How to adjust your Mortgage Payments and Total Mortgage Payout

The top 2 variables affecting your mortgage:

1) The Amortization Period
2) Interest Rates

Amortization Period: Full time period until the mortgage debt matures (commonly 25 years, and now up to 40 years)

Increasing the amortization period lowers the monthly payment amount while increasing the total payout for the mortgage as less of your monthly payment is attributed to the principle debt and instead is applied to the interest. Decreasing the amortization period would have the opposite effect: higher monthly payments, decreasing the total payout on the mortgage as more of the payment is applied to the principal debt and less to interest payments.

Interest Rates: Whether a variable rate or a fixed rate.

Generally, the interest rate tied to the term increases with the length of the term—a normal yield curve (risk tends to increase with time); however, at this point in time the yield curve is very flat and inverts slightly at the 4 year horizon. This is significant because normally as the term increases, so does the monthly mortgage payment and total mortgage payout; as a result of the inverted curve, locking in a 5 year term will afford a mortgagor a lower rate than locking in at with a 2, 3, or 4 year term producing lower monthly payments and a lower payout.

The difference between the Term of the mortgage and the duration or amortization period of the mortgage:

Term: this refers to the time period negotiated by the mortgagor and mortgagee and the underlying contract negotiated. Usually this will be 5 years or less and will include details such as interest rates--fixed or variable, and at what rate; also included are any options such as early repayment without penalties.

Amortization period or duration: this refers to the entire length of the mortgage. Commonly this is 25 years; however, due to the fact that wages have not risen as quickly as housing costs in much of Canada or the past 20 years you can now amortize a mortgage debt over up to 40 years. This will normally require additional mortgage insurance however.

Other things that need to be considered when negotiating a mortgage: closed term vs open term, legal fees, property surveys, moving costs, and unforeseen costs.

Closed term means you can not pay the mortgage back without penalty over the term while open term means you are able to pay the mortgage back early--normally you will pay a higher rate for this option.

So how do I lower my payments?

1) Get a lower rate: consider a variable mortgage--interest rates tend to be lower. Also, consider a closed term--interest rates also tend to be lower this way.

2) Change the amortization period: how is this done?

Consider changing your payment frequency. It is surprising how much faster a mortgage is payed off when your payments are made weekly as opposed to monthly or semi-monthly. You can keep the same total payment for the month but divide it up into 4 weekly payments.

To make your payments lower you could also increase the amortization period; however, this will mean a larger total payout in the end.

Here are some useful links for estimating what size of mortgage you can afford and how changing a few options will effect your payments:

Canada Mortgage -Great Calculators for estimating what you can afford
Genworth

Don't forget that buying a home is usually the biggest investment a person makes in their life so make sure you get the most from your mortgage. Owning Real Estate tends to be a good hedge against inflation; however, investing in the stock market on average will yield a much greater return so do diversify.

When to Buy and Sell Stocks

When to Buy and Sell Stocks:

Slow Growers (Cash Cows): utilities, railroads, banks, financial companies

AT&T (T), Verizon (VZ), Duke Energy (DUK), ExxonMobil (XOM), Union Pacific Railroad (UNP), Bank of America (BAC), Bank of Montreal (BMO), JPMorgan Chase (JPM), Bear Stearns (BSC), Goldman Sachs (GS), etc.

How to Buy: check for cushion in earnings to eliminate risk that a fall in earnings could erase dividend. Buy when yield is attractive relative to stock’s’ history.

When to Sell: Fundamentals start to deteriorate (losing market share, adding too much debt, acquisition of unrelated business, no research and development or share price has appreciated 30 to 50 percent and yield becomes unattractive)

Medium Growers (Stars): Large established companies that continue to grow at a moderate pace.

Often huge companies: Coca-Cola (KO), Procter and Gamble (PG), Colgate-Palmolive (CL), Kraft Foods (KFT)

Grow in 10 to 12 percent range with high degree of certainty.
Can be bought when undervalued for 30 to 50 percent gain.
Offer good protection from recessionary times, (Sub Prime Mortgage Meltdown)

How to Buy: Value, with historically low P/E

When to sell: P/E rises above historical average, or if growth starts to slow down, or new products fail

Fast Growers (?): smaller aggressive companies with growth estimates above 20% a year (Most will have very high P/E’s). A lot of tech companies can be found here.

iROBOT (IRBT), 1-800 Flowers (FLWS), Baidu (BIDU), Google (GOOG), etc.

How to Buy: Make sure plenty of room for expansion, Note whether expansion is speeding up or slowing down. Be careful if the P/E on the stock is greater than the growth rate of the business.

When to Sell: Watch for end of rapid growth phase. Sell if P/E ratio is well above the current growth rate or if company has expanded as much as it reasonable can (Watch out Starbucks (SBUX)). Also, look upon unanimous Wall Street buy recommendations and heavy institutional ownership as sell signals.

Cyclicals (Boom and Bust): autos, airlines, tire companies, steel, chemicals, defense, manufacturing.

Ford (F), Honda (HMC), Toyota (TM), Boeing (BA), Delta Airlines (DAL), Michelin Group (ML), Alcan (AL), Dow Chemical (DOW), Allied Defense Group (ADG).

Sales and Profits rise and fall in response to an expanding or contracting economy. Timing is everything and stock swings are huge.

How to Buy: Watch sales and inventory trends and cost cutting plans. Buy after extended period of misery when business conditions start to look better.

When to Sell: economic slow down begins potting up in the media, inventories begin to rise, hiring ceases, the Fed indicates possible rate cuts may be necessary. Some Cylicals are front runners while others are laggards so look for where a specific industry falls in its cycle.

Turnarounds (Nightmare to Love Affair): Normally established companies with turbulent times. If they can turn things around huge stock movements can occur (Be the Vulture).

Magna International (MGA), General Motors (GM), Merck (MRK), Pfizer (PFE)

How to Buy: Ask touch questions. Can company survive raid by creditors? How much cash and debt? What’s left for shareholders? Is the company simultaneously cost cutting and growing sales?

When to Sell: After it’s turned around and all troubles are over. Also if inventories start to rise faster than sales, or debt increases, or if P/E ration gets too high in light of earnings growth. At least take some of your profits once the company is back on track.

Asset Plays (Finders Fee): Railroads usually land rich, may have mineral and timber rights that the market is unaware of.

Canadian National Railway (CNR.TO), Union Pacific Railroad (UNP)

How to Buy: Ask probing questions: What’s the value of the assets? How much debt is there and is debt increasing? Is there a catalyst (corporate raider) in the wings to help unlock the value?

When to Sell: After the market appreciates the value of the assets. Once it’s in the news you know it is time to, at minimum, take some profits.

Major Stock Categories

The Major Stock Categories:

Slow Growers (Cash Cows): utilities, railroads, banks, financial companies

AT&T (T), Verizon (VZ), Duke Energy (DUK), ExxonMobil (XOM), Union Pacific Railroad (UNP), Bank of America (BAC), Bank of Montreal (BMO), JPMorgan Chase (JPM), Bear Stearns (BSC), Goldman Sachs (GS)

Medium Growers (Stars): Large established companies that continue to grow at a moderate pace.

Coca-Cola (KO), Procter and Gamble (PG), Colgate-Palmolive (CL)

Fast Growers (?): smaller aggressive companies with growth estimates above 20% a year (Most will have very high P/E’s). A lot of tech companies can be found here.

iROBOT (IRBT), 1-800 Flowers (FLWS), Baidu (BIDU), Google (GOOG),

Cyclicals (Boom and Bust): autos, airlines, tire companies, steel, chemicals, defense.

Ford (F), Honda (HMC), Toyota (TM), Delta Airlines (DAL), Michelin Group (ML), Alcan (AL), Dow Chemical (DOW), Allied Defense Group (ADG).

Turnabouts (Nightmare to Love Affair): Normally established companies with turbulent times. If they can turn things around huge stock movements can occur.

Magna International (MGA), General Motors (GM)

Asset Plays (Finders Fee): Railroads usually land rich, may have mineral and timber rights that the market is unaware of.

Canadian National Railway (CNR.TO), Union Pacific Railroad (UNP)

What is the Bottom Line?

It does not matter which Major Stock Category an investment falls under. A successful investor will always need to answer to the best of his or her ability the 5 most important stock investment questions:

1. Why this company?
2. Why now?
3. What return is expected?
4. Over what period of time?
5. What could turn this into a mistake?