Amortization can be viewed as the time it will take you to repay your mortgage without making extra payments. It can be adjusted to increase or decrease your mortgage payment and interest due. Mortgage payments are calculated by spreading out the repayment of the mortgage amount at a certain interest rate over a specified period of time, called the amortization period. The length of your amortization affects how quickly you become mortgage-free. It also affects how much interest you’ll pay over the lifetime of your mortgage. A longer amortization results in paying a lower mortgage payment and more interest overall, whereas a shorter amortization results in paying a higher mortgage payment with less interest overall.
Amortization Benchmarks
The benchmark amortization period is typically 25 years when discussing mortgage products. 25 years is also typically the basis for standard mortgage calculators. However, 25 years is not the only option when it comes to mortgage amortizations. They can be as short as 5 years, and as long as 35 years!
Benefits of a Shorter Amortization
Opting for a shorter amortization period will result in paying less interest overall during the life of your mortgage. A shorter amortization means you will also become mortgage-free faster and may give you access to your home equity sooner with proper planning. However, by choosing to pay off your mortgage over a shorter time frame, monthly payments will be higher.
Benefits of a Longer Amortization
If your income is irregular, and you are at the maximum of your monthly budget, or if you’re considering your first home, you may need to consider if having more of your cash flow directed to mortgage payments will be of benefit to you. You might opt for a lower payment and to save up for lump sum payments to save on interest instead without being obligated to make higher regular payments. Smaller monthly mortgage payments may make home ownership less daunting for first-time buyers, and can free up additional monthly cash flow for other priorities. A longer amortization period can sometimes get you into your dream home sooner too, as it can allow you to qualify for a slightly higher value mortgage than a shorter amortization might.
Accelerating Amortization
Bi-weekly payments split your monthly payment in two, and are paid every 14 days. Paying at this frequency shortens a 25-year amortization by roughly 3.5 years without making extra lump sum payments, and can save thousands in interest as well. Two months of the year, you’d make 3 bi-weekly payments instead of two. Those two months’ additional payments bring the principal of the mortgage down more rapidly, reducing the interest due and reduces the amount of time it takes to repay the mortgage as well.
Let’s Chat!
I would be happy to help with the decision for the amortization that best suits your requirements and ensures you have adequate cash flow. You may not be stuck with the amortization schedule you choose at the time you got your mortgage. You can in some cases shorten or lengthen your amortization at a later date in addition to making extra payments on your mortgage.
Ideally, one should re-evaluate their mortgage at renewal time (every 3, 5, or 10 years depending on your mortgage term). During renewal is a great time to review your amortization and payment schedules or make changes if they are no longer working for you. But if you need assistance with cash-flow or ways to save on interest within your term and renewal is still some time away, there may still be options to review.
If you have any questions or are looking to get started on purchasing a home, don’t hesitate to reach out any time, I am always happy to help.
Adapted from DLC Marketing
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