As you contemplate buying your first home, you might be wondering about mortgage amortization. In case you’re unfamiliar with that term, it refers to the length of time of your mortgage repayment.
At Addition Financial, we hear questions about mortgage terms and options a lot. It’s our job to work with members and make sure they understand their options. We want our members to succeed, and that’s one of the things that sets us apart from traditional banks.
With that in mind, in this post we’ll review some of the mortgage amortization options available to you as a first-time homebuyer so you can decide which option will work best for you.
#1: Long Amortization Period, Lower Monthly Payments
The most common mortgage term is 30 years. That means you’ll have to make a total of 360 monthly payments over 30 years before you’ll own your home.
Thirty years might seem like a long time, but there are advantages to choosing a longer mortgage term. The biggest is that a 30-year term keeps your monthly payments as low as possible. For many people, that’s important. They want to be sure they can afford the monthly payments.
A 30-year mortgage is best if you feel that your income is unlikely to increase, and you want the safety of knowing that you can predict your payments and be able to meet them.
The downside of a 30-year mortgage is that at first, you’ll be paying more in interest than you’ll be paying toward the principal of your loan. That can be disheartening because it means you won’t have much equity in your new home at first. You may have very little if you made a minimal down payment.
#2: Short Amortization Period, Higher Monthly Payments
Thirty years is standard, but shorter periods can be attractive if you want to pay off your mortgage more quickly and have the wherewithal to do so.
Some alternatives to a 30-year mortgage include terms of 20 years or even 15 years. Your monthly payment will be substantially higher than it would be with a 30-year term, but you’ll pay less in interest and gain equity more quickly as a result.
It’s always a good idea to ask your lender to break down your options. You might think that a 30-year term is best but learn that you can afford the payments on a 20-year plan. You won’t know unless you check.
#3: Accelerated Amortization
What if you decide that a 30-year mortgage is best but find that you can afford to pay a bit more than the minimum due each month? If that sounds like something you can do, you might be interested in accelerated amortization.
Accelerated amortization involves paying some extra money to your mortgage lender each month. For example, if you had a $200,000, 30-year mortgage, paying an additional $100 per month could help you pay off your mortgage in 25 years instead of 30.
The key determining factor here is whether your lender will put the extra money toward the principal of your loan instead of using it to pay interest. Paying toward the principal of your loan is what you want because lowering the principal will get you more equity. Make sure to check before you engage in any accelerated amortization.
#4: Adjustable Rate Mortgages
Most mortgages have a fixed interest rate. However, adjustable rate mortgages can sometimes help you amortize more quickly – but it’s important to know the risks.
After the housing crash of 2007-2008, adjustable rate and “balloon” mortgages got a lot of negative attention. The benefit of having an adjustable rate mortgage is that you can be flexible with your payments in some situations. For example, if your income increased dramatically, you could adjust your payments accordingly.
However, outside forces can affect your payments, too. Economic indicators and provisions in the contract could leave you with a payment that’s higher than you can afford. It’s very important to read the fine print (and consult a lawyer) before signing any contract for an adjustable rate mortgage.
#5: Re-Amortization
The final option you have is to pay a lump sum of the principal and then ask your lender to re-amortize your payments based on the new, lower balance.
Of course, this option is dependent upon you having the money to make a large payment toward the principal balance of your loan. If you inherit money or get a big bonus, it might be worth considering.
Keep in mind that not all lenders are willing to re-amortize. You should make sure to check with your lender. It’s also important to ask about fees. Many lenders charge a fee to re-amortize. Asking questions will ensure that you make the best possible decision for your circumstances.
Mortgage amortization is a complex topic. The five strategies here can help you make the best choice for you and your family now – and in the future.
To learn about Addition Financials mortgage options and how they can work for you, please click here.
Posted on Apr 9, 2018
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