| > | | | | compounded semi-annually. This means that monthly |
| Normal 0 false false false MicrosoftInternetExplorer4 | | | | mortgage payments on identical loans are higher in the |
| st1\:*{behavior:url(#ieooui) } /* Style Definitions */ | | | | United States than they are in Canada because the |
| table.MsoNormalTable {mso-style-name:"Table Normal"; | | | | number of compounding periods per year is higher (as |
| mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; | | | | our example above reveals). |
| mso-style-noshow:yes; mso-style-parent:""; | | | | The Formula |
| mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin:0in; | | | | To calculate the mortgage payment in either country |
| mso-para-margin-bottom:.0001pt; | | | | correctly, you must first calculate the interest rate per |
| mso-pagination:widow-orphan; font-size:10.0pt; | | | | payment. Here's the formula: |
| font-family:"Times New Roman"; | | | | ((1+interest rate/compound period)^(compound period |
| mso-ansi-language:#0400; | | | | periods per year))-1 |
| mso-fareast-language:#0400; | | | | For example, assume an annual interest rate of 7.0%, |
| mso-bidi-language:#0400;} | | | | and twelve periods per year. The calculation for the |
| The major difference between how mortgages are | | | | interest rate per payment for semi-annual |
| calculated in the US and Canada rests solely on the | | | | compounding (as in Canada) is: |
| way compound interest is calculated. | | | | ((1+0.07/2)^(2/12))-1 = 0.575% |
| To understand the difference between US and | | | | The calculation for the interest rate per payment for |
| Canadian mortgages, however, we should start at the | | | | monthly compounding (as in the USA) is: |
| beginning. | | | | ((1+0.07/12)^(12/12))-1 = 0.583% |
| Compound Interest | | | | Are you able to see the difference? With semi-annual |
| The underlying assumption of compound interest is that | | | | compounding, the compound period is 2 (twice |
| interest is earned on interest. Therefore, with | | | | annually) whereas with monthly compounding the |
| compound interest you apply the interest rate to the | | | | compound period is 12 (twelve times annually). |
| original principal as well as to all accumulated interest. | | | | Okay, now let's calculate each country's loan payment |
| This is different from simple interest, where the interest | | | | where:rate = interest rate per month (0.575% or |
| rate is applied only to the original principal amount. | | | | 0.583%)loan amount = $100,000nper = total number of |
| Hence, the higher the compounding rate and the more | | | | payments for the loan (300, or 25x12) |
| frequent the compounding (known as the compound | | | | Formula: -PMT(rate,nper,loan amount) |
| period), the larger the resulting mortgage payment. | | | | Canada: -PMT(.00575,300,100000) = $700.42 |
| For example, assume a loan amount of $100,000 at | | | | USA: -PMT(.00583,300,100000) = $706.78 |
| 7.00% interest rate amortized over 25 years. The | | | | How to Make the Calculation |
| monthly mortgage payment is $706.78 when | | | | There are several ways to compute mortgage |
| compounded monthly and $700.42 when compounded | | | | payment. You can use a mortgage calculator, a |
| semi-annually. As you can see, the payment is higher | | | | spreadsheet program like Excel, or in some cases, real |
| when the compound period is monthly rather than | | | | estate investment software. |
| semi-annually because monthly compounding is clearly | | | | Whatever method you use, though, hopefully by |
| more frequent than semi-annual compounding. | | | | knowing the difference between how mortgages are |
| Okay, let's consider the difference between US and | | | | treated here in the United States versus those in |
| Canadian mortgages. | | | | Canada, as well as how to compute them, you will get |
| Mortgages in the United States are compounded | | | | the results you desire. |
| monthly whereas mortgages in Canada are | | | | |