You’re at an exciting life stage: you’re looking to buy your first home. Along with the thrill of anticipation, you might be curious to learn how mortgages work. Buying a house is one of the most important investments you’ll likely make, and your mortgage is also a key piece of your overall long-term financial plan.
Let’s take a look at the basics of a mortgage.
What are the most important considerations when getting a mortgage?
- The right lender – A lender should take the time to understand your current and future needs. You want someone who’s there for you and who offers solutions for your complete financial picture, not just a part of it.
- The right mortgage – The flexibility of your mortgage is just as important as the interest rate. Look for features that give you control, such as conversions, pre-payments, the ability to switch lenders and the option to borrow more.
- A competitive rate – It’s important to make sure you’re getting a fair interest cost, but that doesn’t mean it’s the most critical piece. Features and flexibility are less obvious features that are often far more valuable.
- Know what you’re signing – Does your great rate come with hidden fees or expensive penalties? Read the fine print so there aren’t any surprises later.
How much will I have to pay?
There are 2 parts to your monthly mortgage payment: the principal and the interest.
The principle portion is the amount you borrowed. The interest amount is what the lender is charging you to borrow money. The interest is spread over the entire length of the mortgage, so you pay a bit each month.
Factors that determine your mortgage costs and payments
|
Factor |
What is it? |
How does it impact the costs? |
What do you need to consider? |
|---|---|---|---|
|
Amount borrowed |
The funds you borrow from a lender to pay for the cost of your home. |
The more you borrow, the more you need to pay back, and the more interest you are charged. |
Simply, borrow less. Purchasing a home below your maximum credit limit can help keep the costs within reason. |
|
Amortization |
The total length of time your mortgage repayment is scheduled for. Most mortgages are spread over 25 years. Other popular choices include 10, 15 or 20 years. |
The longer your chosen amortization period, the more you’ll end up paying for your mortgage in total, as you’ll be borrowing the money for longer. However, the longer your amortization, the lower your payment amount. |
If your goal is to pay off your mortgage as fast as possible, choose the shortest amortization your budget allows. |
|
Interest costs |
Interest costs are based on the rate the lender charges you to borrow money for buying the home. |
The lower the rate, the lower the interest costs, which results in a lower mortgage payment. |
Rates are usually offered in two forms and can be locked in for different periods of time (mortgage term). You can learn more about fixed-rate and variable-rate mortgages in our Mortgages section. |
|
Payment frequency |
The regular time intervals at which you make payments towards your mortgage. |
The more often you pay, the smaller each installment will be. It can also help reduce the length of time you’re spending paying back your loan, reducing the total interest. |
Most mortgage lenders will offer monthly, semi-monthly, weekly, or bi-weekly payment options. |
|
Pre-payments |
The amount a lender allows you to pay directly towards the principal, outside of the regularly scheduled payments. |
The more principal you can pay off directly, the less interest you’ll pay over the length of your mortgage. |
All lenders are different, but most allow pre-payments in the form of lump sums or increases to your regular payments, up to a limit every year. |