Amortization may seem like a complicated term, but it simply refers to the length of time it takes to pay off your entire mortgage. This period is mainly impacted by two factors: the amount of your down payment and your personal preference. Canadian homeowners who put less than 20% down on a house are required to purchase CMHC insurance. One of the conditions of this insurance is that the maximum amortization period of your mortgage is 25 years. If you put more than 20% down, you can extend the amortization period up to 30 years. With those basic guidelines in mind, you may be wondering whether you should go with a longer period or a shorter one. Here are some factors to consider when deciding on the right amortization period for you.
The most obvious benefit of a longer amortization period is that monthly payments will be relatively lower. Not only will this feel good on your budget, but it could actually help get you into your dream home faster. Lenders take the monthly mortgage payments into account when calculating the maximum amount they are willing to offer. If the amortization period is longer, monthly payments will be lower, thus freeing up that projected debt-to-income ratio. Some homeowners could even find themselves being approved for a higher mortgage amount than originally expected.
As good as this sounds, these lower monthly payments do come with a caveat: you end up paying much more in interest over the life of the mortgage. Your interest rate will typically be the same regardless of what length of time you choose for your amortization. This means that homeowners with a longer amortization are simply spreading the principal amount out over a longer period of time, while still paying the same lump sum in interest every month. Homeowners with a shorter amortization period are paying more principal each month, but as they don’t have to pay as many months, they end up saving thousands in interest.
Not only will homeowners save tons of money in the long run, shorter amortization periods could be a great benefit in the meantime as well. The more you pay towards the principal amount of your home each month, the quicker you are building home equity. This equity can be used for a variety of smart financial decisions including low interest financing for consolidating debt, investing into real estate, or securing a line of credit for your children’s education.
The vast majority of Canadian homeowners still choose shorter amortization periods of 25 years or less, but the decision on length is a highly personal one. Furthermore, homeowners who have already signed into a certain amortization period are not always locked in. Mortgage term renewals and even your current lender may be able to offer you a flexible solution. For advice on what length of amortization would best work for you or how you change your existing one, contact our experienced mortgage team at Source Mortgage today.
Source was absolutely great to work with - went above and beyond to help us get everything done when buying our new home. Highly recommended!! Chad and Jenelle Richards Jan 09 2013
Chad and Jenelle Richards
Added January 23rd 2013
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