Pros And Cons of Mortgage Amortization Periods
“After The Interest Rate, The Next Major Decision With a New Mortgage is The Amortization Term”
For most home buyers that are looking at securing a mortgage, the primary goals are the least money down, the lowest interest rate, and the smallest monthly payment.
There is absolutely nothing wrong with any of these, provided you understand what goes along with them.
Lets take a closer look at amortization and how it impacts both your cash flow and long term interest costs.
Right now, you can get mortgage amortization period of 10 years, 15 years, all the way up to 35 years in many cases. The longer the amortization period, the smaller your monthly payment is going to be as the principal is paid back over a longer period of time.
As an example, moving from a 25 year amortization to a 35 year amortization will reduce your payment by 16% on a mortgage interest rate of 4% which can be quite significant to many people.
But when the amortization period is extended that extra 10 years, the total amount of interest you will be paying over the life of the mortgage, assuming the same interest rate stayed at 4%, would increase by 32%.
So one way to look at a longer amortization period is as a short term cash flow tool that allows you to manage the money you’re working with today, but still allows you make incremental principal pay downs over time to shorten the repayment period and reduce total interest costs.
Basically, it just doesn’t make a whole lot of sense to pay that much of additional interest over time, so the only reason for taking a 35 year amortization is because you believe you will have additional cash available to apply to the mortgage some point in the future.
The best way to determine what amortization period works the best for you and to see first hand the differences in the interest paid over time is to sit down with a mortgage broker and work through all the different scenarios together so you are more confident that the numbers you’re looking at are accurate.
If you have any questions regarding amortization periods and mortgage rates, please give me a call and I’ll make sure you get all your questions answered.
About the Author Joe Walsh
I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel