Is a 40- year Amortization Mortgage right for you? by Eduarda Pita

Eduarda (Eddie) Pita – www.eddiemac.ca - (416) 920-9931


Is a 40- year Amortization Mortgage right for you? 
by Eduarda Pita

Longer or shorter - your amortization affects how much your mortgage really costs.
Choosing the length of your amortization period, which means the number of years you will need to pay the full balance of your mortgage, is an important decision that can affect how much interest you pay over the life of your mortgage.
Historically, the banking industry’s standard amortization period has been 25 years, a standard that still applies today. It is the benchmark that is used by lenders when discussing mortgage offers, and it is usually the basis for mortgage calculators and payment tables. However, shorter or longer timeframes are available.
The main reason to opt for a shorter than standard amortization period is to become mortgage-free sooner. And since you are agreeing to pay off your mortgage in a shorter period of time, the interest you pay over the life of the mortgage is therefore greatly reduced. You also have the advantage of building home equity sooner.
Equity is the difference between any outstanding mortgage on your home and its market value. It represents the amount of money you can claim as your asset. If you choose, your equity can be used to secure lower interest cost financing for things such as home renovations, your children’s education or for second property investments, just to name a few.
While there are many good reasons to opt for a shorter amortization period, there are a couple of other factors to consider. Because you are reducing the actual number of mortgage payments you make to pay off your mortgage, your regular payments will be higher. If your income is irregular, or if you’re buying a home for the first time and will be carrying a large mortgage, a shorter amortization period that increases your regular payment amount and ties up your cash flow may not be the best option for you.
Lenders are quietly pushing 40-year amortizations as a way to help borrowers cope with the higher interest rates and with rapidly rising homes prices.
For a given amount, a 40-year amortization carries lowers monthly payments than a 25 -year. That means a 40 year amortization allows you to afford a slightly more expensive house. The longer amortization has disadvantages: You pay more interest and build equity slower. Of course, there’s no such thing as a free lunch. Any time a borrowers adds years to a mortgage term, the overall interest bill rises.
So who should do 40-year amortizations? People who have a big mortgages of $400,000 plus. People who are single moms or dads who live their children and family where they are dependent on the income of parents’ pension and children’s income. Lastly those who have substantial debt who need to refinance their debt onto their mortgage and need the longer amortization to help them get back up on their feet.
No matter how the amortization is structured, the benefit to the borrower remains the same: lower monthly payments.

Have more questions?
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