Mortgage amortization is a term that confuses a lot of people, which is probably why so many homeowners make mistakes with it. To keep it simple, mortgage amortization refers to paying off your mortgage over a specific period of time.
In Canada, the most common amortization periods are 20 and 25 years, with 25 being the maximum allowed. A proper amortization schedule shows how long it will take you to pay the mortgage, how much from each payment goes toward interest, and how much goes toward the principal.
The process seems straight forward, and it is as long as you avoid making the following mistakes:
Choosing the Wrong Lender
Some mortgage lenders out there are a lot more flexible than others, and choosing the wrong one could affect your amortization. Some lenders will try to limit your ability to prepay or increase payments, and you will pay for that over time. Even with a modest mortgage and interest rate, making one extra payment per year can decrease your interest by more than $10,000, which can enable you to pay it off a few years earlier.
Selecting the Longest Term Possible
Automatically going for the longest amortization term possible because your payments are less is also a mistake. A shorter amortization period with bigger payments might not seem very fun, but you will end up saving thousands of dollars and knocking years off the mortgage. Not to mention, you may be able to handle those higher payments comfortably, so it’s a valuable use of time to explore that option.
Extending the Term too Often
Refinancing your mortgage isn’t uncommon, but if you extend the amount of time that’s left on your current mortgage, the interest payments start again from scratch. That means your new payments will be mostly interest and the cycle starts over again.
Sometimes this is a helpful option if you need to make room financially in other areas of your life, but take time to work out the numbers first. What seems like a good idea may end up costing you in the end.
Not all of those fancy amortization calculation tools you see will accurately figure out the actual amount of money you’ll pay over the life of your mortgage. Make sure the tool you use, or person you use, properly calculates the end amount, even if that means working it out manually. Your mortgage amortization is one of the key elements in determining how much you’ll spend in interest, so it’s important to invest time to getting it right.