When discussing mortgages, one of the primary sources of confusion for potential home buyers is the distinction between mortgage term vs. amortization period. Since purchasing a home is often the largest purchase an individual will make in their life, it is crucial to have the facts surrounding these elements of a mortgage. That is why the lending experts at PHL Capital have put together some information on these two terms to give buyers the information they need to understand the details of their mortgage.
Read our list of common mortgage questions and answers.
The mortgage term is the amount of time your mortgage agreement and interest rate will be in effect. For example, a 25-year mortgage may have an initial term of five years. Your mortgage term will have a direct impact on your mortgage interest rate, as shorter terms tend to have lower interest rates than long-term agreements. Another way to think about mortgage terms is like a “reset” button for a mortgage. When the term is up, you must agree to a new mortgage term based on the remaining principal at a new rate. Most homeowners will need to renew their mortgage term at least 4-5 times throughout their amortization period.
The mortgage amortization period is best defined as the length of time it will take you to pay off your entire mortgage. Amortization periods typically range from 25 years to 40 years in duration, though this can vary based on several factors. Most lenders will only offer a maximum length of a 25-year amortization period unless the buyer can provide a 20% down payment. Should this be possible, the lender may offer up to 40 years based on the buyer’s credit history, income, and other factors.
The length of your amortization period has a direct impact on the amount of interest you pay and your monthly mortgage payments. A longer amortization period typically features lower mortgage payments, but you will pay more interest over the term. This can be seen when looking at a $300,000 mortgage with options for a 25-year amortization period and a 30-year amortization period. With the 25-year option at 5.1% interest, a borrower will pay approximately $229,000 in interest over this period. With a 30-year option at the same interest rate, the borrower will pay approximately $340,000 in interest, an increase of approximately $110,000.
While the latter option results in additional interest being paid, the monthly mortgage payment amount will be approximately $140 lower per month. This means that the best amortization option for your needs will vary based on your preferences, budget, and goals.
To learn more about our lending solutions, get in touch with the team at PHL Capital Corp. We can be reached by phone at 604-579-0847 and will be happy to answer any questions you may have regarding mortgages or our application process.