamount
($272,000+$183,000=$455,000)attoday’scurrentrates.
- Janine’slenderwillrefinancethemortgageandofferheranewrateof
3.99%compoundedsemi‐annually,notinadvance.
Option2:
Keephercurrentmortgageasis,andgetasecondmortgageforjustthe
additionalfundsneeded.
- Janine’smortgagebrokercangetherasecondmortgageforarateof
4.49%compoundedsemi‐annually,notinadvance.
Withoutconsideringpenaltiesand/orfees,andfocusingjustontheinterestamounts,
whichoptionwilleffectivelyprovideJaninealoweroverallinterestrate?
Step1 Calculatetotalfinancingrequired
Step2 Step3 Step4 *isitlikelythatatraditionallenderwillbeabletoofferJaninethatnewmortgageof
$455,000?Why?/WhyNot?
Copyright 2012 6 Module 4 Workbook Module4Mini‐Quiz
1.
Whennootherfactorsarechanged,themoreoftenyoucompoundinterest,the
__________expensivetheloanisfortheborrower.
a) Less
b) More
c) Same
d) Noneoftheabove
2.
Accordingtothefederalinterestact,blendedpaymentloanscanonlycompound
interest:
a) Yearlyonly
b) Half‐yearlyonly
c) Yearlyorhalf‐yearly,notinadvance
d) Yearlyorhalf‐yearly,inadvance
3.
Laurelwantstobuyapropertywithafirstmortgageof$626,000at5%
compoundedsemi‐annually,notinadvance,andasecondmortgageof$130,000at
6.5%interestcompoundedsemi‐annually,notinadvance.Whatistheaverage
mortgagerateforthetwomortgages(roundedtoonedecimalplace)?
a) 5.0%
b) 5.3%
c) 5.5%
d) 5.7%
4.
Gailwantstobuyapropertywithafirstmortgageof$395,000at7.25%
compoundedsemi‐annuallynotinadvance,andasecondmortgageof$200,000at
3.95%interestcompoundedsemi‐annually,notinadvance.Whatistheaverage
mortgagerateforthetwomortgages(roundedtoonedecimalplace)?
a) 5.9%
b) 6.1%
c) 6.3%
d) 6.5%
Copyright 2012 7 Module 4 Workbook 5.
6.
7.
8.
A$225,000loanhasaninterestrateof4.95%withatermof3years.Usingsimple
interest,whatistheannualinterestamount?
a) $11,137.50
b) $22,275.00
c) $33,412.50
d) $191,587.50
A$600,000loanhasaninterestrateof7.95%withatermof3years.Usingsimple
interest,whatistheannualinterestamount?
a) $42,000
b) $477,000
c) $47,700
d) $420,000
A$138,000loanhasaninterestrateof5%compoundingannually,withatermof3
years.Whatistheinterestamountinthefirstyear?
a) $20,700.00
b) $7,607.25
c) $7,245.00
d) $6,900.00
A$232,000loanhasaninterestrateof5%compoundingannually,withatermof4
years.Whatistheinterestamountinthefirstyear?
a) $11,600
b) $1,600
c) $116,000
d) $46,400
Copyright 2012 8 Module 4 Workbook 9.
10.
11.
Whichofthefollowingtermscanbedefinedbysaying“forthesameamount
borrowed,overthesameperiodoftime,thesameamountisowedattheendof
thatperiod.”
a) InterestRates
b) EffectiveInterestRates
c) StatedInterestRates
d) EquivalentInterestRates
Interestrateswiththiscompoundingfrequencyareknownas“effectiverates”,as,
ineffect,theyexpresshowmuchaborrowerwillpayininterestoveroneyear.
a) Monthlycompounding
b) Semi‐Annualcompounding
c) Annualcompounding
d) Quarterlycompounding
Whichofthefollowingformulaswouldyouusetodeterminethetotalamount
owingonaloanof$100,000at3%compoundingsemi‐annuallyforatermof3
years?
a) PxixN
b) Px(1+i)n
c) Px(1+i/m)mn
d) [1+(i/m)]m‐1
12.
Stevenhasamortgagecommitmentwitharateof6.5%compoundedsemi‐
annually,notinadvance.Oleghasamortgagecommitmentwitharateof6.5%
compoundedannually,notinadvance.Theyarebothfor$250,000loansfor1year
terms.Basedontheinformationprovided,choosethecorrectstatementbelow.
a) Bothloanscontravenethefederalinterestact.
b) Steven’sloanat6.5%interestcompoundedsemi‐annuallywillcostmorein
interestover1year.
c) Oleg’sloanat6%compoundedannuallywillcostmoreininterestover1year.
d) Bothloanswillcostthesameamountininterestover1year.
Copyright 2012 9 Module 4 Workbook 13.
14.
15.
16.
Johnhasamortgagecommitmentwitharateof7%compoundedsemi‐annually,
notinadvance.Georgehasamortgagecommitmentwitharateof6.75%
compoundedannually,notinadvance.Theyarebothfor$150,000loansfor1year
terms.Basedontheinformationprovided,choosethecorrectstatementbelow.
a) Bothloanscontravenethefederalinterestact.
b) John’sloanat7%interestcompoundedsemi‐annuallywillcostmoreininterest
over1year.
c) George’sloanat6.75%compoundedannuallywillcostmoreininterestover1
year.
d) Bothloanswillcostthesameamountininterestover1year.
Jamiewouldliketopurchasea$750,000property.Shehas$150,000savedupfor
adownpayment.Thecurrentpostedrateforherpreferredtermis6.125%
compoundedsemi‐annually.Jaimewouldliketomakemonthlypayments.
InordertodetermineJamie’smonthlymortgagepaymentamount,whatadditional
importantvariabledoyouneedtocompletethecalculation?
a) InterestRate
b) PaymentFrequency
c) Time(N)
d) PresentValue
Sherriewouldliketopurchasea$450,000property.Shehas$67,500savedupfor
adownpayment.Sheislookingtoamortizefor30years,andthecurrentposted
rateforherpreferredtermof5yearsis6.125%.Sherriewouldliketomake
monthlypayments.
InordertodetermineSherrie’smonthlymortgagepaymentamount,what
additionalimportantvariabledoyouneedtocompletethecalculation?
a) InterestRate
b) PaymentFrequency
c) CompoundingFrequency
d) PresentValue
IfSherrie’smonthlyP&Ipaymentis$2,305.17,whatisheracceleratedweekly
payment?
a) $576.29
b) $531.96
c) $1,152.59
d) $2,305.17
Copyright 2012 10 Module 4 Workbook 17.
18.
19.
20.
Rajwouldliketopurchasea$350,000propertyandput5%downforadown
payment.Heislookingtoamortizefor35years,andthecurrentpostedrateforhis
preferredtermof10yearsis7.375%compoundedsemi‐annually.
InordertodetermineRaj’smortgagepaymentamount,whatadditionalimportant
variabledoyouneedtocompletethecalculation?
a) InterestRate
b) PaymentFrequency
c) CompoundingFrequency
d) PresentValue
IfRaj’smonthlyP&Ipaymentis$2,246.21,whatisRaj’s(regular)bi‐weekly
payment?
a) $561.55
b) $748.74
c) $1,036.71
d) $1,123.11
WhichofthefollowingisTRUE?
a) Acceleratedbi‐weeklypaymentsaremade48timesperyear.
b) Acceleratedbi‐weeklypaymentsaremade26timesperyear.
c) Acceleratedbi‐weeklypaymentsaremade24timesperyear.
d) Noneoftheabove.
TRUEorFALSE?
ItismoreimportanttounderstandtheCONCEPTSratherthanthespecific
mathematicalformulas.
Copyright 2012 11 Module 4 Workbook Module4Mini‐Quiz:AnswerKey
1. B
2. C
3.
B
4.
B
5. A
6. C
7. D
8.
A
9.
D
10. C
11. C
12. B
13.
B
14.
C
15. C
16. A
17. B
18.
C
19.
B
20. TRUE
Copyright 2012 12