Why is it important: Amortization periods are such an important aspect to understand when looking at particular mortgage packages with lenders. It is important to understand the personalities of a mortgage, in which amortizations are one aspect. 25 year amortizations typically will have the sharpest rate. Longer term amortizations bring lower monthly payments, whereas shorter term amortizations will pay down the principle quicker with less payment going towards the interest of the mortgage. Longer term amortization does not mean you can’t pay the mortgage off sooner, as long as the lender allows for prepayment privileges. These extra payments will go directly towards the principle of the mortgage and not on the interest and as a result will shorten the the time of your amortization.
Last Week we discussed Port and Extend and how it is an important aspect to consider when signing a contract with a lender. As we have discussed in the past on many blogs, the personalities of your mortgage are just as important to considhttps://geoffleemortgage.com/porting-and-extending/er as the rate. A lender can persuade you with the rate, so you want to be careful and understand everything that you are signing up for.
Today, we are going to talk about term length and how that can affect your years to come.
Amortization periods mean the length of the mortgage if you were to pay it off with present terms of current contract. For instance, if you have contracted to a 5 year fixed rate term at a 5% interest rate with an amortization period of 25 years, it will calculate the monthly payment as if you were going to be paying that rate all the way to 25 years. For this reason, monthly payments can change over time depending on your rate.
Amortizations can vary widely by lender. Depending on your down payment and financial history, lenders may give you different options or present just one option to consider, meaning you may not have a lot of choice in the amortization you get with a singular lender, which is why it is always best to understand what is available between all lenders.
There are pros and cons to anything, and the same can be said about amortization periods. We will discuss this below.
Longer Amortization Periods
Longer amortization periods are mortgage term lengths that are 20+ years in length. This means that for example if you paid 20% down on a $500,000 condo ($100,000), then you will be paying the mortgage of $400,000 in 20 years at the interest rate provided by the lender. All calculated together, the lender for that specific rate term (variable and fixed rates vary), will present you with a monthly amount, called your mortgage payment.
It is important to understand that you can only have an amortization period at or above 25 years if you have a down payment of 20% or more (bound by legislation). 20% down and more on a property gives you increased flexibility.
The pros with a longer amortization period is that you will have lower monthly payments. This will allow for flexibility for different situations that could happen in your life such as job loss, grief, emergencies, etc. A lower monthly mortgage amount may allow you to be more able to take prolonged periods of time without a regular paycheck.
The cons with a longer amortization period are namely interest payments. The longer the amortization, the more you will be paying in interest, as it is calculated on a per year basis depending on the mortgage amount left.
Shorter Amortization Periods
Shorter amortization periods are mortgage term lengths that are under 25 years in length. The advantages in a shorter amortization period is less overall interest being paid, which in turn creates equity faster and allows for more breathing room and opportunity to invest in other routes. The quicker you pay off your mortgage, also gives you more flexibility and adaptability if something major changes in your life.
The cons of a shorter amortization period can be the stress of paying your mortgage off every month. You likely are an ambitious person, but even ambition can be taken down by unfortunate events, which is why it is always important to be prepared for emergencies.
For this reason, many may opt for a longer term amortization period that includes great prepayment options. This makes it a win win for some individuals because they can pay the property off faster, but still have those lower monthly mortgage payments in case of some life crisis.
Amortization periods are crucial to understand when going into a mortgage contract with a lender, just as all personalities of the mortgage are important.
Both short and long term amortizations can bring different benefits that could fit your situation best. For these reasons, we recommend reaching out to us so we can give you preferences based on your lifestyle and discuss other important personalities of a mortgage that could impact what type of amortization period you are looking for.
Give us a call today, we will be more than happy to help answer all your questions and get you on your path to real estate success!