CHOOSING YOUR AMORTIZATION

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CHOOSING YOUR AMORITZATION

The choice of your mortgage amortization period, representing the number of years required to become debt-free, is a decision of great consequence as it directly impacts the total interest you'll pay over the life of your mortgage.  The amortization is also known as the life of the mortgage in years.

While the standard amortization period in the mortgage industry is typically 25 years and serves as the reference point for discussions with lenders, as well as the foundation for mortgage calculations and payment schedules, it's important to recognize that alternatives exist, ranging from shorter durations to extended periods of up to 35 years.

Opting for a shorter amortization period primarily serves the goal of achieving mortgage-free status at a quicker pace. Committing to paying off your mortgage within a briefer timeframe significantly reduces the overall interest accrued during the mortgage's duration. Additionally, a shorter amortization enables you to accumulate home equity more rapidly, representing the difference between your outstanding mortgage balance and your home's market value.

Nevertheless, it's vital to weigh other considerations before settling on your amortization period. Shorter periods necessitate higher regular payments since they reduce the total number of mortgage installments. If your income fluctuates, perhaps due to commission-based earnings, or if you're a first-time homebuyer shouldering a substantial mortgage, opting for a shorter amortization might lead to increased regular payments, potentially impacting your cash flow adversely.

Thankfully, I can assist in selecting an amortization period tailored to your specific financial circumstances, ensuring that your cash flow remains sufficient. If you find that you can comfortably manage higher payments, are interested in mortgage savings, or simply prefer to avoid prolonged debt, you can explore the possibility of a shorter amortization period.

Advantages of Extending Amortization:

Choosing a longer amortization period comes with its own advantages. For example, it can expedite your journey to owning your dream home. During the mortgage application process, lenders calculate the maximum regular payment you can handle, which is then used to determine the maximum mortgage amount they are willing to extend.

While a shorter amortization period results in higher regular payments, a longer one spreads these payments over an extended timeframe, reducing your regular principal and interest payments. Consequently, you will qualify for a larger mortgage with the longer amortization, enabling you to achieve homeownership dreams ahead of schedule.

It's worth noting that this option may not suit everyone. Many individuals are drawn to a longer amortization period because regular mortgage payments can be comparable to or even lower than monthly rent, but it does entail paying more interest over the mortgage's lifetime.

Importantly, your choice of amortization period isn't etched in stone throughout your mortgage's life. You retain the flexibility to shorten it and curtail interest costs by making extra payments when possible or by making annual lump-sum principal prepayments. If these payment options align with your preferences, your mortgage professional can ensure that your mortgage terms accommodate them without imposing penalties.

It makes financial sense to periodically reassess your amortization strategy when your mortgage approaches renewal, whether that's after three, five, 10 years, or another term. This approach allows you to leverage career advancements, increased income, and bonuses by selecting accelerated payment options such as larger or more frequent payments, or by simply boosting the frequency of regular payments (e.g., switching from monthly to bi-weekly or weekly payments). These actions will curtail your amortization period and result in substantial interest savings over the life of your mortgage.