The amortization period is the total length of time it will take to pay off the mortgage. Choosing the amortization period that right for you is important. If paying a mortgage puts you on the edge of your financial comfort zone, a longer amortization period will lower your payments.
However, a long-term amortization period means more interest is paid to the lender, which can negatively affect your ability to save for retirement. When looking at your overall long-term financial goals it is important to choose a term with affordable payments but one that will also allow you to pay off 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-year term mortgages are available to homebuyers able to place a 20 percent 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 in interest payments.
- 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 on 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. This will result in your balance dropping more quickly while requiring no lifestyle changes.
Mortgage term lengths vary widely—anywhere from six months to ten years. As a rule of thumb, the shorter the term the lower the interest rate, and vice versa.
While five-year mortgages are what most homebuyers typically choose, you may consider a short-term mortgage if you have a higher tolerance for risk, if you have time to watch rates, and if you not prepared to make a long-term commitment.
Before selecting your mortgage term, it may be helpful 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 is probably your best option.
- Do you reason to believe that interest rates have bottomed out and are not likely to drop more? If so, then a long mortgage term may be the right choice. Alternatively, when rates are high it may be preferable to opt for a short- to medium-length mortgage term in the hopes that rates drop by the time your mortgage expires.
- Are you looking for security as a first-time home buyer? If so, a longer mortgage term may make it easier for you to budget for monthly expenses.
- Are you willing to follow interest rates closely and risk there being increased mortgage payments following a renewal? If so, a short mortgage term may suit you best.
Mortgage Payment Frequency
Adjusting the frequency of your mortgage payments is one of the most overlooked ways to save money out there. Most lenders will allow you to make your payments at intervals that suit your needs and preference and opting for more frequent payments has the potential to save you considerable sums.
Lenders typically offer the following options:
- Monthly payments (12 per year)
- Semi-monthly payments (24 per year)
- Bi-weekly payments (26 per year)
- Weekly payments (52 per year)
- Accelerated bi-weekly payments (26 per year)
- Accelerated weekly payments (52 per year)
The more frequently you make payments on the mortgage, the faster the principal 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 principal balance.
If you have questions on how to optimize your payment schedule, please contact us.