Monday, 8 June 2015

Mortgage Term vs. Mortgage Amortization



This is a concept that I struggled with when I first started thinking about buying a home. In my head, I couldn’t understand the difference between an amortization and a term. How do these affect my payments? How do they affect the length of time it takes to pay off my home?

Amortization


The mortgage amortization period, put simply, is the length of time it will take to completely pay off your initial mortgage amount. This is the period of time lenders use to Calculate your monthly payments. A shorter amortization will usually mean higher payment, higher principal repaid, and less interest than a longer one. Mortgage amortizations can range anywhere from a few years to as much as 35 or even 40 years in some cases. As a borrower, it is important to understand how your amortization as it can affect not only your payments today, but your long-term goals later.

Term


Your mortgage term is a related, but very different period of time. It indicates the length of time in which you agree to a specific set of terms and interest rate with a particular lender. A closed term indicates that there will be some form of prepayment penalty should you break the contract(i.e. refinance, move to another lender, etc.). These usually come with a lower rate as you are more likely to complete the full term(Anywhere between 1-10 years).

Open terms on the other hand give you the ability to completely repay your mortgage amount at any time during the term. This can be beneficial for flips, short-term stays, or during periods of construction as you are able to break your term at any time to change mortgage products or move to another property.


There are pros and cons to different amortization lengths, as well as terms. There are also pros and cons to open vs. fixed terms. Please visit my Glossary and FAQ pages for more info and stay tuned here for more posts!

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