Total Mortgage Cost in Relation to Length of Amortization Period

The amortization period means the number of years within which to fully pay your mortgage. The standard amortization period in the banking industry has been 25 years. However, longer or shorter periods are available. It is important as it affects the total amount of interest you’ll pay over the duration of your mortgage.

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.

However, there are other considerations to bear in mind. Since you are making the actual number of payments fewer, the amount of each regular payment you will be making will increase. So, if you do not have a regular source of income, or if it is your first time to buy a home and you will be laden with a heavy mortgage, this option may not be the best for you. However, if you can comfortably pay the higher fees and you want to save money, or perhaps you just want to be out of debt as quickly as possible instead of being in debt for an extended time period, it would be a good idea to have a shorter than standard amortization period.

Having a long amortization period also has advantages. You can move into your dream home faster with a longer period of amortization. Lenders compute the ceiling amount you can afford as regular payment when you first apply for your mortgage. That calculated amount will then be used to compute the total amount they will let you borrow as mortgage. An extended period of amortization lessens the regular principal amount and interest payment by distributing the payments over a longer time period. So you could be permitted to a greater mortgage amount than you expected, or be eligible for your mortgage earlier than you hoped. Whichever way, you get your dream house sooner than you imagine. Many people may choose a longer period of amortization since regular payments can be similar or perhaps even cheaper than paying rent. However, it translates to paying greater interest over the period 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.

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