Mortgages for beginners

A mortgage is just a giant loan to buy a house. Here's the simple explanation.

A mortgage is a loan the bank gives you to buy a house. You pay back that money over 20, 30, or 40 years. That's it.

How much money the bank lends

Usually 80% of the house's value. You put down 20% (your down payment). If the house costs 200,000, the bank lends 160,000 and you put down 40,000.

How much you pay each month

You divide what you owe by the number of months. But you also pay interest because the bank needs to earn money. So your monthly payment is money you're returning + interest.

The interest rate is your enemy if it's variable

If your mortgage is variable, the interest goes up and down with the market rate. When rates go up, your payment goes up. When they go down, it goes down. It's unpredictable.

Fixed-rate mortgage: predictable but expensive

You pay the same amount every month. It's nice knowing exactly what you'll pay. But it's usually more expensive than variable.

What they don't tell you

For the first years, most of what you pay is interest, not principal. You're basically paying the bank, not buying the house. Then it reverses.

It's not a bad idea

Yes, you pay tons of interest. But after 30 years, the house is yours. If you'd rented those 30 years, you'd have nothing.

Be careful not to borrow too much

Don't borrow more than you can afford. The rule is your mortgage shouldn't be more than 30-40% of your salary.