One of the first things you will need to figure out when purchasing a home is how much your monthly mortgage payments will be. If you obtain a traditional mortgage, your monthly payments will be calculated based on a combination of principal and interest.
Principal and Interest
In order to understand how your mortgage payments are calculated, it’s important to understand two terms: principal and interest. Principal is the original amount you borrow for your home. So if you purchase a $200,000 home and put $40,000 as a down payment, you will need to borrow $160,000 from the bank. This amount is the principal.
Interest is the fee you pay to borrow the money and is typically set as a percentage of the amount of money borrowed. For homes, the average interest rate is about 5%. The interest rate you get on your loan will depend on a variety of factors, including current market rate and your credit rating. The interest rate plays a large role in the overall amount you will pay each month; the higher your interest rate, the larger your monthly payments.
Property taxes as also figured into your mortgage payment, depending on where you live.
Calculating Monthly Payments
Your monthly mortgage payments are a combination of your interest rate, the principal, and the length of the loan. A portion of your monthly payments goes towards interest and a portion towards principal. In the beginning, the amount of money that goes towards interest is much more than the amount going towards the principal. The amount of interest for each payment is amortized, meaning with each payment, a smaller amount goes towards interest and a larger amount goes towards principal. Your Calgary mortgage broker can provide you with an amortization schedule illustrating the amount of money from each payment that goes towards principal and interest each month.
In our example of a $160,000, 30-year loan at 5% interest, monthly payments would be $1,067 (plus taxes). Over the 30-year period of time, you will pay $384,209.00, with nearly $150,000.00 of that going towards interest.
Many lenders will allow you to save money on the amount of interest you pay by making bi-weekly payments instead of monthly payments. If you pay $533 every other week instead of $1,067 each month, you would end up saving $27,000.00 over the life of your loan. You would also pay your mortgage off five years sooner.
Understanding how your monthly payments are calculated can help you learn how much you can expect to pay for your home each month. Additionally, knowing how your payments are calculated can also help you learn how to pay off your loan faster and save money spent on interest.
