A mortgage loan is different than any other loan, and most mortgage loans are negotiated for a set time period of less than 10 years. They are negotiated for a single interest rate which will remain in place for the entire term of the mortgage loan. You can pay off a loan in full at any time, but you may pay a penalty depending on the mortgage lender. Most of us are familiar with this kind of loan through the purchase of our vehicles. With mortgages, the length of the mortgage, the term of the mortgage and the mortgage interest rate are negotiated separately. In this case: the 'amortization' of the mortgage is the length of time it will take to pay off the mortgage the term refers to the time period covered by your current mortgage contract. This is normally the length of time that you are 'locked in' to a particular interest rate and payment amount. the interest rate can either be fixed or variable. Amortization The period of time taken to clear off the mortgage, even as long as 30 years is called the 'amortization' period. It indicates the amount of time it will take to pay off the mortgage loan, assuming you make all payments in full and on time. In general, the shorter your amortization, the less you pay in interest costs over the life of your mortgage. So, if you amortize your mortgage over 15 years instead of 25 you can save thousands of dollars in interest costs. The only challenge is whether you can afford the larger payments. A shorter amortization will always translate as higher mortgage loan payments - because you are paying off the mortgage loan more quickly. Term 'Term' of the mortgage is the amount of time for the current conditions of the mortgage, including the interest rate (whether locked in or variable) and the mortgage lender. Mortgage terms can be as short as 6 months, or as long as 10 years. In most cases, the longer the term of the contract, the more it will cost you. Most mortgage lenders will consider a longer term to be higher risk to them - after all, interest rates could go up and that means your mortgage may not be as profitable. So, longer term mortgages will usually come with the highest interest rates. Also, mortgage lenders want to ensure that you stay with them - after all, they are making money from your business. So, the term covers them in two ways: they insure that they make their money and that their clientele is 'stable'. Interest An important aspect of your home mortgage is the interest rate. This rate is negotiated for a period of time - from 6 months to as long as 10 years. This time period is the period over which you will pay the agreed interest rate. The lower your interest rate, the less you pay in interest costs over the life of the mortgage. This can also save you thousands of dollars. A final word on interest rates: mortgage lenders 'stack' the deck in their own favour. Any interest rate they are willing to charge is at a level at which they believe they will make money. This is certainly not a charity business. Now, if you 'lock in' your interest rate for 5 years you will likely pay more for your mortgage. However, if you are willing to accept a bit of risk at your end (particularly if you have a stable job and a good credit history) you are almost always better off with variable rate mortgage. This type of mortgage allows the interest you pay to fluctuate with the market. While this sounds risky, it actually allows you a lot of freedom and almost always saves you money, for two reasons: The interest rate charged on variable rate mortgages are usually much less than any 'locked in' rate If the rates look like they will go up you can generally switch to a 'locked in' interest rate at no penalty. Savings In most cases, it is best to get the shortest possible amortization coupled with the lowest interest rate possible. This is how you save money on your mortgage in the long term. However, you have to be careful. The shorter the amortization period, the higher the payment. So, while you save money over the long run because you pay less in interest charges for your loan, you have to be able to afford the payment in the short term.
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