The term of a mortgage is the length of time for which certain factors, such as the interest rate you pay, are set when you negotiate a mortgage.
Terms usually last anywhere from six months to 25 years. At the end of the term, you either pay off your mortgage or renew it. If you renew, you can negotiate terms and conditions again.
Generally, the longer the term of the mortgage, the higher the interest rate. The term of a mortgage is not the amortization period.
The amortization period is the time period over which the entire debt will be repaid. Most mortgages are amortized over 15-, 20- or 25-year periods. The longer the amortization the lower your scheduled mortgage payments. But you pay more interest over a longer amortization.
For example, for a $100,000 mortgage at 10 per cent interest with a 25-year amortization period and a monthly payment of $895, you will pay $168,500 interest. If you amortize over 10 years for the same amount at the same interest you pay only about $57,000 interest. But your monthly payment is much higher—about $1,311.
You want to pay the least-possible amount of interest on a mortgage. Here are some ways to reduce the amount of interest you pay:
The faster you pay off your mortgage, the less interest you will pay, and the sooner you will enjoy the security of a mortgage-free home.
This allows someone who buys your home from you to take over (or assume) your remaining mortgage. It is attractive if interest rates are higher when you sell than when you bought because an assumable mortgage then increases the value of your home.
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Terms usually last anywhere from six months to 25 years. At the end of the term, you either pay off your mortgage or renew it. If you renew, you can negotiate terms and conditions again.
Generally, the longer the term of the mortgage, the higher the interest rate. The term of a mortgage is not the amortization period.
The amortization period is the time period over which the entire debt will be repaid. Most mortgages are amortized over 15-, 20- or 25-year periods. The longer the amortization the lower your scheduled mortgage payments. But you pay more interest over a longer amortization.
For example, for a $100,000 mortgage at 10 per cent interest with a 25-year amortization period and a monthly payment of $895, you will pay $168,500 interest. If you amortize over 10 years for the same amount at the same interest you pay only about $57,000 interest. But your monthly payment is much higher—about $1,311.
You want to pay the least-possible amount of interest on a mortgage. Here are some ways to reduce the amount of interest you pay:
- Make a larger down payment.
- Make lump sum principal payments, or prepayments (paying principal before it would be paid under the regular payment) from time to time in addition to the regular principal and interest payments.
The faster you pay off your mortgage, the less interest you will pay, and the sooner you will enjoy the security of a mortgage-free home.
- Arrange a mortgage with a shorter amortization period—higher regular level payments so that the mortgage is paid off sooner.
- Arrange a mortgage with more frequent regular payments, such as every two weeks or weekly, instead of monthly.
This allows someone who buys your home from you to take over (or assume) your remaining mortgage. It is attractive if interest rates are higher when you sell than when you bought because an assumable mortgage then increases the value of your home.
- Portability this means you can carry your mortgage with you to the next home you buy.
- Expandability this lets you increase the amount of the mortgage (for whatever reason) at the same interest rate, which is probably lower than the rate for a second mortgage.
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