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 The
Money Management Newsletter: Home
Ownership
Understanding how Term and Amortization work
can save you lots of money.
Home Ownership Editor & OCNA
Special to Money Management Newsletter
If there is one thing that confuses the public
it is the difference between the Mortgage Term and the Mortgage Amortization
Rate.
The Mortgage Term is that period of time until your
mortgage becomes due and payable. Most mortgages have a term that ranges
from six months to five years. The rationale for having shorter terms
is for the benefit of both the borrower and the lender.
As a borrower, if you have always made your mortgage
payments, then almost every institutional lender wants to renew your mortgage.
Usually, the same terms and conditions apply, except for interest rate.
It is changed to the then current rate of interest.
The lender gets to adjust the rate of interest to current
levels as well. From a borrower's point of view, "term" is really
all about forecasting the direction of interest rates. If you believe
that rates will drop in the near future, then you will elect to choose
a shorter term mortgage. If you believe that interest rates will rise
from current levels, then you will probably opt for a term of four or
five years to lock in that rate.
Amortization, on the other hand, relates to the rate
at which the mortgage is paid off. Most borrowers start with a twenty-five
year amortization period. That means the mortgage will be paid off in
full after twenty-five years based on the monthly payments and level of
interest rates in the initial mortgage.
If you elect to take a five year mortgage and a twenty-five
year amortization, then at the end of five years, you should elect a twenty-year
amortization rate if want to retire the mortgage within the twenty-five
years. The fastest way to pay off a mortgage is to pay off a mortgage
is to shorten the amortization rate. Most people tend to think of amortization
rates in terms of five year multiples. But there is no rule to that effect.
As a borrower, you want can pick any amortization rate you want from one
year right up to twenty-five.
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| Mortgage Amortization Schedule
Calculator |
To find out what's best for you, use the Mortgage
Amortization Schedule Calculator in the Financial
Tools section. Change the term periods and also the interest rate factors.
By doing so, you'll see how by reducing the term from say 25 years down
to 20 the difference to the monthly payment is small yet the saving of 5
years interest is huge.
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