Wait! Keep reading! Most people’s eyes glaze over when we start talking about amortization and mortgage calculations, but I am here to simplify and explain this important part of your mortgage.
Amortization of a mortgage refers to the length of time it takes to pay off your mortgage loan, and it is impacted by the interest rate and payment schedule you have decided on. Here in Canada, generally, the maximum amortization period on a mortgage loan is 25 years, but there is no actual minimum. To understand amortization better, let’s review a few other essential mortgage words:
- Principal — this is the actual amount of the loan (mortgage) that you were approved for. For example, you may have a loan balance AKA a principal of $100,000 or $275,000.
- Interest rate — (Also called a “mortgage rate”) this is what the lender charges you to loan you their money. They add this amount to your principal when calculating your payments and the interest rate is only available for a set period of time. This year and in past years, we’ve been lucky so far that interest rates on mortgages are relatively low. Interest rates go up and down depending on the economy and other factors (stay tuned for a future blog on this!).
- Term — this is the length of time that the interest rate on your loan will be in effect – or “locked in”. Terms typically vary from 6 months, up to 5 or 7 years. Terms that are longer than that aren’t as popular, because their interest rates are much higher. When your term is up, you can renew your mortgage and start a new term — hopefully with a lower interest rate — but that is always hard to predict.
Now that we have a better understanding of how the principal, interest rate and term all connect to form the amortization, you’ll better understand that your amortization is simply the reduction of your loan over its lifetime, not just a single term.
Getting a handle on payments and schedules
Once you get your interest rate and loan amount sorted, you then must decide what those payments will look like. As mentioned here you can pay your mortgage off weekly, bi-weekly, monthly, or with accelerated versions of these. The more payments you make in a year, the less you pay in interest over the entire length of your mortgage. If you want to get an idea of how much of a mortgage payment you can afford, check out my fun mortgage calculator.
How to speed up the amortization process
The tricky part of mortgages is the realization that the principal isn’t paid off in equal amounts over the length of the term. The amortization process is actually fairly slow. Even though you work hard to make your regularly scheduled payments, you are paying off more of the interest in the first several years than you are of the principal. But, don’t panic! That’s how amortization works. The interest is “front-loaded” and paid off first but, eventually, you will be excited to see that principal amount going down!
There are many payment options and schedules, along with ways that you can reduce the amount of interest you will be paying overall, though naturally, you will need to make your payments realistic and affordable based on your specific budget, spending habits, and income. However, you can speed up the amortization process by considering some of the following:
- Have a shorter mortgage period. Although it’s common for people to pay off their house in 25 years, you have some flexibility on the length of time in which you can pay off your mortgage.
- Consider putting down bulk payments on your mortgage loan (on top of your regular payments) throughout the year. Some lenders limit if, how much, or when you can do this, so be sure to ask lots of questions and know your options before signing on the dotted line.
- Look into refinancing a few years after you’ve signed on for your mortgage. If you can refinance, your payment schedule will be adjusted to reflect the new terms and loan amount.
Owning your own home is one of life’s great pleasures and I want to help you get there! Sure, it may come with a bit of sweat and tears, but getting the right information and support is essential! That’s why I’m here for you. The mortgage world can be tough to navigate around especially as a first-time home buyer, so feel free to call on me for some direction. If you have any questions, concerns or general inquiries, please don’t hesitate to give me a call at 705-315-0516. I look forward to hearing from you and working to find you the best rates and options possible for your unique home buying situation.