Need Math Help (Mortgage Related)

[QM]

I've been working at these numbers for an hour. I think I have the answer, but I've been working at it for so long that my mind is spinning and I need help!

K. Here's the thing I'm trying to figure out. I'm trying to figure out which route is better.

Currently our mortgage is at $107,963.
If we choose the 11 year ammortization...
@ 3.19% fixed for 4 years, our mortgage will be at $68,772 by the end of the 4 years.
@ 3.50% fixed for 5 year, our mortgage will be at $58,481 by the end of the 5 years.
Difference between the two figures is $10,291.

In 4 years, if the mortgage rate was 6.5% and we got that rate, after 1 year we will pay $10,932 in that 1 year on our mortgage.
In 5 years, if the mortgage rate is 6.5% and we got that rate, after 1 year we will pay $9,296 in that 1 year on our mortgage.
$10,932-$9,296=$1,636.

Therefore, the best "deal" is to go with a 3.5% fixed 5 year. Am I correct?!...Or is the other way around?

[Greebo]

Compare 4 years to 4 years, not 4 years to 5 years.

[QM]

Greebo - Is this the calculation that you're referring to?

4 year...$68,772 - $10,932 = $57,840
If we have 3.5% interest rate for 5 years we'll be at $58,481 at the end of 5 years.
$57,840 - $58,481 = ($641)

Did I just figure out that if the interest rate increases after 4 years to 6.5%, then it's still better that we went with the 4 year fixed? Not really sure. I'm having a blonde moment here!...even though I'm not blonde!

[Greebo]

Greebo - Is this the calculation that you're referring to?

4 year...$68,772 - $10,932 = $57,840
If we have 3.5% interest rate for 5 years we'll be at $58,481 at the end of 5 years.
$57,840 - $58,481 = ($641)

Not quite- because you need to know in the 5 year plan, at the end of 4 years where you would be to compare to the 4 year plan at that point in time.

I want you to figure out in the 5 year mortgage, what will your balance be at the end of 4 years?

Did I just figure out that if the interest rate increases after 4 years to 6.5%, then it's still better that we went with the 4 year fixed? Not really sure. I'm having a blonde moment here!...even though I'm not blonde!

What you did was take 4 years out and add 1year to it, and compare it to taking 5 years out and adding 1 year to it.

That's not an apples to apples comparison.

Start by looking at where your mortgage will be and how much interest you'll have paid in 4 years on both - you did that on the 4, do it on the 5 but do the math for 4 years into it, not the end of it. That gives you your first apples-apples comparison point.

[QM]

Start by looking at where your mortgage will be and how much interest you'll have paid in 4 years on both - you did that on the 4, do it on the 5 but do the math for 4 years into it, not the end of it. That gives you your first apples-apples comparison point.

Gah! I can't do it!...I don't know what I'm doing! This is going to take another hour or more to figure out!

[QM]

Taking a deep breath and answering one question at a time...

Not quite- because you need to know in the 5 year plan, at the end of 4 years where you would be to compare to the 4 year plan at that point in time.

I want you to figure out in the 5 year mortgage, what will your balance be at the end of 4 years?

In the 5 year plan with the interest at 3.5%, at the end of 4 years we'll be at $69,074.

[QM]

Start by looking at where your mortgage will be and how much interest you'll have paid in 4 years on both - you did that on the 4, do it on the 5 but do the math for 4 years into it, not the end of it. That gives you your first apples-apples comparison point.

After 4 years (with the 4 year fixed at 3.19%), we'll be at $68,772.
After 4 years (with the 5 year fixed at 3.50%), we'll be at $69,074.
The difference is $302.

Now what, Greebo? Do I have my answer yet?

[QM]

After 4 years (with the 4 year fixed at 3.19%), we'll be at $68,772.
After 4 years (with the 5 year fixed at 3.50%), we'll be at $69,074.
The difference is $302.

Now what, Greebo? Do I have my answer yet?

*After 4 years (with the 4 year fixed at 3.19%), we'll be at $68,772. In that 1 year (at 6.5%), we would have paid $10,932 on our mortgage. $68,772 + $10,932 = $79,704(Totalling 5 years)
*After 5 years (with the 5 year fixed at 3.50%), we'll be at $58,481.

Therefore, it's best to go with the 5 year at 3.50%. Did I get that right?

[QM]

*After 4 years (with the 4 year fixed at 3.19%), we'll be at $68,772. In that 1 year (at 6.5%), we would have paid $10,932 on our mortgage. $68,772 + $10,932 = $79,704(Totalling 5 years)

Was I supposed to subtract instead of add? If so, $68,772 - $10,932 = $57,840

4 years at 3.19% and 1 year at 6.5% = $57,840
5 years with 5 years at 3.50% = $58,481
Difference is $641.
Then the 4 year fixed at 3.19% and the 1 year at 6.5% would be the better route.

Which way do I do it?...Add or subtract?

[QM]

Was I supposed to subtract instead of add? If so, $68,772 - $10,932 = $57,840

4 years at 3.19% and 1 year at 6.5% = $57,840
5 years with 5 years at 3.50% = $58,481
Difference is $641.
Then the 4 year fixed at 3.19% and the 1 year at 6.5% would be the better route.

Which way do I do it?...Add or subtract?

I just realized something horrible! I did a wrong calculation somewhere.

I forgot to start the ammortization to calculate after the 4 years at 7 years ammortization. I typed in 6 years ammortization...which it wouldn't be at if I went with 4 years at an 11 year amortization. Which changes the totals. If the mortgage amount after 4 years of 3.19% is $68,772 and I start the ammortization at 7 years (instead of 6 years) at 6.5%, then after 1 year I would have put $9,124 on our mortgage in that one year.

If I'm supposed to subtract to calculate the 5 years, then $68,772 - $9,124 = $59,648.

4 years at 3.19% (ammortization starting at 11 years) and 1 year at 6.5% (ammortization starting at 7 years) = $59,648
5 years with 5 years at 3.50% = $58,481
Difference is $1,167.
Then the 5 year fixed at 3.5% would be the better route.

Waiting for Greebo before I play more with the numbers. So glad that I didn't become an accountant!

[Greebo]

I'm confused now too and we're on the way out the door to run errands - busy day...

Gimme your starting balance again and you said 11 year amortization, right? I'll try to work up some comparisons for you by tomorrow pm.

[QM]

I'm confused now too and we're on the way out the door to run errands - busy day...

Gimme your starting balance again and you said 11 year amortization, right? I'll try to work up some comparisons for you by tomorrow pm.

Thanks so, so, so much, Greebo!

My starting balance is $107,963. I want to start with an 11-year ammortization.

Just repeating that we have a choice of...
- a 4 year fixed at 3.19% OR
- a 5 year fixed at 3.50%

That's so nice of you!

[monkeywrangler71]

In 4 years, if the mortgage rate was 6.5% and we got that rate, after 1 year we will pay $10,932 in that 1 year on our mortgage.
In 5 years, if the mortgage rate is 6.5% and we got that rate, after 1 year we will pay $9,296 in that 1 year on our mortgage.
$10,932-$9,296=$1,636.

The first problem with this part is that you are comparing year 5 in the first scenario with year 6 in the second.

The second, and biggest, problem is that you have pulled the 6.5% interest rate out of thin air. Since you have no way of knowing what the interest rate will be in 4 years, all the calculations based on this figure are meaningless.

[monkeywrangler71]

After 4 years (with the 4 year fixed at 3.19%), we'll be at $68,772.
After 4 years (with the 5 year fixed at 3.50%), we'll be at $69,074.
The difference is $302.

Now what, Greebo? Do I have my answer yet?

This is your answer. You will save $302 in the next 4 years with the 4 year term. Year 5 comparison can not be completed without a crystal ball.

Decide for yourself if you'd rather save the $302 or trade that savings for an extra year of knowing what your rate will be. It's not a math question, it's a risk aversion question.

[QM]

The second, and biggest, problem is that you have pulled the 6.5% interest rate out of thin air. Since you have no way of knowing what the interest rate will be in 4 years, all the calculations based on this figure are meaningless.

I pulled the 6.5% interest rate out of thin air because the guy from Ontario Mortgage Action Plan that I spoke with yesterday said the interest rate could be that in 4 years. So I took that # and put it in an "if scenerio". If the interest rate is 6.5% in 4 years then which way is better?...

Today my banking rep told me that the interest rate is predicted to be between 4.75% and 5.75% in 4 years. So (not showing it on this thread) I started using the same calculations with 5.15%. I could be wrong, but I think that the 5 year fixed is still the better route to go. Not really sure. It depends if I'm doing my calcs right.