Today’s Lesson – November 11th 2016
Term vs. Amortization
The term of a mortgage is the length of time a lender will loan mortgage funds to a borrower. This duration can be from six months to ten years, two to five years being the most common. Generally, the shorter the duration of a mortgage term, the lower the interest rate, and the less it costs to borrow the money. At the end of each term, you will either pay off the balance owing or renegotiate the mortgage for another term until the entire mortgage is paid back.
Short term agreements or mortgage contracts are usually for two years or less. Short term mortgages offer a lower cost of borrowing (interest rate) than a longer term. People who believe that interest rates are currently higher than they will be in the future generally choose a short term mortgage. They anticipate that interest rates will be lower at the time of renewal.
Long term agreements are generally for three years or more. Long term mortgages cost a bit more than short term mortgages, so the interest rate will be higher. A higher interest rate appeals to borrowers who value the stability and predictability of fixed expenses over a set period of time. A stable mortgage payment is easier to budget and offers peace of mind.
It can take a long time to completely pay off your mortgage – usually from 15 to 25 years. The process of fully paying off your loan by installments of principal and interest over a definite period of time is called Amortization. The amortization is used to calculate the mortgage payments within the term of the mortgage.