Joan Manuel

ROYAL LEPAGE Sales Representative
Email: isellhomes@joanmanuel.com
(416) 443-0300

Contact Info

Privacy Statement

Legal Notice

Mortgages

MORTGAGES

For most home owners, a mortgage is a way of life:
It takes a huge piece of our take home pay;
It costs us mega dollars in interest;
It takes forever and ever to pay off;

BUT,

It buys us a roof over our heads;
It gives our family a warm and secure home;
It builds equity in an appreciating asset;

AND,

The alternative is to continue to pay rent,
which does not build equity 
and leaves us with nothing more than 
a large pile of rent receipts.

Before we look at the specifics of a mortgage, we will review the terminology associated with this financial instrument. In reality a mortgage is a financial instrument. It is an investment made by an individual or corporation or lending institution. They will invest in a mortgage, if they believe that it will give them a good solid return on their investment.

Financial professionals, like professionals in every industry, have their own language and their own terminology. We are going to review the terminology used to describe a mortgage so that when the time comes for you to sit across the table from that professional lender, you will know the language.

Mortgage Principal

The mortgage principal is the total amount of the mortgage. It decreases (slowly) over the full life of the mortgage. When you apply and are approved for a $150,000 mortgage, the $150,000 is the principal. As you continue to make your monthly payments, the principal will gradually decrease.

Here is a forecast of what a $150,000 mortgage at 8.5% interest, compounded semi-annually, with a 25 year amortization will look like over time (see chart on following page).

• At the end of Year 5 (60 payments), the principal balance will be...$139,000
• At the end of Year 10 (120 payments), the principal balance will be...$122,000
• At the end of Year 15 (180 payments), the principal balance will be...$ 97,000
• At the end of Year 20 (240 payments), the principal balance will be...$ 59,000
• At the end of Year 25 (300 payments), the principal balance will be...$ 00,000

Note: For ease of use, the figures in the above illustration have been rounded to the nearest $1000. For exact calculations, see your mortgage specialist.(Principal Balance remaining at Year End)

Interest / Interest Rates

The interest you pay is the investor's return on their investment. Interest rates fluctuate based on many other economic factors including the return on investment a lender can receive from other sources. Your interest rate is usually fixed for the term of the mortgage, unless you have negotiated a variable rate mortgage.

When you make your monthly payment, you will be paying both principal and interest. Your first monthly payments will be mostly interest. However, as you continue to make those payments, the equation changes and gradually more of your monthly payment goes toward principal.

The interest rate you negotiate is very important to the overall process of buying a home. A high interest rate will increase your monthly payment and may force you to consider a smaller, less expensive home. A lower interest rate will reduce your monthly payment or allow you to buy more home with the same payments you would have to make with a higher interest rate.

The following is a comparison of the difference that your interest rate will make to your monthly payment. These examples assume a $150,000 mortgage with payments amortized over 25 years, with interest compounded semi-annually.

• At 6% interest rate your monthly payment would be $970
• At 7% interest rate your monthly payment would be $1,070
• At 8% interest rate your monthly payment would be $1,150
• At 10% interest rate your monthly payment would be $1,350
• At 12% interest rate your monthly payment would be $1,550

Note: For simplicity, the figures in the above illustration have been rounded to the nearest $10. For exact calculations, see your mortgage specialist.

             As you can see, the interest rate you negotiate is very important: 
                 the lower the interest rate,
                    the lower your monthly payment,		
                       the higher the mortgage you can qualify for,
                          the bigger or better the home you can acquire.

	

Using the 30% GDSR equation, a combined family income of $50,000 will qualify to carry a mortgage of $164,000 with annual property taxes of $2,400 using a 6% interest rate. An increase of 2% in interest rates to 8% will increase the GDSR to about 40%. This would reduce the pre-qualification mortgage approval to $137,000 to satisfy the 30% GDSR equation.

Payments

Your mortgage payments will be made up of a principal payment and an interest payment. This combination is called a `blended' payment. Every payment reduces the principal owed on the home. Interest is always calculated by multiplying the interest rate by the remaining principal due on the mortgage. Because every payment reduces the principal, the interest allocation gradually decreases and the amount applied to principal increases.

The following chart shows how interest payments decrease and the dollars applied to principal increase over the life of the mortgage ($150,000 mortgage at 8.5% for 25 years, compounded semi-annually).

Note: For simplicity, the payment figures in the above illustration have been rounded to the nearest $10. Mortgage balances are rounded to the nearest $1000. For exact calculations, see your mortgage specialist.

Mortgage Term

The mortgage term can be a confusing expression. London Life mortgages are from 6 months to 10 year terms.

The term of the mortgage is the length of time for which the lender is prepared to loan the money. At the end of the term, the principal still owing must be paid back to the lender or renewed for another term.

For example, the lender may specify that this is a mortgage for 5 years at a fixed rate of interest. At the end of the 5 years, the principal still outstanding must be paid back to the lender unless the lender is willing to renew the mortgage for another term.

Chapter Overview | Previous | Next

NOTE: To obtain a copy of the book for yourself please do not hesitate to contact Joan Manuel.
If you would like to print out a copy of the provided portion of chapter 2 for your own reference please refer to the printable version.

Last Update: March 14, 2000

Copyright ^© 2000, Joan Manuel