Mortgage Amortizations

Mortgage Amortization

Definition: The process of paying off a loan by periodic payments of blended principal and interest.

 

It's easy to get a loan unless you need it.
- Norman Ralph Augustine


The length of time you have to pay back the loan is very important. It is also important to know what kind of loan it is. The most common mortgage today is described as ‘The Constant Payment Mortgage’. This is a mortgage in which the payments are made on a specific day at a specific frequency, for example, monthly or weekly.

These types of loans have two types of amortizations. They can be fully amortized or, most common, partially amortized. Partially amortized loans are set in to terms of 2-10 years where the amortization can be 15-30 years. For example, a 25 year amortization with a 5 year term. This would mean that there would be a large payment at the end of the term. This usually gets put back into another term until the amortization period ends. Keeping it this way gives lenders and borrowers more flexibility and choice when the terms expire as many things can happen over the duration of a mortgage.

Amortizations have been allowed to go as long as 50 years but now have recently been scaled back to 30 year maximums. This is good for many reasons. An attached graph below will indicate that the longer amortization will decrease your payments only slightly after 30 years, yet extending the life of your mortgage much longer.

Keep in mind that it is far better to place more money on your mortgage earlier rather than later. Even if you allocate for just another $20 on each payment it will greatly reduce the amount of interest over all.

Check out a mortgage calculator and see for yourself.

http://www.mortgagecalculator.org/

  • Example of a 400k mortgage at 5% interest. 

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