How Mortgage Payments Work
A mortgage is a loan used to purchase real estate, with the property itself serving as collateral. Your monthly mortgage payment consists of principal (the amount that reduces your loan balance), interest (the cost of borrowing), property taxes, and homeowner's insurance, commonly referred to as PITI. In the early years of a mortgage, the majority of each payment goes toward interest; as the loan matures, more goes toward principal. Understanding this amortization structure helps you make informed decisions about your mortgage.
The size of your monthly payment depends on four main factors: the loan amount (home price minus down payment), the interest rate, the loan term, and property taxes and insurance. A larger down payment reduces the loan amount and eliminates private mortgage insurance (PMI) if it reaches 20%. A shorter loan term (15 years vs. 30 years) results in higher monthly payments but significantly less total interest paid.
Lenders typically follow the 28/36 rule: your mortgage payment (PITI) should not exceed 28% of your gross monthly income, and your total debt payments should not exceed 36%. These ratios help ensure you can comfortably afford your mortgage.
Mortgage Payment Formula
| Feature | 30-Year at 6.5% | 15-Year at 5.75% |
|---|---|---|
| Monthly P&I | $1,770 | $2,324 |
| Total Interest | $357,292 | $138,369 |
| Total Cost | $637,292 | $418,369 |
| Interest Saved | Baseline | $218,923 |
| Extra Monthly Cost | Baseline | +$554 |
- 1Monthly rate: 6.5% / 12 = 0.5417%
- 2Number of payments: 30 x 12 = 360
- 3Monthly P&I = $280,000 x [0.005417(1.005417)^360] / [(1.005417)^360 - 1]
- 4Monthly P&I = $1,770
- 5Property tax: $4,200 / 12 = $350
- 6Insurance: $1,800 / 12 = $150
- 7Total PITI: $1,770 + $350 + $150 = $2,270
- 8Total interest over 30 years: $357,292
Strategies to Save on Your Mortgage
Reduce Your Mortgage Costs
Canadian Mortgage Differences
Canadian mortgages differ from US mortgages in several important ways. Canadian mortgages typically have 5-year fixed terms (though 25-year amortization), after which the rate resets or you renew. Canadian mortgage interest is compounded semi-annually (not monthly as in the US), resulting in a slightly lower effective rate. Down payments under 20% require mortgage default insurance (similar to PMI) from CMHC, Genworth, or Canada Guaranty. The minimum down payment is 5% on the first $500,000 and 10% on amounts above $500,000 (for homes up to $1.5M). Canadian mortgage interest is not tax-deductible (unlike the US), making the effective cost higher for Canadian homeowners.
On a 30-year mortgage, you will typically pay more in interest than the original loan amount. A $280,000 loan at 6.5% costs $357,292 in interest, meaning you pay $637,292 total for a $280,000 loan. Understanding this total cost motivates strategies like extra payments and shorter terms that can save you hundreds of thousands of dollars.