Mortgages

At it’s most basic level, lenders such as banks, pay interest on money they borrow at the Prime Rate, and then lend that borrowed money to potential home owers at a higher interest rate. The difference between what the lender collects in interest payments from the borrower, and the amount the lender had to pay for having borrowed the money in the first place, is the lender’s profit.

The various mortgage terms are essentially elements which lenders and borrowers use as negotiating points, each of which may be adjusted to be able to come to a mutually desireable mortgage loan. By adjusting the Term, Interest Rate, Payment Amounts, Payment Frequency, Rate Type (Fixed or Variable or Combo) and other elements, the total value of the mortgage loan may go up or down, and the key is to find a balance between what the borrower can afford and wants to pay, and the value of the investment to the lender.

Term

The duration of the mortgage, eg. 10, 15, 20, 25, 30 and 50 year mortgages.

Interest

The cost of borrowing the money for the mortgage, paid to the lender at a fixed rate for a specific duration of time, at which point the rate may change and the interest paideither goes up or down, based on the rate change.

Payment Amount / Frequency

The amount paid at given intervals with the option of paying more in an effort to decrease the Term. Most payments are made on a monthly basis, however options exist for payments to be made more frequently (eg, biweekly / twice a month).

Overpaying and frequent payment intervals are each designed to reduce the Term and thus the the total interest paid.

Prepayment

Unless otherwise negotiated, lenders do not accept paying the mortgage in full before the end of the mortgage Term without paying a penalty. When a lender provides funds for a mortgage, they are in essence, investing in you and your property, and in return for providing the investment capital, they take interest.

If the anticipated Term isnt reached, then they arent realizing the return on their investment, and this is why the penalties exist.

Loan Type: Fixed

Fixed Rate mortgages simply means that the interest rate remains the same throughout the duration of the Term and calculated so that the final payment closes the mortgage loan. In this situation, the Lender takes on a large part of the interest rate risk. Should the cost of borrowing money go up, then it reduces the revenue the lender generates from the interest paid by the borrower. A Fixed Rate mortgage is calculated as follows;

You may calculate by creating an Excel / Open Office formula using and entering your own values for RATE, TERM and AMOUNT:
=SUM(((RATE/100/12)/(1-(1+RATE/100/12)^(-TERM/12)))*AMOUNT)

So if the RATE is 5% for a 20 year TERM on a mortgage AMOUNT of $250,000, then the formula would look like;
=SUM(((5/100/12)/(1-(1+5/100/12)^(-20/12)))*250000) = $1,649.89

Use our Mortgage Calculator to calculate sample payments and for a breakdown and explanation of both how its calculated and the payment schedule.

Loan Type: Variable

When the Loan is Variable, then the Term is divided into periods of time in which the rate may be different from period to period and even change within a period of time. This takes some of the risk away from the lender.

Should the cost of borrowing money go up, then the variable rate may go up too, increasing the interest paid each month by the borrower.