The “New Math” for Mortgages

If you know a child in school, you’ve probably heard what a lot of us adults call “new math.” Having taken math before, you’d think math would never change, and that’s exactly how Mortgage Brokers thought about mortgages. After all, the process of qualifying and calculate mortgage payments is really just “doing the math”.

Well the math has changed for mortgages, mostly due to continuous rule and regulation changes from our government and within our industry.  So, here’s a few lessons you might want to quickly sharpen up on:

RULE # 1:  5% DOWN ISN’T ALWAYS 5% DOWN

Confused Kid- Cute

There was a time when our clients had to put 20% down unless they were a first-time home buyer.  Then the rules changed for the better. Home buyers that were willing to pay insurance premiums, could choose to put down less, regardless of whether they were a first-time home buyer. With the most recent changes, regardless of whether you are a first-time home buyer or not, the first $500,000 requires 5% down, with the remainder requiring 10%.

Question:  A client is buying a house for $650,000.  What is their minimum down payment?

Old Math:  $650,000 x 5% = $32,500

New Math:  $500,000 x 5% + $150,000 x 10% = $40,000


RULE # 2:  A MILLION MEANS A LOT

A million dollars is a lot of money and it also greatly affects your minimum down payment. Within the old regulations, you could put as little as 5 or 10 % down on a million-dollar purchase.  Now, any home purchase above a million dollars will not be eligible for the default insurance, which means a 20% down payment will be required.

Question: A family is buying a home for $1.1 million. What is the down payment required?

Old Math: $1,100,000 x 5% = $55,000

New Math: $1,100,000 x 20% = $220,000


RULE # 3:  THE PAYMENT FOR YOUR NEW MORTGAGE, AND THE PAYMENT WE USE FOR QUALIFICATION IS NOT THE SAME

Contract vs Qualifying Rate

This rule, by far, has had the most impact in the mortgage industry since the rule change on Jan 1stof this year. Let’s say you signed on to a 5-year or greater fixed term mortgage this year. Before the rule change, borrowers qualified at the rate and payment that they would actually be making (contract rate). However, as of this year, almost all lenders now require borrowers to qualify at what is called a “Benchmark Rate”. The benchmark rate is the average of the Big 5 Banks’ “posted rate”, which is as much as 2% above the discounted rates that Mortgage Brokers offer (currently sitting at 5.34%).

Question: A family wants to buy a $600,000 home and has 20% as a down payment.  What is the payment to be used to qualify? $600,000 – $120,000 (down payment) = $480,000 mortgage

Old Math: $480,000 @ 3.34% with a 25-year amortization

Payment = $2,356 per month

New Math: $480,000 @ 5.34% with a 25-year amortization

Payment = $2,885

So why does this fictional qualifying rate matter if you’re not actually paying that rate? 

Well, because it affects how much income is required to qualify for your mortgage. The difference in family income required with the new rules is about $20,000 in this example.  So, the family that qualified for this $480,000 mortgage, could have actually qualified for an additional $100,000 before the rule change. That’s a tremendous difference and this now, not only affects qualifying for purchases, but refinances and lender transfers as well.

For our new generations learning math, the techniques and strategies to calculate the answers have changed, but the answers remain the same.  Unfortunately, we cannot say the same about mortgages. Not only have our techniques changed, the answers are different as well.  For more information on the new mortgage rules & qualifying rates, contact one of our qualified Mortgage Brokers in your area today.

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