Everything Amortization - DLC NasaKasa

Everything Amortization

When asked, most people had no idea what an amortization period was. We are here to educate you on all things amortization! The amortization period of your mortgage is the length of time it will take you to pay off your entire mortgage loan. Many people confuse the length of the mortgage term and the amortization. The term of a mortgage is the duration you’re locked in with your current lender. That is the length of time that the mortgage covenants and conditions, such as the mortgage payment and interest rate, are in force. Typical periods can range from one to five years, and in rare circumstances, up to ten years. Essentially, the definition indicates the duration of the relationship between the lender and the borrower.

The amortization term is the amount of time it takes for the mortgage to be entirely paid off to zero. A typical amortization time is 25 years. It is crucial to remember that for a mortgage to be paid off in full in 25 years, all elements must be equal during that period. Borrowers, in some circumstances, have accelerated repayment plans that will shorten the term of the mortgage. In other situations, borrowers may raise their mortgage through refinancing, extending the duration of the loan. 

Borrowers who want to pay off their mortgage sooner might request a reduced amortization period. Borrowers can also request a more extended amortization period of up to 30 years; however, they must have a minimum of 20% as a down payment or equity in the property. The difference between the property’s worth and the current mortgages is referred to as equity.

FAQ

Why do people choose longer amortization periods?

People will opt for a longer amortization to keep their regular payments lower. The longer the amortization, the more spread out the payments, which makes them smaller. However, the interest you end up paying overtime will be more than when opting for a shorter amortization. 

Please refer to the table below:

Amortization25 years30 years
Purchase Price$500,000.00$500,000.00
Down Payment20%20%
Interest Rate1.99%1.99%
Monthly Payment$1,692.00$1,475.00

Why can a shorter amortization save you money?

A shorter amortization can save you money because the faster you pay off your mortgage, the sooner you stop paying interest. In the end, it’s the interest that costs you. This strategy isn’t feasible for most as shortening the amortization means larger monthly payments, which not everyone can afford.

What are accelerated payments?

Accelerated payments are exactly what their name means, increasing the speed of the payments made. Accelerated payments can reduce the total amount of interest paid. Accelerated bi-weekly payments, for example, may comprise 26 installments in a year, allowing a borrower to complete 13 months’ worth of payments. These extra payments help you pay down your principal faster (for example, in 23 years instead of 25 years), pay less interest, and are an essential aspect to consider if you pick a shorter amortization duration.

If you need further clarification, we would be happy to help; just give us a call at 905-997-7001.