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 an amortization period that’s shorter? For one, a shorter amortization period means that it’s possible for you to be free of your mortgage earlier. Also, by agreeing that you will pay off the mortgage within a shorter time period, you are greatly reducing the interest you have to pay over the duration of the mortgage. Another advantage is that you can build your home equity faster with a shorter period of amortization. Equity refers to the difference in the home’s market value and any existing mortgage on it. This represents how much money you can affirm as your asset. If you decide to, you can use this equity as security for funding your kids’ education, home renovations, succeeding property investments, and many others.
There are, of course, other factors to consider. By reducing the total number of mortgage payments to make, the amount of each regular payment will be increased. If you don’t have a regular income or if you’re buying your first home and will be burdened with a large mortgage, this may not be the appropriate option.
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.
Whatever the amortization period you chose when you first got your mortgage, you can always change it. You can always shorten the period of amortization and employ alternatives like accelerated payment, giving additional payments like Double Up, or a per annum lump sum prepayment of the principal, to minimize interest costs. Also, regularly re-evaluate your amortization approach especially when mortgage renewal time comes. As your job and salary improves, you can raise the amount of your regular payment by as much as 10% once annually. All of the said prepayment features help to shorten your amortization period by years, and cut your costs on interest.
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