Ditech : Mortgages: What is the Difference Between Term and Amortization
When you arrange a mortgage to help you with the purchase of a property, you will negotiate the details with your lending institution. Two of the items you will decide on will be term and amortization.
The term of your mortgage will be the length of time that you will be "locked in" to certain payments at a specific interest rate. For example, if you choose a "5 year closed mortgage term", this means that you will have mortgage payments of a certain amount for 5 years. At the end of 5 years, you will have to either pay the remaining amount owing to your mortgagee*, or renegotiate your mortgage. This length of time is usually between 6 months and 5 years, although there are some lending institutions that will offer mortgage terms of 7 or 10 years.
If you choose to either renegotiate your mortgage or pay out your mortgage before the end of your term, you may have to pay a penalty, depending on the agreement contained in your Standard Charge Terms*.
The amortization of your mortgage is the length of time that it would take you, at your current payment and interest rate, to pay your mortgage in full. This amount of time is usually 20 or 25 years, when you first arrange your mortgage. As you progress through the years of payments on your mortgage, if you keep your payments similar, the amortization of your mortgage will decrease.
Let's say you have arranged a mortgage with a lending institution for $150,000.00 for a 5 year term at an interest rate of 6.5%, with an amortization of 25 years. You have agreed to make monthly payments of $1,004.74 on the 1st day of every month. At the end of 5 years, you renegotiate with your lending institution. They will continue to hold your mortgage for an additional 5 year term at the same interest rate. By keeping monthly mortgage payments of $1,004.74, you now have an amortization of 20 years.
* For a more detailed description of these mortgage terms, read the article, "Common Mortgage Terms".
The term of your mortgage will be the length of time that you will be "locked in" to certain payments at a specific interest rate. For example, if you choose a "5 year closed mortgage term", this means that you will have mortgage payments of a certain amount for 5 years. At the end of 5 years, you will have to either pay the remaining amount owing to your mortgagee*, or renegotiate your mortgage. This length of time is usually between 6 months and 5 years, although there are some lending institutions that will offer mortgage terms of 7 or 10 years.
If you choose to either renegotiate your mortgage or pay out your mortgage before the end of your term, you may have to pay a penalty, depending on the agreement contained in your Standard Charge Terms*.
The amortization of your mortgage is the length of time that it would take you, at your current payment and interest rate, to pay your mortgage in full. This amount of time is usually 20 or 25 years, when you first arrange your mortgage. As you progress through the years of payments on your mortgage, if you keep your payments similar, the amortization of your mortgage will decrease.
Let's say you have arranged a mortgage with a lending institution for $150,000.00 for a 5 year term at an interest rate of 6.5%, with an amortization of 25 years. You have agreed to make monthly payments of $1,004.74 on the 1st day of every month. At the end of 5 years, you renegotiate with your lending institution. They will continue to hold your mortgage for an additional 5 year term at the same interest rate. By keeping monthly mortgage payments of $1,004.74, you now have an amortization of 20 years.
* For a more detailed description of these mortgage terms, read the article, "Common Mortgage Terms".
Labels: Ditech : Mortgages: What is the Difference Between Term and Amortization
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