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An amortization period refers to the entire length of time it takes to pay off your mortgage in full. The most common amortization is 25 years, as this is the longest period of time you can stretch out your mortgage payment when you make a down payment below 20% of your home’s value. But, as you pay down your mortgage, your amortization period decreases – unless, of course, you tap into your home equity.
- An amortization period is the entire length of time it takes to pay off your mortgage in full
- Every extra dollar put towards your mortgage counts. You don’t have to make large payments to shorten your amortization over time
- Even if you’re in your very first mortgage, there are steps you can take now to reduce the overall amount of money you’ll pay towards owning your property outright
Short vs long amortization periods
Many people opt for a longer amortization as it represents lower monthly payments. But because it also means a longer period of time that you have a mortgage, you’ll pay more in interest. And, on the other hand, the shorter your amortization period, the less you pay in interest, but your monthly payments will be higher.
How to choose a mortgage amortization period
The key when selecting your amortization is to focus on affordability. You never want to stretch your finances too thin. It makes sense, therefore, to select a 25-year amortization period and then pay your mortgage off quicker – by taking advantage of prepayment opportunities. See: Mortgage Prepayment
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Ways to shorten your mortgage amortization period
While mortgage debt will cost you the lowest interest rate among all debts, there’s a certain sense of freedom in being able to chip away at that principal balance and shorten the time in which it will take you to become mortgage free. As you reduce your principal balance, you also reduce the amount of interest you’ll have to pay on your borrowed mortgage amount.
Every extra dollar put towards your mortgage counts. You don’t have to make large payments to make a difference. That’s why it’s essential to ensure your mortgage includes pre-payment privileges – not all of them do.
While many people think of lump-sum amounts when they envision making pre-payments, you can also pre-pay small amounts over the course of your mortgage term. ✋
Important: Be sure to know your pre-payment rules before making extra payments so you’re not penalized by your lender for paying too much within the year.
Even if you’re in your very first mortgage, there are steps you can take now to reduce the overall amount of money you’ll pay towards owning your property outright:
- Increase your payment frequency. By switching to an accelerated weekly or bi-weekly payment schedule, you’ll make an extra monthly payment each year (See: Mortgage Payment Options)
- Round up your mortgage payments. If you round up your mortgage payment from, say, $766 to an even figure such as $800, every extra effort is going directly toward your principal balance
- Keep payments the same at renewal. If you renew your mortgage at a time when mortgage rates are lower, consider leaving the payments the same. Chances are, you won’t miss the money because you’re used to paying that amount, so you can use this drop in rates to your full advantage
- Take advantage of flexible payments. Most lenders allow you to increase your regular payment up to a set maximum, such as 15%, while others let you double up your payments
- Put your bonus, inheritance or any extra money towards your mortgage. This is when a lump-sum payment option can come in handy. Most lenders will allow you to make a lump-sum payment of anywhere between 10% and 25% of the value of your mortgage per year. The lump-sum payment is based on either the original amount you borrowed or the amount currently outstanding. Since mortgages decrease with each payment, it’s best to negotiate a lump-sum payment option based on the original amount you borrow so you can pay more
No matter how you choose to pay off your mortgage quicker, you’ll be happy to see the amortization number drop as you renew each mortgage term.
Other articles in this guide: “Understanding Your Mortgage Rate”
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