When you buy a home, you're greeted with a complex mortgage payment that may appear confusing at first. Unlike a rental payment, the monthly mortgage amount is a mixture of several different charges. For first-time home buyers, it's important to understand what you're paying for each month. With mortgages lasting 20 years or longer, understanding them should be a top priority for investors.
Principal and Interest The main parts to any mortgage are principal and interest. The principal is the amount you agreed to pay the sellers during the bidding process. For example, the initial home price or principal might have been $150,000. When you pay your mortgage each month, you slowly pay down the principal's initial amount. The interest amount is the money charged to your loan by the lender based on your good credit. When you begin your mortgage payments, you'll normally pay more interest than principal. As time goes by, the principal will be paid off faster than the interest. Most lending institutions use this amortisation schedule for their clients.
Trust Accounts Explained If you only paid the principal and interest on the mortgage, you'd have a rude awakening when property taxes and insurance are due. Every year, you must pay a certain amount of taxes on your property. These taxes pay for community resources, such as schools and emergency services. Depending on your Canadian region, taxes could be due every quarter or on a semiannual basis. Insurance is required by the lender because the home must be covered in the event of a catastrophic accident or natural disaster. You can easily pay for taxes and insurance by adding a trust account to your mortgage payment. In one lump sum, you'll pay the principal, interest, taxes and insurance. As a result, you won't receive a huge bill for these items. They're simply paid off in small increments across the entire year.
Monthly or Weekly Payments? In most cases, you'll pay for your mortgage on a monthly basis. The interest is calculated monthly, and allows you to make 12 payments each year. This payment schedule usually culminates in a mortgage period that lasts 15 or 30 years. However, you do have the option of paying for your mortgage on a weekly basis. Essentially, your monthly payment is divided by four, and the bank withdraws this lower weekly amount on a day of your choosing. Because there are 52 weeks in a year, you'll make an extra monthly payment with this scheduling type. As a result, you'll pay fewer interest charges and complete the mortgage in less time than a standard monthly payment.
Adding Onto Your Payment Another way to pay off your mortgage faster is adding an amount to the standard monthly payment. Every time you receive your mortgage bill, there's a section for an additional payment. Add any funds you can to the principal. Over time, you'll reduce the mortgage's length and save substantially on interest amounts. However, don't compromise your budget to add this extra amount. Always pay the required mortgage, and only add to it when it's possible. You should still have a comfortable lifestyle with any mortgage amount.
A smart way to start any home buying process is beginning with a trusted lender. This bank can look over your income and compare it to your liabilities. Using complex calculations, the lender forms a mortgage payment that you can afford. It's based on a given property value range, such as $200,000 to $250,000. Use this pre-approved lender amount to guide your property search. When you remain within the pre-approved price range, you'll have no problems affording the monthly payment.
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