If you are a first-time homebuyer, many terms may confuse you. Amortization is one word you may often hear but not know what it means and how it affects you. Let’s take a closer look at this word and why you should know it.
What is Amortization?
Amortization is essentially the process of paying off your mortgage or the principal of a loan. As you make your mortgage payment each month, a portion of that money goes toward the principal of the loan and your mortgage loan is reduced.
When you first begin to pay your monthly mortgage payment, you will notice that more of your payment is going toward your loan’s interest, rather than the principal. This is normal. As time goes on, your payment amount stays the same but the principal on your loan is reduced. This results in paying less interest month after month. When you have less interest to pay, a larger portion of your monthly payment can go towards your principal balance.
What is an Amortization Period?
An amortization period is the amount of time it takes to pay back your loan. When you apply for your loan, you will be asked how long you desire to pay off your home loan. In Canada, you can choose to extend your payments for up to 30 years. Keep in mind that the longer your amortization period, the lower your monthly payments. However, you can expect to pay substantially more interest.
For example, if you borrow $500,000 with a 3.3% interest rate, after 30 years you will pay $495,000 in interest alone. However, if you reduce your amortization period to 20 years, you will only pay $330,000 in interest. This will save you an astounding $165,000.
An amortization period is not the same as a mortgage term. A mortgage term is the length of time you are committed to a lender, rate, and any other conditions. The amortization period is the time it takes to pay off the loan.
Can I Pay Off My Mortgage Early?
Before you decide to pay off your mortgage early, you want to read the fine print of your loan. While not common, some loans may charge a penalty fee if you pay it off before you completed the agreed-upon amortization schedule. If paying off your mortgage is a goal of yours, talk to your lender prior to making any final decisions and signing your documents.
If you have questions about buying a home in the Markham area, the home-buying process, mortgages, the current real estate market, etc., contact Markham real estate agent Martin MacFarlane today or visit his blog.