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Special Glossary of Mortgage Terms
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The Learning Centre:
Mortgages
 

The Money Management Newsletter: Home Ownership
Understanding how Term and Amortization work can save you lots of money.

If there is one thing that confuses the public it is the difference between the Mortgage Term and the Mortgage Amortization Rate.

The Mortgage Term is that period of time until your mortgage becomes due and payable. Most mortgages have a term that ranges from six months to five years. The rationale for having shorter terms is for the benefit of both the borrower and the lender.

As a borrower, if you have always made your mortgage payments, then almost every institutional lender wants to renew your mortgage. Usually, the same terms and conditions apply, except for interest rate. It is changed to the then current rate of interest.

The lender gets to adjust the rate of interest to current levels as well. From a borrower's point of view, "term" is really all about forecasting the direction of interest rates. If you believe that rates will drop in the near future, then you will elect to choose a shorter term mortgage. If you believe that interest rates will rise from current levels, then you will probably opt for a term of four or five years to lock in that rate.

Amortization, on the other hand, relates to the rate at which the mortgage is paid off. Most borrowers start with a twenty-five year amortization period. That means the mortgage will be paid off in full after twenty-five years based on the monthly payments and level of interest rates in the initial mortgage.

If you elect to take a five year mortgage and a twenty-five year amortization, then at the end of five years, you should elect a twenty-year amortization rate if want to retire the mortgage within the twenty-five years. The fastest way to pay off a mortgage is to pay off a mortgage is to shorten the amortization rate. Most people tend to think of amortization rates in terms of five year multiples. But there is no rule to that effect. As a borrower, you want can pick any amortization rate you want from one year right up to twenty-five.

Mortgage Amortization Schedule Calculator
To find out what's best for you, use the Mortgage Amortization Schedule Calculator in the Financial Tools section. Change the term periods and also the interest rate factors. By doing so, you'll see how by reducing the term from say 25 years down to 20 the difference to the monthly payment is small yet the saving of 5 years interest is huge.

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