Mortgages are not easy to figure out. With competitive interest rates from banks and the constant fluctuations in the real estate market, homebuyers are often left with unanswered questions when applying for their mortgage. It’s crucial to understand all the definitions of mortgages because one little misunderstanding will cost you in the long run. One of the handiest tools that can help is a mortgage calculator.
A mortgage calculator can help you start planning financially and get ready to apply for a mortgage. To help you start planning your mortgage, we put together a guide on how to use a mortgage calculator.
Understanding Mortgage Definitions
When dealing with mortgages, there is a set of definitions you should be familiar with. So, think of a mortgage calculator as one of your tools to help you budget your mortgage payments. But first, let’s define what a mortgage is.
A mortgage is a loan that a lender gives to a home buyer to purchase a house or property. Once a lender approves the mortgage, the home buyer is responsible for making monthly mortgage payments.
Here are some useful definitions to help you understand your mortgage terms:
- The principal is the original amount of money the borrower gets for the mortgage. Another way to think of the principal is the mortgage loan amount. An example of a principal amount is the approved amount of $200,00. The principal is $200,000.
- The interest rate is the annual interest rate you have to pay for the mortgage. For example, a principal of $200,000 with a 6% annual interest rate. You will have to pay $12,000 annually based on a 6% annual interest rate.
- Insurance is needed if your down payment is less than 20% of the buying price.
- Taxes are based on the house’s overall value.
- The mortgage term is the amount of time that your agreed interest rate is active.
- The amortization period is the duration it will take to pay back the loan. Typical amortization periods are 20 years and 25 years.
Types of Mortgages
Different types of mortgages cater to the needs of each borrower. To use a mortgage calculator, you must understand the types of mortgages available and the one that is most suited for you.
1. Open mortgages
The biggest advantage of open mortgages is flexibility. An open mortgage is ideal for homeowners who can make large sums of monthly mortgage payments and pay off the entire mortgage without penalty.
While paying off an open mortgage, homeowners are not too concerned by the fluctuations of interest rates and can still pay off the whole amount before the mortgage term is complete.
2. Closed mortgages
For the majority of Canadian homebuyers, closed mortgages are preferred. They are given to homeowners who agree to pay their mortgage payments with a pre-determined interest rate over an established period.
Compared to an open mortgage, closed mortgages have a lower interest rate and sometimes come with prepayment features, such as allowing you to make lump-sum payments.
The main thing you should keep in mind about close mortgages is that you might have to pay penalty fees if you decide not to fulfill your mortgage contract.
3. Fixed-rate mortgages
Your mortgage rate’s interest rate is pre-determined with a fixed mortgage and stays the same throughout your mortgage term. Fixed-rate mortgages are common in Canada and usually last for five years. That means you pay the same interest rate for five years, even if market interest rates change.
4. Variable-rate mortgages (VRM)
With variable-rate mortgages, the interest rate is reviewed during specific intervals throughout the mortgage term and can be changed according to market fluctuations. When the interest rate changes, the lender makes adjustments to the mortgage repayment plan.
5. Home equity lines of credit (HELOC)
A home equity line of credit is an option for those who borrow a percentage of their home’s value. It makes up the difference between the value of your home and the remaining balance of your current mortgage. HELOC’s are not like traditional mortgages. For instance, one term could have a fixed rate, while the next term could have a variable rate.
The First-time Homebuyer Incentive
The Government of Canada is offering the first-time homebuyer incentive as a shared-equity mortgage. In this program, the homebuyer and government share the investment in the house. When a first-time home buyer participates in this program, they aren’t required to pay a sizeable down payment, and they usually pay lower monthly payments towards their mortgage.
How to Use a Mortgage Calculator
Once you become familiar with the mortgage definitions and the various types of mortgages, it’s time to apply that knowledge to a mortgage calculator. Using a mortgage calculator gives you an idea of how much you would need to pay for the duration of your mortgage contract.
To use a mortgage calculator, you will need to know the following mortgage information:
- The principal of the mortgage minus the down payment. For example, principal of $200,000 or $300,000.
- The mortgage term and duration of the agreement. For example, a 5-year mortgage term or 10-year mortgage term.
- The agreed interest rate during the term. For example, 5% or 6% percent.
- The amortization period is the amount of time it will take you to pay off the mortgage—for example, 25 years or 30 years.
When you enter these numbers and press “calculate,” the mortgage calculator will estimate monthly payments and how much interest you will have paid during the amortization period.
The best way to use a mortgage calculator is to adjust the interest rates, principal, and amortization period. You can get an idea of how much you could pay with different interest rates and a shorter or longer amortization period. Even if you don’t have the specific information, mortgage calculators are perfect for getting prepared for buying your first home.
To learn more about using a mortgage calculator properly, call sMp Mortgages at 1-844-MY-PLAN (1-855-915-5139) or contact us here.