Archived — A Roof Over Your Head (4)

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How Much Does a House Cost — Really? (continued)

The Down Payment

You'll be expected to have money available for a down payment when you ask your lender for a mortgage. The CMHC says down payments generally range from 5 to 25 percent of the purchase price.

The larger the down payment, the smaller the mortgage, and the less interest you will pay in the long run. Also, the amount of down payment will determine if you have to buy mortgage insurance. Mortgage insurance protects the lender if you don't make your payments. It doesn't protect you, the buyer. You pay the premium.

Mortgage Talk

When you know how large a mortgage you can afford, you're ready to decide the conditions of the mortgage:

  • the length of the amortization period;
  • the term, or length, of the actual loan;
  • the method of repayment;
  • the frequency of your payments;
  • the type of interest rate: fixed or variable; and
  • the type of mortgage: conventional or high-ratio, open or closed.

Amortization period

Amortizing a mortgage means paying the debt off over a specific period of time. You make regular installments to repay the principal (the amount that you borrowed) and pay for the interest. Mortgages are usually amortized for between 5 and 25 years. The following example shows how much more you will pay by taking a longer amortization period.

Mortgage: $60 000 – Interest Rate: 4.9 percent

Amortization period
(Years)
Monthly Payment Total Cost
(Assumes the interest rate remains the same)
10 $633.46 $76 015.20
15 $471.36 $84 844.80
18 $418.59 $90 415.44
20 $392.60 $94 240.80
25 $347.27 $104 181.00

Term

Term is the length of time for which the loan is issued. The term is usually much shorter than the amortization period, which states the time within which the entire mortgage is to be repaid.

The term is important, because your interest rate may be fixed according to the term. (See Type of interest rate.) Suppose you get a $60 000 mortgage amortized over 20 years at 4.9 percent for a five-year term. The balance of the mortgage is due at the end of five years. Unless you can pay off your mortgage at the end of five years, you must renew and renegotiate your mortgage.

The interest rate when you renew may be higher or lower than the previous rate. If the interest rate is higher, your monthly payment increases. If you want the monthly payment to remain the same, you may want to lengthen the amortization period (but this will cost more money in the long run). If the interest rate is lower when you renew, your monthly payment is lower. You may want to have the same monthly payment and shorten the amortization period, which saves you money over the life of the mortgage.

Deciding on a term depends partly on whether you think the interest rate will go up or down. When the interest rate is low, many consumers lock in the rate for long terms. When the rate is high, or fluctuating greatly, many consumers choose shorter terms. You may want to get advice from several sources.

Method of repayment

There are different ways to repay your mortgage. The most common way is to "blend" the payment of principal and interest. Each month, the amount of your payment that goes to interest decreases slightly, and the amount that goes to principal increases slightly. In the early years of the amortization period, most of your payment pays interest on your loan. Toward the end of the amortization period, most of your payment pays principal.

Frequency of payments

If you negotiate a mortgage with weekly payments, you make a few extra payments per year. However, you pay less interest.

For example, let's say that your monthly payment is $600. In one year, you pay $7200 ($600 x 12).

By making weekly payments, you pay $150 each week ($600 divided by four). In one year, you pay $7800 ($150 x 52). Interest is calculated on the principal of the mortgage, so having a smaller principal means that you pay less interest.