A borrower has a $400,000 mortgage at 5.5% with a 25-year amortization. What is their approximate monthly payment?

Q: What is the correct answer to: A borrower has a $400,000 mortgage at 5.5% with a 25-year amortization. What is their approximate monthly payment?

The correct answer is $2,484. Option C ($2,484) is correct because it accurately applies the mortgage payment formula. With P=$400,000, monthly interest rate r=5.5%÷12=0.004583, and n=25×12=300 payments, the calculation yields: M = 400,000[0.004583(1.004583)^300]/[(1.004583)^300-1] = approximately $2,484. This represents the monthly principal and interest payment, which is the standard calculation method used by Canadian lenders and required knowledge for real estate professionals under provincial licensing requirements.

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

Mortgage payment calculations are fundamental to Canadian real estate practice. The standard formula calculates monthly principal and interest payments based on loan amount, interest rate, and amortization period. Canadian mortgages typically use semi-annual compounding but are quoted as annual rates. Real estate professionals must understand these calculations to properly advise clients on affordability. Under TRESA, RESA, and provincial regulations, professionals have disclosure obligations regarding financial implications of transactions. FINTRAC requirements also mandate proper documentation of financing arrangements. The 25-year amortization was the previous Canadian standard before extending to 30 years for insured mortgages, though 25-year terms remain common for conventional mortgages exceeding 80% loan-to-value ratios.

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

Remember 'PMT' - Principal, Monthly rate, Time periods. Think of a 'Powerful Money Tree' that grows your payment calculation. The tree needs three nutrients: the Principal (trunk), Monthly interest rate (branches), and Time periods (leaves). Just like a tree needs all parts to grow, your payment calculation needs all three components in the correct formula to flourish. When you see mortgage payment questions, visualize the Money Tree and immediately identify the three components: Principal amount, convert annual rate to monthly (divide by 12), and calculate total payments (years × 12). This ensures you don't miss any steps in the complex formula.

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

Always convert annual interest rate to monthly by dividing by 12, and multiply years by 12 for total payments. Double-check your calculator is in the right mode and that you're using the correct amortization formula, not simple interest calculations.

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

A first-time homebuyer couple approaches you about a $400,000 condo. They've been pre-approved at 5.5% with 25-year amortization. You calculate their monthly payment at $2,484 to help them budget for other homeownership costs like property taxes, insurance, and maintenance fees. This accurate calculation helps them understand their true affordability and avoid overextending financially. You also explain how a longer amortization would reduce monthly payments but increase total interest paid, helping them make an informed decision about their mortgage structure.

Question

Mortgage & Real Estate FinancePayment CalculationsONHARD

A borrower has a $400,000 mortgage at 5.5% with a 25-year amortization. What is their approximate monthly payment?

Answer Options

A

$2,384

B

$2,434

C

$2,484

D

$2,534