Experience with lowering monthly mortgage payment

[llee]

Hi,

I called RBC today to ask to lower my monthly payment (on variable P minus).

After waiting for more than 45 min, the rep said first I cannot do it, because I haven`t made any additional payment. I said he didn`t make sense, and he looked further.

After 20 min calculation, he finally said he could do it (saving $100 per month, from $550 to $450), but my amortization period is back to 35 years (vs 28.2 year with $550 payment). He strongly warned me of this bad financial decision because I am paying a lot more interest in 35 years. When the prime rate comes up, my amortization will be beyond 35 years, and my monthly payment will be upward adjusted. He said four times that this is a very bad financial decision. I said "I agree, but please go ahead to lower my payment".

Why does RBC give me such a hard time (and lesson) for lowering monthly payment??

Thanks.

 

[ChrisDavies]

As I mentioned in my blog post on the subject, if you do it for the right reasons then it`s a great idea. If you`re spending the cash on hookers and blow, maybe not so much. (Ok, maybe that`s a bad joke)

 

[MikeMcCrae]

I have found that most people do not understand debt. I too had long discussions from bankers re the way I handle my affairs and they have never agreed with my decisions. However on the short term (4-5 years so far) my decisions have outpaced the yield of their decisions by a very large margin.
You could however talk to someone different at the bank about the adjustment of the ammortization. There shouldn`t be an increase in the ammort. just because you alter the rate. It is fine if you don`t moind the 35 year but it shouldn`t be necessary.

 

[llee]

QUOTE (MikeMcCrae @ Apr 23 2009, 04:56 PM) You could however talk to someone different at the bank about the adjustment of the ammortization. There shouldn`t be an increase in the ammort. just because you alter the rate. It is fine if you don`t moind the 35 year but it shouldn`t be necessary.

Hi Mike,

Can you elaborate how altering the rate and lowering month payment but not increase the ammort?

I thought if less goes to the principal, then the ammort will jump up?

Thanks,
Lucas

 

[Caninvestor]

QUOTE (llee @ Apr 23 2009, 11:16 PM) Hi Mike,

Can you elaborate how altering the rate and lowering month payment but not increase the ammort?

I thought if less goes to the principal, then the ammort will jump up?

Thanks,
Lucas

I don`t think you can alter the rate. Some lenders will let you move your amort back to lower your payments. if your on a 35 year amort and have been paying your mortgage down for a year + extra...making your amort 28 years left. you can bring it back to 34 thus reducing your payment but this will increase the interest and lower your principal pay down.

 

[JohnS]

QUOTE (llee @ Apr 23 2009, 11:16 PM) Hi Mike,

Can you elaborate how altering the rate and lowering month payment but not increase the ammort?

I thought if less goes to the principal, then the ammort will jump up?

Thanks,
Lucas

This is only done on a variable rate mortgage, of course, which is where Caninvestor got it wrong, I believe. But in a variable rate mortgage, the interest rate varies. It goes up and it goes down. This doesn`t affect the amortization or anything - it`s the actual interest rate that changes.

Now, with some variable rate mortgages, your payment from one month to the next will change if prime changes (and hence your rate). However, with other types of variable rate mortgages (the one it sounds like you have, I`m guessing) they give you the rate you pay, but they set your payment at more than that rate in case prime goes up. This way, you get a cushion, and you`re not screwed if rates go higher. All of the extra you pay therefore goes to the principal. With these kinds of variable rate mortgages, when prime goes down, your payment stays the same, but the extra goes to principal. However, if you talk to the bank, they should be able to lower your (inflated) rate a bit, thereby decreasing your payments. You`re not truly extending your amortization, but rather it just won`t be decreasing as quickly.

As as example, on my property I`m paying prime minus 0.3%. This worked out to somewhere in the area of $630 a month. However, I was paying $800, and the extra $170 went to principal. Prime dropped a few times, and I got them to lower my payment to about $730. Prime dropped another time or two, so I got them to lower my payments to about $675. I`m still paying extra towards my principal, as my payment "should" only be about $525 (I`m guessing). Now, if I hadn`t gone in those times to get them to lower my payments, I`d still be paying $800, but the extra $275 would be going to the principal, as opposed to just an extra $150. Because I am still paying an extra $150 a month, my amortization will still be less, but it won`t be as much less at if I was still paying $800. But the cashflow now is more important than the years of interest in the future, which is why I had them do it.

Hopefully that makes it a bit clearer.

Have a good one!

JohnS

 

[llee]

QUOTE (JohnS @ Apr 24 2009, 07:17 AM) .... with other types of variable rate mortgages (the one it sounds like you have, I`m guessing) they give you the rate you pay, but they set your payment at more than that rate in case prime goes up. This way, you get a cushion, and you`re not screwed if rates go higher.

QUOTE As as example, on my property I`m paying prime minus 0.3%. This worked out to somewhere in the area of $630 a month. However, I was paying $800, and the extra $170 went to principal.

In my case, I am paying exactly as the ammort math worked out (X goes to principal and Y goes to interest). There`s no extra payment to the principal. That`s why my ammort period has to reset to the original, I believe.

 

[Thomas Beyer]

QUOTE (llee @ Apr 23 2009, 05:25 PM) Hi,

I called RBC today to ask to lower my monthly payment (on variable P minus).

After waiting for more than 45 min, the rep said first I cannot do it, because I haven`t made any additional payment. I said he didn`t make sense, and he looked further.

After 20 min calculation, he finally said he could do it (saving $100 per month, from $550 to $450), but my amortization period is back to 35 years
I think 25 year amortization MUST be your goal as a RE investor !!

Why: in 5 years rates WILL BE higher .. (certainly higher than today`s prime - X %) and with a 25 year amortization you pay down 10% of the mortgage in the first 5 years .. buying you a cushion for higher rates in 5 years !

Do NOT lower your payment for a $100/month savings !

Underwrite EVERY deal with a 6% interest rate at 25 year amortization, and stress test it with an 8% interest rate. If it does not cash flow at that level .. you are too levered or pay too much !

 

[Caninvestor]

QUOTE (JohnS @ Apr 24 2009, 10:17 AM) This is only done on a variable rate mortgage, of course, which is where Caninvestor got it wrong, I believe. But in a variable rate mortgage, the interest rate varies. It goes up and it goes down. This doesn`t affect the amortization or anything - it`s the actual interest rate that changes.

Now, with some variable rate mortgages, your payment from one month to the next will change if prime changes (and hence your rate). However, with other types of variable rate mortgages (the one it sounds like you have, I`m guessing) they give you the rate you pay, but they set your payment at more than that rate in case prime goes up. This way, you get a cushion, and you`re not screwed if rates go higher. All of the extra you pay therefore goes to the principal. With these kinds of variable rate mortgages, when prime goes down, your payment stays the same, but the extra goes to principal. However, if you talk to the bank, they should be able to lower your (inflated) rate a bit, thereby decreasing your payments. You`re not truly extending your amortization, but rather it just won`t be decreasing as quickly.

As as example, on my property I`m paying prime minus 0.3%. This worked out to somewhere in the area of $630 a month. However, I was paying $800, and the extra $170 went to principal. Prime dropped a few times, and I got them to lower my payment to about $730. Prime dropped another time or two, so I got them to lower my payments to about $675. I`m still paying extra towards my principal, as my payment "should" only be about $525 (I`m guessing). Now, if I hadn`t gone in those times to get them to lower my payments, I`d still be paying $800, but the extra $275 would be going to the principal, as opposed to just an extra $150. Because I am still paying an extra $150 a month, my amortization will still be less, but it won`t be as much less at if I was still paying $800. But the cashflow now is more important than the years of interest in the future, which is why I had them do it.

Hopefully that makes it a bit clearer.

Have a good one!

JohnS

your right i forgot about prime going down which lowered my payment and amort...thus i just put the amort back to its orignal location which lowered my payments

 

[JohnS]

QUOTE (llee @ Apr 24 2009, 11:09 AM) In my case, I am paying exactly as the ammort math worked out (X goes to principal and Y goes to interest). There`s no extra payment to the principal. That`s why my ammort period has to reset to the original, I believe.


It might just be me, but something isn`t making sense here. If you`re not overpaying, but are just paying the amount dictated by the interest rate, then when prime (and therefore, your interest rate) drops, your payment should drop as well. Or else, it isn`t a variable rate mortgage.

Or am I missing something here?

Either way, have a good one!

JohnS

 

[PeterKinchMortgageTeam]

QUOTE (llee @ Apr 23 2009, 04:25 PM) Hi,

I called RBC today to ask to lower my monthly payment (on variable P minus).

After waiting for more than 45 min, the rep said first I cannot do it, because I haven`t made any additional payment. I said he didn`t make sense, and he looked further.

After 20 min calculation, he finally said he could do it (saving $100 per month, from $550 to $450), but my amortization period is back to 35 years (vs 28.2 year with $550 payment). He strongly warned me of this bad financial decision because I am paying a lot more interest in 35 years. When the prime rate comes up, my amortization will be beyond 35 years, and my monthly payment will be upward adjusted. He said four times that this is a very bad financial decision. I said "I agree, but please go ahead to lower my payment".

Why does RBC give me such a hard time (and lesson) for lowering monthly payment??

Thanks.


when resetting the payment on a variable rate mortgage - it stays set that that payment unlike with the adjustable rate mortgage which flucuates up and down as your rate changes. I suspect what is trying to warn you about (and am actually surprised to hear that more lenders are not warning.....) is that if you set your payments based on current prime, when prime goes up (and it will) if you do not reset your payments back up, you will be in a situation where the monthly payments you make are not even covering the interest, called a negative amoritzation - meaning you could well wind up owing more than you think. If you`re LTV is high, you may wind up with a mortgage that is signifiantly more than the value of the property.

All financial decisions need to made within the context of a plan. If you do not reset your payments when prime goes back up you may be in for a surprise when it comes time to pay out your mortgage as interest compounding on interest can add up very quickly. As payments are reset in good times to take advantage of better rates and cashflow, it is equally if not more so, important to adjust in situations where rates are going up........

 

[JoefromTO]

I wouldn`t lower my payments if I were you, I`d keep them what they were. Your used to a low payment and have taken advantage of the prime lowering to lower your payment even more, which is great for cashflow today.

Let`s assume that your using that extra cashflow to purchase other properties. Thats very noble and smart, but be careful of where your LTV is on the property in question. How much is it? How much did you put down? That`s a more important question to ask IMO. In other words, don`t take too much of the cashflow away from this property because you might need it.

I agree with Thomas that interest rate will go up in the years to come. If your heavily leveraged like you have 90% of the value mortgaged and your payments are amortized over 35 years to have been able to make the deal work and therefore your payments are very low so as to make it cashflow, when the interest rates climb and you still have a high loan to value and a high principal balance, your cashflow will be shot and you will feel the pain. Especially if the banks decide not to do 35 year mortgages (would that happen?)

So its either pay off some debt NOW because you can take advantage of very low rates and therefore make greater contributions to principal and therefore suffer some cashflow blues today, BUT you will have helped mitigate your future problem which can hurt big time.

However, if your situation is not this drastic and your LTV is much more favorable, then you really don`t have alot to worry about, except that you can expect your cashflow to suffer somewhat, regardless of what you do now.

Someone else posted about 10year mortgages. To be honest, I was seriously thinking about it. If you can get a 10 year mortgage at 5 or 6%, thats pretty amazing IF we suspect that rates might go up higher than that.

My crystal ball just blew up....dangit! Anyone got one that works and has no clowds ?

 

[surfermoe]

QUOTE (thomasbeyer2000 @ Apr 24 2009, 09:26 AM) I think 25 year amortization MUST be your goal as a RE investor !!

Why: in 5 years rates WILL BE higher .. (certainly higher than today`s prime - X %) and with a 25 year amortization you pay down 10% of the mortgage in the first 5 years .. buying you a cushion for higher rates in 5 years !

Do NOT lower your payment for a $100/month savings !

Underwrite EVERY deal with a 6% interest rate at 25 year amortization, and stress test it with an 8% interest rate. If it does not cash flow at that level .. you are too levered or pay too much !


This is the first time I`m hearing an experienced investor say this. Usually they say to go for the longest amortization possible, with the least-frequent payments (i.e monthly, not bi-weekly) in order to maximize cash flow and improve your GDS/TDS ratios - all toward the goal of using more leverage to buy more properties.

With all due respect to Thomas, I`d love to hear the views of other seasoned investors on this.

Moe

 

[ChrisDavies]

QUOTE (surfermoe @ Apr 27 2009, 10:11 AM) This is the first time I`m hearing an experienced investor say this. Usually they say to go for the longest amortization possible, with the least-frequent payments (i.e monthly, not bi-weekly) in order to maximize cash flow and improve your GDS/TDS ratios - all toward the goal of using more leverage to buy more properties.

With all due respect to Thomas, I`d love to hear the views of other seasoned investors on this.

Moe

Moe, there`s a good thread here about the balance between leverage and risk, and I also wrote a piece about our ability to evaluate things like risk is a process of continual learning.

Fundamentally, we all agree that we should carefully use leverage to expand your portfolio. Taking that as a given, there`s been a number of discussions about the risk of seeing higher interest rates and vacancy rates, all based around the idea of making sure we can remain solid during the next 12-24 months of uncertainty.

I`ve already expressed my belief that you should plan for higher rates (like Thomas` 6% 25 year am) by taking the lowest rate you can now on your existing properties and banking the difference.

- Chris

 

[MikeMcCrae]

As always Thomas makes a lot of sense, but I do look at it a bit different. I suggest to all my clients to take the longest amort. possible. This allows you to qualify for more property. However, making additional payments is a good thing because as Thomas says rates will most likely be higher at renewal and paying down some principal is not a bad thing. Having a contractual low payment and paying a higher payment gives you the best of both worlds.

On the variable rate mortgage if the rate goes down and you pay less in interest your payment does go down but you haven`t changed the amount of principal you are paying. There are other things that come into play here though. Like Peter said if your payment does not reset automatically once you lower it it may stay low and put you into a negative amortization position.

Get a broker Llee and sit down with him and let him/her go over this with you.

 

[TerryKruse]

We just re-amortized the mortgage on a property and the payment went down from $2787 per month to $1600 per month... WOW!

I know there are dangers in having this low of a payment, but we will be intelligent with this and use the extra money to pay down a higher interest rate LOC. That way we are still lowering our debt.

A happy day for us!

Cheers, Terry

 

[Bankfighter]

The bank would earn more interest by extending your amortization. Sounds like he was giving his personal opinion without regards for the shareholders of the bank. good for him. better customer service would have been nice though