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Your Mortgage Basics



Learn these basic mortgage terms and start the process with confidence.

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  • How does a mortgage work?
    Simply put, a mortgage is a loan to buy a home.

    Principal vs. Interest

    In the early years of a mortgage, a greater percentage of each payment goes towards interest charges and a smaller percentage covers the 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, that means you have $50,000 in equity.

  • What is amortization?
    Amortization is how long it will take to pay your mortgage in full. Term refers to the length of a mortgage contract provided by a lender. The total length of a mortgage is usually made up of several terms. For example, a lender may offer a 5-year term though it may take 25 years to pay your mortgage completely.

    Shorter Amortization

    • Less time to pay off your mortgage
    • Less interest paid overall
    • Higher mortgage payments

    Longer Amortization

    • More time to pay off your mortgage
    • More interest paid overall
    • Lower mortgage payments

  • Sample Amortization Table
    Imagine borrowing $200,000 at 7.0% interest on a fixed term with monthly payments.3 This is how amortization could affect you:
    Amortization Period4Your Monthly PaymentTotal Interest You'll Pay
    20 Years$1,538.62$169,438.71
    25 Years$1,400.83$220,488.68
    30 Years5$1,317.21$274,528.13
    These results are based on the above example as well as a number of assumptions. While care is taken in the preparation of this illustration, no warranty can be made as to its accuracy or applicability for any particular case.
    Imagine borrowing $200,000 at 7.0% interest on a fixed term with monthly payments.3 This is how amortization could affect you:
    Amortization Period4
    Your Monthly Payment
    Total Interest You'll Pay
    20 Years
    $1,538.62
    $169,438.71
    25 Years
    $1,400.83
    $220,488.68
    30 Years5
    $1,317.21
    $274,528.13
    These results are based on the above example as well as a number of assumptions. While care is taken in the preparation of this illustration, no warranty can be made as to its accuracy or applicability for any particular case.

  • What does term mean?
    The length of the current mortgage agreement. A mortgage may be amortized over a long period (such as 30 years)5 with a shorter term (six months to five years or more). After the term expires, the balance of the principal owed on the mortgage can be repaid or a new mortgage agreement can be entered into at the current interest rates.

  • What’s the difference between fixed and variable interest rates?

    Fixed Rate mortgage

    Your interest rate and mortgage payments remain the same throughout the term. This means you’ll know exactly how much you’ll still owe at the end of every term.6

    Variable Rate Mortgage

    Your interest rate changes with BMO’s prime rate while your mortgage payments remain the same throughout the term. This means that if interest rates fall, more of your mortgage payment is applied to the principal. If interest rates increase, more of your payment will go towards interest.
    It’s important to note that interest rate fluctuations may also affect your amortization period (number of years required to pay off the mortgage), and if a rate increase results in a longer amortization period, your payments may have to increase.

  • What’s the difference between open or closed mortgages?

    Open Mortgage

    You can repay all or part of your mortgage at any time without a prepayment charge. This means you can pay off your mortgage faster, but your interest rates may be higher than on a closed mortgage.

    Closed mortgage

    You have fixed payments for a significant period of time, but your prepayment options are limited. This means that your interest rate is usually lower than on an open mortgage. If you wish to make a lump sum, you may be limited as to how much you can prepay without a prepayment charge being applied.

  • How do I set a payment schedule?
    Another important decision is setting your mortgage payment frequency. Traditionally, mortgage payments are made every month. But there can be significant benefits to paying more frequently, especially if you choose an accelerated bi-weekly or weekly option.
    With more frequent and accelerated payments, you pay a little more each month, but you’ll benefit by paying down your mortgage faster and saving interest costs over the long term.

  • Just look at the difference those two extra payments can make:
    (Based on borrowing $200,000 at 7.0% interest on a fixed term with different payment frequencies for a 25-year amortization.3)
    Payment frequencyYour paymentNumber of payment in a yearThe total interest you'll payInterest saved
    Monthly
    You make one payment each month
    $1,400.8312$220,262.29-
    Semi-monthly
    Half your monthly payment is taken from your account, twice a month
    $699.4124$219,532.37$729.92
    Bi-weekly
    You make a payment every two weeks
    $643.3326$218,532.34$1729.95
    Weekly
    You make a payment every weeks
    $321.4552$218,263.94$1,998.35
    Accelerated bi-weekly
    You pay half your monthly payment, every two weeks
    $700.4226$171,728.49$48,533.80
    Accelerated weekly
    You pay one quarter of your monthly payment every week
    $350.2152$171,728.49$49,066.40
    These results are based on the above example as well as a number of assumptions. While care is taken in the preparation of this illustration, no warranty can be made as to its accuracy or applicability for any particular case.
    (Based on borrowing $200,000 at 7.0% interest on a fixed term with different payment frequencies for a 25-year amortization.3)
    Payment frequency
    Your payment
    Number of payment in a year
    The total interest you'll pay
    Interest saved
    Monthly
    You make one payment each month
    $1,400.83
    12
    $220,262.29
    -
    Semi-monthly
    Half your monthly payment is taken from your account, twice a month
    $699.41
    24
    $219,532.37
    $729.92
    Bi-weekly
    You make a payment every two weeks
    $643.33
    26
    $218,532.34
    $1729.95
    Weekly
    You make a payment every weeks
    $321.45
    52
    $218,263.94
    $1,998.35
    Accelerated bi-weekly
    You pay half your monthly payment, every two weeks
    $700.42
    26
    $171,728.49
    $48,533.80
    Accelerated weekly
    You pay one quarter of your monthly payment every week
    $350.21
    52
    $171,728.49
    $49,066.40
    These results are based on the above example as well as a number of assumptions. While care is taken in the preparation of this illustration, no warranty can be made as to its accuracy or applicability for any particular case.

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