The amortization period denotes the number of years you have to pay your mortgage balance in full. The length of your amortization period will have a great impact on the total actual cost of your mortgage. For years, the banking industry had been using a standard amortization period of 25 years. Most lenders use this benchmark when they discuss mortgage offers. Longer or shorter time frames, however, are also possible.
A shorter amortization period means you become mortgage-free earlier, pay significantly reduced interest, and establish home equity faster. Equity means the difference of the home’s market value and any outstanding mortgage on it; how much money you can claim as asset. You can then use your equity as security for financing the education of your children, home renovations, other property investments, and many others.
However, there are other considerations to bear in mind. Since you are making the actual number of payments fewer, the amount of each regular payment you will be making will increase. So, if you do not have a regular source of income, or if it is your first time to buy a home and you will be laden with a heavy mortgage, this option may not be the best for you. However, if you can comfortably pay the higher fees and you want to save money, or perhaps you just want to be out of debt as quickly as possible instead of being in debt for an extended time period, it would be a good idea to have a shorter than standard amortization period.
A longer period of amortization also has its advantages. You can have your dream home more quickly with a longer period of amortization. When applying for a mortgage, lenders compute the ceiling amount you can afford as regular payment. That amount is then used to compute the total amount they will loan as mortgage. A longer period of amortization lowers the regular principal amount and interest payment by allocating payments over a longer time period. So you could be entitled to a greater mortgage amount than you expected, or be qualified for your mortgage earlier than you projected. Whichever way, you end up with your dream house sooner than you imagine. A longer period of amortization may appeal to majority of people as regular payments are can be similar or even cheaper than paying rent, but in the long run, it also means having to pay more interest over the duration of the mortgage.
Whatever the amortization period you chose when you first got your mortgage, you can always change it. You can always shorten the period of amortization and employ alternatives like accelerated payment, giving additional payments like Double Up, or a per annum lump sum prepayment of the principal, to minimize interest costs. Also, regularly re-evaluate your amortization approach especially when mortgage renewal time comes. As your job and salary improves, you can raise the amount of your regular payment by as much as 10% once annually. All of the said prepayment features help to shorten your amortization period by years, and cut your costs on interest.
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