Mortgage basics explained
Want to know all about mortgages? BMO Bank of Montreal can help.
What is a mortgage?
A mortgage is a loan to buy a home. Like any loan, interest is charged on the amount you borrow (the principal). Each mortgage payment consists of repayment of the principal, plus interest.
But there are a few characteristics that differentiate a mortgage from other types of loans.
Principal versus interest. In the early years of a mortgage, a greater percentage of each payment covers interest charges and a smaller percentage covers principal repayment. As the amount you owe decreases, more of each payment goes toward paying down the principal.
Building equity. The more principal you pay down, the more equity you build up in your home. Basically, equity is the amount of your home that you own. If your home is worth $300,000 and your mortgage is for $250,000, you have $50,000 in equity.
With a number of options available, we can help you tailor your mortgage to your lifestyle, your current financial situation, and your risk tolerance. Here are the main choices you can discuss with your BMO Mortgage Representative or Mortgage Specialist.
The amortization period is the length of time it will take you to pay off your entire mortgage. The traditional amortization period is 25 years and in cases where you have less than a 20% down payment, that is the maximum amortization period allowed. You may choose a shorter amortization period or, if you have at least a 20% down payment, you can even choose greater (up to 30 years). The longer the amortization, the lower your monthly mortgage payments, but the more you will pay in interest over the life of the mortgage.
The mortgage term is the amount of time your mortgage contract is in effect. At the end of each term, you need to renew your mortgage for another term. This is an opportunity to consider whether you’d like to make any changes to your mortgage. Most mortgage terms are five years, though shorter or longer terms may be offered. The agreed-upon interest rate is in effect for the term. At the end of the term, you can renegotiate the rate and other details of the contract for the next term.
Open or closed
An open mortgage provides the flexibility of being able to repay all or part of your mortgage at any time without a prepayment charge. A closed mortgage limits your prepayment options, but usually offers a lower interest rate than an open mortgage.
Traditionally, mortgage payments are made every month. By paying more frequently, you’ll pay your mortgage down faster and pay less interest over the long term.
You’ll see the biggest savings if you choose accelerated payments. An accelerated bi-weekly payment, for example, means that you pay one-half of your monthly payment at a time, but pay every two weeks rather than two times a month. This means you make 26 payments a year instead of 24 — and those two extra payments make a significant difference:
|Payment frequency||Your payment||Number of payments a year||The total interest you’ll pay||Interest saved|
|Monthly (one payment each month)||$1599.52||12||$229,863.58||--|
|Semi-monthly (you pay half your monthly payment, twice each month)||$798.77||24||$229,168.39||$695.19|
|Bi-weekly (you make a payment every two weeks)||$734.73||26||$229,209.41||$654.17|
|Accelerated bi-weekly (you pay half your monthly payment, every two weeks)||$799.76||26||$185,837.13||$44,026.45|
|Weekly (You make a payment every week)||$367.16||52||$228,934.65||$928.93|
Based on a mortgage of $250,000 at 6% (APR) interest on a fixed term with different payment frequencies for a 25-year amortization.
Fixed rate or variable
With a fixed rate mortgage, you get the security of knowing that the interest rate on your mortgage won’t rise during the term, even if interest rates increase. Because the principal and interest are predictable, you’ll know exactly how much you will owe at the end of the term.
With a variable rate mortgage, the interest rate changes with BMO’s prime rate. Because your monthly payments remain the same throughout the term, the amount applied to the principal versus interest may change with fluctuations in BMO’s prime rate. Your amortization period (number of years to repay the mortgage) may vary and be longer if rates have risen or be shorter if rates have fallen since the start of the term. You can switch at any time and at no cost to a fixed rate mortgage, provided the new term is the same or longer than the remaining length of your current closed variable rate term.
Talk to a BMO mortgage professional
A BMO home financing expert can help you select a mortgage based on your financial situation, comfort level and goals. Just use our Real-Time Online Appointment Booking Tool to speak with a BMO Mortgage Representative in-branch or meet with a BMO Mortgage Specialist when and where it is convenient for you. Or, you can begin the pre-approval process online now.
Complete your application online and we will contact you within two business days to follow-up with you.
In just a few easy steps, choose the date, time and branch to book an appointment that works with your schedule.
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