In: Mortgage30 Sep 2013
The amortization period denotes the number of years you have to pay your mortgage balance in full. The length of your amortization period will have a great impact on the total actual cost of your mortgage. For years, the banking industry had been using a standard amortization period of 25 years. Most lenders use this benchmark when they discuss mortgage offers. Longer or shorter time frames, however, are also possible.
Why would you choose a shorter period of amortization? A shorter amortization period means you can be mortgage-free earlier. Since you pay off your mortgage more quickly, the amount of interest you pay is considerably less. Also, you establish home equity faster with a shorter period of amortization. Equity means the difference in the home’s market value and any outstanding mortgage on it. It’s the worth in money you can declare as your asset. This equity can then be used as security for funding the education of your kids, home renovations as well as other property investments, and many more.
There are, however, other things to consider. Reducing the total number of mortgage payments results in increasing the amount of each regular payment. If you have an irregular income or if you’re a first-time home buyer and will be having a large mortgage, it might not be the best option for you.
A longer period of amortization also has its advantages. You can have your dream home more quickly with a longer period of amortization. When applying for a mortgage, lenders compute the ceiling amount you can afford as regular payment. That amount is then used to compute the total amount they will loan as mortgage. A longer period of amortization lowers the regular principal amount and interest payment by allocating payments over a longer time period. So you could be entitled to a greater mortgage amount than you expected, or be qualified for your mortgage earlier than you projected. Whichever way, you end up with your dream house sooner than you imagine. A longer period of amortization may appeal to majority of people as regular payments are can be similar or even cheaper than paying rent, but in the long run, it also means having to pay more interest over the duration of the mortgage.
It doesn’t matter what amortization period you chose when you first applied for your mortgage; you may change it should you wish to do so. You can always compress the period of amortization and take advantage of options like accelerated payment, making additional payments like Double Up, or giving a yearly lump sum prepayment of the principal, to minimize interest costs. Also, be sure to re-appraise your amortization policy when the time to renew your mortgage comes. As your career and income advances, you can then raise the total of your regular payments by as much as 10% once a year. These prepayment features aid in shortening your amortization period by years, and help you save on interest.
An amortization schedule, a table listing each and every payment on the initial debt, shows this ratio of principal and interest and demonstrates how a loan’s principal amount decreases over time. An amortization schedule can be generated by anwith the use of actual tables which have been tested and found true over the years.