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21 Mar

What is a Mortgage Amortization?

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Posted by: Tracey Brock

 

 

What is a Mortgage Amortization?

Buying a new home is a very exciting yet at times, confusing moment in your life.  Many of my first time home buyers become overwhelmed with the new terminology that is being thrown at them from all angles.  Beacon Scores, GDS/TDS, Variable Rate, Adjustable Rate, etc.  Today I would like to take the time to explain what the word Amortization means as it applies to mortgages and how it is different from the mortgage term.

Wikipedia defines an Amortization Schedule as follows:

An amortization schedule is a table detailing each periodic payment on an amortizing loan (typically a mortgage), as generated by an amortization calculator. Amortization refers to the process of paying off a debt (often from a loan or mortgage) over time through regular payments. A portion of each payment is for interest while the remaining amount is applied towards the principal balance. The percentage of interest versus principal in each payment is determined in an amortization schedule.

While a portion of every payment is applied towards both the interest and the principal balance of the loan, the exact amount applied to principal each time varies (with the remainder going to interest). An amortization schedule reveals the specific monetary amount put towards interest, as well as the specific amount put towards the principal balance, with each payment. Initially, a large portion of each payment is devoted to interest. As the loan matures, larger portions go towards paying down the principal.

The Amortization of a mortgage is the estimated number of years it will take you to pay off your mortgage entirely. Typically, amortization periods range up to 30 years. Although, there are Prime Lenders in Canada, that will amortize your mortgage up to 40 years. The longer your amortization is, the lower your mortgage monthly mortgage payments will be.  However, the higher the amortization, results in more total interest paid over the life of your mortgage.

An amortization is made up of a number of mortgage terms.

A mortgage term is the length of time you have agreed to a certain interest rate and a specified payment schedule. A term can range from as short as 6 months to as long as 10 years. At the end of your term, also known as renewal, you can agree to a new interest rate and payment schedule, or you can pay off your mortgage entirely.  For example, at the end of a 5 year term with a 30 year amortization with monthly mortgage payments, your new amortization (or estimated time your mortgage will be paid in full) will be 25 years.

For more information on your mortgage and for a quick mortgage pre-approval, ask for me

Tracey Brock, Mortgage Broker, directly at 905 793 0700.

It’s about more than just mortgages and I am here to help you!