Amortization and Term Length
Amortization Period and Term Length – how long do you want to take to pay down your mortgage; and how often do you want to resign a contract?
Choosing the amortization period that right for you is important. The amortization period is the total length of time it will take to pay off the mortgage. If paying a mortgage puts you on the edge of your financial comfort zone, a longer amortization period will lower your payments; however, the long term amortizations mean more interest is paid to the lender – which can negatively affect your ability to save for retirement. When looking at you overall long term financial goals it is important to choose a term with affordable payments, that also also you to pay the mortgage off as quickly as possible.
Due to recent changes in real estate law, extended amortizations are no longer available in most situations. However, 30 and 35 year term mortgages are available to home-buyers that are able to place a 20% loan-to-value down payment on a home.
How to reduce your total interest costs regardless of amortization
- Increase frequency of payments. Making accelerated biweekly payments rather than monthly payments will save you interest.
- Know and use the prepayment privileges on the mortgage. On most mortgages you can prepay a certain amount each year, without penalty. Making Prepayments as often as possible helps lower the principle balance outstanding and saves interest.
- At renewal time, shop around. Make sure you still have the right mortgage for your needs. Be sure to consider the interest rate, term, prepayment privileges, and other options.
- If your income increases, use the raise to pay off your mortgage faster. Your balance will drop more quickly, but it won’t feel like you’re changing your spending habits.
The length of mortgage terms vary widely – from 6 months to 10 years. As a rule of thumb, the shorter the term, the lower the interest rate; the longer the term the higher the interest rate. While 5 year mortgages are what most home-buyers typically choose, you may consider a short-term mortgage if you have a higher tolerance for risk, if you have time to watch rates or are not prepared to make a long-term commitment right now.
Before selecting your mortgage term, it might help to consider the following questions:
- Do you plan to sell your home in the short term without buying another? if so, a short mortgage term may be your best option.
- Do you believe that interest rates have bottomed out and are not likely to drop more? If this is the case, then a long mortgage term may be the right choice. Alternatively, if you think the current rates are high, you may opt for a short to medium length mortgage term hoping that rates drop by the time your mortgage expires.
- Are you looking for security as a first-time home buyer? Then you may prefer a longer mortgage term, so that you can budget for your monthly expenses.
- Are you willing to follow interest rates closely and risk there being increased mortgage payments following a renewal? If this is the case, then a short mortgage term may best suit your needs.
Mortgage Payment Frequency
The frequency with which you make your mortgage payments is one of the most over-looked money saving tools. Most lenders will allow you to make your payments at intervals that suit your needs and preference. Typically, the following options are available:
- Monthly (12 payments per year)
- Semi-monthly (24 payments per year)
- Bi-weekly (26 payments per year)
- Weekly (52 payments per year)
- Accelerated bi-weekly (26 payments per year)
- Accelerated weekly (52 payments per year)
The more frequently you make payments on the mortgage, the faster the principle balance is paid off. However, if you choose an accelerated plan over a regular plan your payments are calculated in such a way the extra payments are made, and those are counted directly on the principle balance. We realize this all sounds a bit confusing, so if you have further questions please contact us using the form to the right.