Terms & Amortization
Difference between Terms and Amortization
Your term has to do with your current mortgage product. Mortgage products have terms ranging from 1- 10 years in length. After your term is complete you can renew with your lender for another term of your choosing, or you can change to another lender for a term length of your choosing.
When you get a mortgage, one of the inputs used to calculate your payment, is how long this mortgage is to be amortized over. The longer the amortization for the same size mortgage, the lower the payment on that mortgage will be.
An easy way to think of amortization is it’s the total time it will take for your mortgage to be paid off if everything (rate and payment) stayed the same for the life of your mortgage.
With Fixed Mortgage Products you can have a term anywhere between 1 and 10 years. With Variable Rate Mortgage products, the term can be 1, 3, or 5 years.
The 5-year rates are typically where all the banks and lenders compete with their rate offerings the most.
What Term Length Should I choose?
5-year terms often have the best overall rates. If you know you’re going to continue to live in your home for at least 5 years then this option might be a good choice.
If you decide to move to sell your home and buy another, most mortgage products can be ported to the next property. This means you don’t need to break the mortgage. Other mortgage products may not be portable.
If your mortgage is not portable you may need to break out of that mortgage and pay a penalty.
If you know you’re going to be moving after 3 years, you can choose a 3-year term, and when the renewal comes up you can choose to renew into an open mortgage. The open mortgage will have higher rates but will allow you to pay it off in full once you sell your house without penalty.
Most mortgages are done with a 25-year amortization. This is the maximum when the mortgage is insured. 30 and 35-year amortizations are also available when the mortgage is conventional (20% down payment or more). The higher the amortization the lower the payment will be.
What Amortization Length Should I choose?
One reason to choose a higher amortization is it will increase how much you can qualify for due to your payment being lower.
A Lower amortization is also possible if you want to pay your mortgage off sooner. However, if your goal is to pay the mortgage off as fast as possible, I often suggest still choosing a 25 or 30-year amortization and then aggressively take advantage of your prepayment privileges.
If you take advantage of all your prepayment privileges you could easily pay off a mortgage with a 25-year amortization in less than 10 years. If unforeseen financial hardships come along, you won't be obligated to make such a large mortgage payment as you would with a lower amortization.