While most people understand what the “Term” of a Mortgage is, the phrase “Mortgage Amortization” is much less understood. Often your amortization period has as big an impact as your mortgage rate does on your monthly mortgage payment.
The Amortization Period for a mortgage is simply the total time it will take to pay off your mortgage. The majority of Mortgage Amortization Periods are 25 years, however with the increased purchase prices of homes, 30 year and 35 year amortization periods are becoming more common.
It’s important not to confuse the Mortgage Term with Amortization Period. The Mortgage Term is the length of time you have arranged a mortgage with your lender—these can vary from 6-months to 10 years. So you can have various Mortgage Terms within an Amortization Period.
A longer Amortization Period will lower your monthly mortgage payments, which under some circumstances can mean the difference between owing your own home and not. When you do stretch out your Amortization Period you are taking longer to pay off your mortgage and therefore you will be paying more interest to your Mortgage Lender.
Please see some examples in the chart below…
|Amortization Period||Monthly Payment||Total Interest Payments||Total Payments|
|Calculations based on a $250,000 mortgage at a rate of 5%. For illustration purposes only|
Here are some tips on reducing your total interest costs on your mortgage.
- Increase the frequency of payments—change from monthly payments to bi-weekly or weekly just ensure that you pick the “Accelerated” option—either weekly or bi-weekly.
- Know your mortgage pre-payment privileges—quite often you can increase your monthly payment and/or make lump sum payments throughout the term of the mortgage. Some lenders will allow you to make lump sum payments anytime throughout the year, some just on the anniversary date, know the particular details on how your lender accepts pre-payments.