A borrower has a $400,000 mortgage at 5% annual interest, amortized over 25 years. What is the approximate monthly payment?

Q: What is the correct answer to: A borrower has a $400,000 mortgage at 5% annual interest, amortized over 25 years. What is the approximate monthly payment?

The correct answer is $2,326. Option B ($2,326) is correct because it accurately applies the mortgage payment formula: M = P[r(1+r)^n]/[(1+r)^n-1], where P=$400,000, r=0.05/12=0.004167, and n=300 months. This formula accounts for compound interest over the full amortization period. The calculation yields approximately $2,326, representing the blended principal and interest payment that remains constant throughout the mortgage term while the underlying principal/interest ratio changes each month.

Q: What background knowledge is needed for this Mortgage & Real Estate Finance question?

Mortgage payment calculations use the compound interest formula to determine fixed monthly payments over the amortization period. The payment includes both principal and interest components, with early payments being mostly interest and later payments mostly principal. Canadian mortgage regulations require stress testing at higher rates to ensure borrower qualification. Real estate professionals must understand these calculations to properly advise clients on affordability, compare mortgage options, and explain payment structures. The calculation assumes monthly compounding and equal payments throughout the term, which is standard for Canadian residential mortgages.

Q: What is a good way to remember the answer to this Mortgage & Real Estate Finance question?

Remember 'PiN' - Principal, interest rate (monthly), Number of payments. Think of a PIN number you need to unlock mortgage calculations. The formula 'pins down' the exact payment by multiplying Principal by the interest factor divided by the discount factor. When you see mortgage payment questions, immediately identify your PiN: convert annual rate to monthly (divide by 12), convert years to months (multiply by 12), then apply the standard payment formula.

Q: What exam tip applies to this Mortgage & Real Estate Finance question?

Always convert annual interest to monthly (÷12) and years to months (×12) first. Double-check your calculator is in the right mode and verify your decimal placement when entering percentages.

Q: How does this Mortgage & Real Estate Finance concept apply in real world practice?

A real estate agent meets with first-time buyers who found a $400,000 home and secured 5% financing over 25 years. The agent calculates the $2,326 monthly payment to help them understand their budget commitment. This calculation helps the buyers determine if they can afford the property alongside property taxes, insurance, and other housing costs, ensuring they make an informed purchase decision within their financial means.

Question

Mortgage & Real Estate FinancePayment CalculationsMEDIUM

A borrower has a $400,000 mortgage at 5% annual interest, amortized over 25 years. What is the approximate monthly payment?

Answer Options

A

$2,267

B

$2,326

C

$2,418

D

$2,515