What is a Mortgage Term? What Does Amortization Mean?
When looking for a mortgage, you have many decisions, including choosing the mortgage terms and amortization. These are two big decisions when choosing your mortgage. Here’s what you should consider when deciding.
What are Mortgage Terms?
Your mortgage terms refer to how long you have to repay your mortgage and the interest rate you’ll pay. You must renew your mortgage or repay the full balance when your term ends.
The Available Mortgage Terms
There are three common mortgage terms most borrowers can choose.
⮕ Short-Term Mortgages
Short-term mortgages have terms of five years or less. A shorter term usually offers a lower interest rate, but you must renew your mortgage (or pay it off) earlier. Most short-term loans are available in both fixed and variable interest rates.
⮕ Long-Term Mortgages
Any mortgage with a term of five years or longer is a long-term mortgage. Most long-term mortgages are for a fixed rate only, and the rates are higher because they are locked in for a longer period, such as 7 or 10 years.
It’s important to know that terms of five years or longer usually have a prepayment penalty if you pay the loan in full within five years.
⮕ Convertible-Term Mortgages
A convertible-term mortgage is a short-term mortgage that you can convert to a long-term mortgage. However, when you extend the loan, the interest rate typically increases to the term the lender offered for long-term mortgages when you borrowed your mortgage.
What is Amortization?
Amortization refers to the time it takes to pay your loan in full. Your term refers to how long you have the current lender with your contract rate & terms, before renewing your mortgage. Amortization, usually 30 years or less, refers to how long it will take you to pay the loan, given the current terms with your lender.
A typical example of this would be a 5-year fixed-rate mortgagewith a 25-year amortization.
What to Consider with Mortgage Terms and Amortization
When considering your mortgage term and amortization, think long-term.
The mortgage term refers to how long you have a specific interest rate before you must renew. Are you comfortable with a shorter term and the requirement to renew your mortgage and/or pay it in full?
If not, a longer term may be a better option for you. However, the longer the amortization or how long it takes you to pay the loan in full, the more interest costs you’ll pay over time.
The less time you have the lender’s money outstanding, the less interest you pay, and vice versa.
When choosing the correct terms and amortization, think about what you can afford now and in the long term as you work to pay your home off in full.
However, consider a shorter term if you think that your life plans may change before your term is up. Longer fixed terms tend to have higher penalties if you break them, which is common if you decide to sell or refinance your home within that 5 years.
Your mortgage term and amortization are important factors when applying for a mortgage. Unfortunately, many borrowers focus on the interest rate and don’t think about the long-term effects of the mortgage.
Instead, look at the big picture. What will the loan cost in the long run, and how many unknowns are there? For example, if you take a short-term, how often must you renew the loan and at what cost? Will you likely incur a penalty in the future for breaking your term? A large penalty can certainly outweigh the importance of getting the lowest interest rate.
Looking at the big picture and the loan’s total costs will help make home ownership as affordable as possible, now and in the future. Let's book a call if you have questions. I would love to help find a solution that is best suited for you and your family.