How a Mortgage Works – The Nuts and Bolts

by Jay Calafiore

mortgages1011Simply put, a mortgage has four basic components:

  • The amount you’re borrowing
  • The amortization period (the total time you have to pay down your mortgage)
  • The term of the mortgage (the amount of time before you have to renew it)
  • The cost of your mortgage (the amount of interest being charged by the lender)

The length of time your mortgage is amortized determines the size of your mortgage payment.

Tip: Making mortgage payments bi-weekly rather than monthly allows you to make more payments per year thereby paying down your mortgage faster.

A common amortization period is 25-30 years as payments are more affordable than a mortgage with a shorter amortization.  The maximum amortization period in  Canada is 35 years.

Mortgage terms typically range from 1-5 years however it’s possible now to get longer terms.

The amount of interest that’s charged by the lender (or the interest rate), is determined by the market and the current state of the economy, in conjunction with your own financial situation and credit record.  Whether or not you plan to make the home your primary residence also affects the interest rate.

Principal vs Interest

When you apply for your mortgage, your mortgage broker will help prepare your amortization schedule.  This is a monthly or bi-weekly payment timetable that will show you how each payment will be allocated towards the different components of your debt.

For each mortgage payment, some funds will be allocated to cover the interest charges and the rest will go towards paying down the principal – the amount you actually borrowed.

With a new mortgage, less of the payment goes towards the principal with most of it paying interest charges.  However, as time passes, this relationship shifts and as less interest gets paid and more goes towards the principal until you pay very ittle interest at all.

Generally speaking the faster you pay off your mortgage the less interest you will have to pay in the long run.  In addition, your mortgage is a great place to allocate (invest) any extra cash you may come into.

Some lenders charge “prepayment penalties” when you try and pay your mortgage off early. Try to avoid these types of mortgages where possible.

Mortgage flexibility is important and something that shouldn’t be overlooked.

Which Types of Mortgages Are Available? (And Which One is Right For You)

FREE Email Course: Zero to Mortgage Pre-Approval

Are you a potential first time homebuyer looking to get the keys to your first place? Well your first step is to get pre-approved for a mortgage.

How? I’ve put together a five-part free email class that spells it out, step-by-step. Sign up below: Each one gets delivered to your email inbox hot & fresh about every 3-4 days. It it you’ll learn:

  • Why you should get pre-approved now
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