Amortization Period Length and Mortgage Cost
by Ron U. Watkins
The amortization period denotes the number of years you have to pay your mortgage balance in full. The length of your amortization period will have a great impact on the total actual cost of your mortgage. For years, the banking industry had been using a standard amortization period of 25 years. Most lenders use this benchmark when they discuss mortgage offers. Longer or shorter time frames, however, are also possible.
A shorter amortization period means you become mortgage-free earlier, pay significantly reduced interest, and establish home equity faster. Equity means the difference of the home's market value and any outstanding mortgage on it; how much money you can claim as asset. You can then use your equity as security for financing the education of your children, home renovations, other property investments, and many others.
There are, however, other things to consider. Reducing the total number of mortgage payments results in increasing the amount of each regular payment. If you have an irregular income or if you're a first-time home buyer and will be having a large mortgage, it might not be the best option for you.
Having a long amortization period also has advantages. You can move into your dream home faster with a longer period of amortization. Lenders compute the ceiling amount you can afford as regular payment when you first apply for your mortgage. That calculated amount will then be used to compute the total amount they will let you borrow as mortgage. An extended period of amortization lessens the regular principal amount and interest payment by distributing the payments over a longer time period. So you could be permitted to a greater mortgage amount than you expected, or be eligible for your mortgage earlier than you hoped. Whichever way, you get your dream house sooner than you imagine. Many people may choose a longer period of amortization since regular payments can be similar or perhaps even cheaper than paying rent. However, it translates to paying greater interest over the period of the mortgage.
Whatever the amortization period you chose when you first got your mortgage, you can always change it. You can always shorten the period of amortization and employ alternatives like accelerated payment, giving additional payments like Double Up, or a per annum lump sum prepayment of the principal, to minimize interest costs. Also, regularly re-evaluate your amortization approach especially when mortgage renewal time comes. As your job and salary improves, you can raise the amount of your regular payment by as much as 10% once annually. All of the said prepayment features help to shorten your amortization period by years, and cut your costs on interest.
A shorter amortization period means you become mortgage-free earlier, pay significantly reduced interest, and establish home equity faster. Equity means the difference of the home's market value and any outstanding mortgage on it; how much money you can claim as asset. You can then use your equity as security for financing the education of your children, home renovations, other property investments, and many others.
There are, however, other things to consider. Reducing the total number of mortgage payments results in increasing the amount of each regular payment. If you have an irregular income or if you're a first-time home buyer and will be having a large mortgage, it might not be the best option for you.
Having a long amortization period also has advantages. You can move into your dream home faster with a longer period of amortization. Lenders compute the ceiling amount you can afford as regular payment when you first apply for your mortgage. That calculated amount will then be used to compute the total amount they will let you borrow as mortgage. An extended period of amortization lessens the regular principal amount and interest payment by distributing the payments over a longer time period. So you could be permitted to a greater mortgage amount than you expected, or be eligible for your mortgage earlier than you hoped. Whichever way, you get your dream house sooner than you imagine. Many people may choose a longer period of amortization since regular payments can be similar or perhaps even cheaper than paying rent. However, it translates to paying greater interest over the period of the mortgage.
Whatever the amortization period you chose when you first got your mortgage, you can always change it. You can always shorten the period of amortization and employ alternatives like accelerated payment, giving additional payments like Double Up, or a per annum lump sum prepayment of the principal, to minimize interest costs. Also, regularly re-evaluate your amortization approach especially when mortgage renewal time comes. As your job and salary improves, you can raise the amount of your regular payment by as much as 10% once annually. All of the said prepayment features help to shorten your amortization period by years, and cut your costs on interest.
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Surrey Langley Pitt Meadows BCChevrolet Toyota Kia Financing
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