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The Benefits of Having a Shorter Amortization Period

The Benefits of Having a Shorter Amortization Period

Last week we defined amortization, and how it affects your interest rates. Amortization is a dense topic, and this week there’s a lot more that we would like to cover when it comes to encouraging you to choose a shorter amortization period on your mortgage. Let’s discuss the ways in which a shorter amortization period is beneficial, and how to reduce your interest costs.

To refresh and expand: A big reason to choose a shorter amortization period is because you become mortgage-free faster as you pay your principle down over less time. Most importantly, when you agree to tackle your mortgage over the course of this shorter time period, the interest you pay across a number of years is greatly reduced.

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Other straightforward advantages to a shorter amortization period have a direct link to equity. Basically, equity is the difference between the outstanding mortgage on your home and its value in the marketplace. This means that when you pay off your mortgage at a rapid rate, you have the advantage of building home equity sooner. Your home equity is a sum of money that you can claim as an asset, which you can then use to secure financing for things like your kid’s college tuition, or home renovations.

There are many great reasons to choose a shorter amortization period (if you can afford higher regular payments over a condensed period of time). Topping the list of “pros” to a short amortization period is the reduction in cost regarding the total interest you will pay. For those of us who have irregular incomes, or who are perhaps buying a home for the first time with a large mortgage, here are some other tips on how to lower your interest rates no matter what amortization period you choose:

Increase payment frequency. Accelerate your payments to bi-weekly rather than monthly. Taking this small step to make more frequent payments (the rough equivalent of one more payment a year compared to a monthly regimen) will generate savings on interest.

Educate yourself about pre-payment. Knowing and using the pre-payment privileges on your mortgage will save you money. Most lenders will let you pre-pay a certain amount every year, and some will even allow you to make larger mortgage payments once in while (if you can afford it). Making pre-payments will knock down the principal balance outstanding on your mortgage, which saves you interest charges.

When it’s time to renew, shop around. Make sure that your mortgage still suits your needs.

There are a number of overwhelming factors tied into the process of borrowing money to buy a home. But the length of your amortization period affects how much your mortgage really costs. Any amortization period you choose will reflect the number of years you need in order to pay off the entire balance of your mortgage; and any decision you make in this regard will affect how much interest you pay over the duration of your mortgage. Try opting for a shorter amortization period to ensure that you’re only paying interest over the course of your mortgage’s lifetime – and not your own.


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