When it comes time to choosing a mortgage, many homeowners opt for
the lowest rate they can find, at the traditional five-year term,
without paying attention to the fine print. In many cases, these
no-frills mortgages - and even some that have frills -can make a huge
dent in your wallet if you ever try to break them.
The concept of Interest Rate Differential (IRD) is one that often
comes up in these situations - and is currently in the news thanks to a
single mom's lawsuit against CIBC. The woman, who recently went through a
divorce and was forced to break her mortgage, is suing CIBC for using
vague language in her mortgage contract that is forcing her to pay the
IRD - the amount of money the financial institution will lose in
interest payments as a result of the broken contract. In this situation,
it's around $45,000 because she had eight years left on her mortgage.
The formula that banks use to calculate the IRD are among life's
great mysteries, and often differ between bank to bank, and whether you
have a fixed or variable rate mortgage. If you're signing a mortgage,
it's best to find out what your bank's policy is upfront, just in case
you may have to break it at some point. You may also want to pay a few
extra points to ensure your mortgage is portable (can be moved to
another home, if you choose to move during the term of the mortgage) or,
if you're not quite sure what the future might bring, sign on for a
shorter term. There's no rule that says you have to sign on for five
years - and, in many cases, a lesser term makes more sense, and might
even save you money.
frigging stunning. really. i am flabberghasted , but i guess i shouldn't be.
ReplyDeletepaula
@inkscrblr
http://www.thriftymommastips.com/
I'm a lawyer. I have probably completed about 1000 real estate transactions for clients. I likely explain things better and/or in more detail than some, but I don't even pretend I understand the interest rate differential. I point to the clause and the pages of mathematical calculations and tell clients they will need to review this issue if they need to pay out their mortgage early. So if I can't explain it and the bank or mortgage broker has not explained it, then who does?
ReplyDeleteIt is certainly important that you understand the interest rate, payment amounts and term of the loan before committing as you could get yourself into a serious financial dilemma just because of some misunderstood loan terms. If you're unsure about the soundness of your decision, get proper advice from a mortgage advisor. He/she will explain things in terms you can understand and help you get the best deal.
ReplyDelete