Jason Peatz – Mortgage Associate

“It is going to take how long for me to pay off my mortgage?!?”

April 30, 2009 10:33 am Jason Uncategorized

I have been quite fortunate in my business to work with many first time home buyers and am happy to take the time to explain all parts of the mortgage process and all mortgage terminology.

Invariably we always get to the topic of amortization and amortization period.

For those of you who do not know what amortization is the Alberta Mortgage Brokers Association (AMBA) uses this definition:

“The gradual retirement of a debt by means of partial payments of the principal at regular intervals…

The Amortization Period is a time of arrangement for paying off a mortgage by equal installments or periodic constant payments.”

The Amortization Period has a huge effect on the size of the borrower’s monthly payment. This, in turn, effects how much home they may qualify for. It stands to reason that if you borrow $100,000 and you decide to pay it off in 10 years that your monthly payments will be bigger ($1,005) than if you decide to pay it down in 20 years ($598).

Sometimes the “standard” Amortization Period of 25 years does not allow a couple to purchase the home that they really want. So I present them with the idea of extending the Amortization Period to the maximum – 35 years. This allows them to qualify for more and in turn get the property they want.

But it is really important for people to understand that there are two draw backs for extending the Amortizaton Period:

• If their down payment is less than 20% and they decide to extend the Amortization Period then the Mortgage Insurance fee will be increased by0.4%. On a $100,000 mortgage their fee would increase by $400.
• By extending the Amortization Period people will be paying more in interest payments over the course of their mortgage. On a $100,000 mortgage with a 25 year Amortization Period the total interest paid is $56,022 but on the same amount with a 35 year Amortization Period the interest paid is $82,426.

As long as the borrowers know that taking this action will effect how much they will pay and decide that they are ok with this then we will move forward with the 35 year Amortization Period.

In future blog posts I will reveal some strategies for paying down your mortgage faster thereby reducing the overall interest payments and negating some of the effect of extending the Amortization Period.

Call if you have any questions.