When you’re looking for a new mortgage, or renewing your existing mortgage, sometimes all the different dates and numbers can get a bit confusing – not to mention the wording and contractual obligations. Before you sign on the dotted line, and end up getting yourself locked into something you’re not happy with, let’s look at two of the more misunderstood mortgage terms – amortization and mortgage term.
Trust me, it’s not as intimidating as it sounds but they are two very important aspects of your mortgage agreement. There’s more to it than meets the eye so I’m here to break it all down for you. Read on to see what these terms mean and how they affect your financial goals.
Amortization vs Mortgage Term
So, first things first, your amortization period is basically the total time it’ll take you to kiss that mortgage goodbye. It’s the roadmap to mortgage freedom. On the other hand, your mortgage term is like a contract with your lender. It’s how long you’re committed to them – kind of like a relationship, but with your bank.
What Is Amortization?
The “amortization period” is like the countdown to when you fully own your home. It’s the number of years it should take to pay off your mortgage in full, considering your interest rate and how much you pay each month.
Now, if you choose a shorter amortization period, you’ll celebrate being mortgage-free sooner, which is awesome. But here’s the deal: your monthly payments will be a bit higher if you do so. Think of it as paying more per month to save money on interest in the long run.
On the flip side, if you go for a longer amortization period, your monthly payments will be smaller, which can make things easier on your wallet. However, there’s a catch. You’ll end up paying more in interest over the entire time you have the mortgage. So, it takes longer to truly own your home and you end up paying more for it overall.
In Canada, the 25-year amortization period used to be the standard. It’s also the maximum period allowed for CMHC-insured homes. But with higher interest rates and inflation, many homeowners are opting for an amortization period of 30 years or higher to decrease their monthly payments making it more affordable to own their home.
Side note: If you want a longer amortization, you’ll need to put down a larger down payment (20% or more).
How to Make Sense Of Your Amortization Schedule
When you’re negotiating for your mortgage, you should review the amortization schedule which is like your mortgage payment plan laid out over time. It shows what you pay each year during your mortgage.
This is a breakdown of what you’ll see on it:
- Interest: This is the extra money you pay to the lender for letting you borrow their money.
- Principal: This is what actually chips away at the amount you borrowed.
- Extra Payments: If you make extra payments, they’ll show up here.
- Total Amount Paid: You can see how much you’re shelling out each year and overall.
- Remaining Balance: This is how much you still owe.
One important thing to note is that at the start, most of your payment goes toward interest. But as time goes on, more of it starts eating into the amount you borrowed overall. So, the sooner you tackle that principal, the quicker you’ll be free and clear, owning your home without the weight of a mortgage.
What Is Your Mortgage Term?
Your mortgage term is like a time frame for your mortgage contract. It can be short (as little as six months) or long (up to 10 years). Short terms often mean lower interest rates, while long terms can have higher rates. When you’ve signed up for a mortgage term, you’re basically locked into the rules of your mortgage contract for that period of time, whether you have a fixed or variable interest rate.
Now, when that term ends, you’ve got options. You can stick with your current lender when it comes time to renew or you can use a mortgage broker to shop around for a new one with better rates and options. Short-term mortgages, under five years, can have either fixed or variable rates. Longer-term ones usually stick to fixed rates. But be cautious, if you have a fixed-rate mortgage and need to bail out before the term’s up (like selling the house), you might face hefty penalties. This is why it’s important to read all the fine print and negotiate as best as you can on what options are available to you.
How Do The Mortgage Term and Amortization Period Work Together?
Let’s make this simple. Imagine your mortgage journey like a book with different chapters: Unless you have a super short mortgage plan or win the lottery and pay off your mortgage early, you’ll experience the beginning and end of several mortgage “chapters” along the way. Each time you finish a chapter (or mortgage term), the remainder of your mortgage gets shorter because you’ve chipped away at what you owe. Similarly, as you read each chapter of a book there are less and less chapters until the book is finished.
How A Mortgage Broker Can Help Figure Out The Best Options For You?
Understanding the differences between these mortgage terms and how they relate to the overall length of your mortgage can have a big impact on your financial flexibility and how much you’ll pay overall for the home of you’re looking to buy. It’s all about finding the right balance for your short-term and long-term money goals so that you have the cash flow to cover your mortgage and live the life you want at the same time.
Navigating all this can be a bit of a maze though, so don’t hesitate to reach out to me, Darren Robinson, an accredited mortgage broker with years of experience. I’ll be your guide through your mortgage adventure and will answer all your questions along the way! Together we will find you the best amortization period, mortgage term, interest rates, and mortgage options available to you. The first step to buying your first home or renewing your mortgage for that matter is setting up a free consultation with me. Call 705-315-0516 now to do so or book an appointment with me online — In that meeting, we will review your financial situation in detail, look at your mortgage options, and make a solid plan to land your that dream home.