The amortization period denotes the number of years you have to pay your mortgage balance in full. The length of your amortization period will have a great impact on the total actual cost of your mortgage. For years, the banking industry had been using a standard amortization period of 25 years. Most lenders use this benchmark when they discuss mortgage offers. Longer or shorter time frames, however, are also possible.
A shorter amortization period means that you enter the realm of being a real home owner that is free and clear on their initial lump sum mortgage, pay significantly reduced interest, and establish home equity faster. Equity means the difference of the home's market value and any outstanding mortgage on it; how much money you can claim as asset. You can then use your equity as security for financing the education of your children, home renovations, other property investments, and many others.
There are, of course, other factors to consider. By reducing the total number of mortgage payments to make, the amount of each regular payment will be increased. If you don't have a regular income or if you're buying your first home and will be burdened with a large mortgage, this may not be the appropriate option.
A longer period of amortization also has advantages. You can get into your dream home quicker with a longer period of amortization. Upon applying for a mortgage, lenders will calculate the maximum amount you can afford as regular payment. That amount is then used to calculate the total amount they will lend as mortgage. Since a shorter period of amortization means increased regular payments, a longer period of amortization lessens the regular principal amount and interest payment by distributing payments over an extended time period. So you could be eligible for a bigger mortgage amount than you thought, or be eligible for your mortgage quicker than you intended. So you get into your dream house sooner than you anticipated. A longer period of amortization means each regular payment is only similar or even lesser than paying rent, but it also means paying more interest over the span of the mortgage.
Whatever the amortization period you chose when you first got your mortgage, you can always change it. You can always shorten the period of amortization and employ alternatives like accelerated payment, giving additional payments like Double Up, or a per annum lump sum prepayment of the principal, to minimize interest costs. Also, regularly re-evaluate your amortization approach especially when mortgage renewal time comes. As your job and salary improves, you can raise the amount of your regular payment by as much as 10% once annually. All of the said prepayment features help to shorten your amortization period by years, and cut your costs on interest.
A shorter amortization period means that you enter the realm of being a real home owner that is free and clear on their initial lump sum mortgage, pay significantly reduced interest, and establish home equity faster. Equity means the difference of the home's market value and any outstanding mortgage on it; how much money you can claim as asset. You can then use your equity as security for financing the education of your children, home renovations, other property investments, and many others.
There are, of course, other factors to consider. By reducing the total number of mortgage payments to make, the amount of each regular payment will be increased. If you don't have a regular income or if you're buying your first home and will be burdened with a large mortgage, this may not be the appropriate option.
A longer period of amortization also has advantages. You can get into your dream home quicker with a longer period of amortization. Upon applying for a mortgage, lenders will calculate the maximum amount you can afford as regular payment. That amount is then used to calculate the total amount they will lend as mortgage. Since a shorter period of amortization means increased regular payments, a longer period of amortization lessens the regular principal amount and interest payment by distributing payments over an extended time period. So you could be eligible for a bigger mortgage amount than you thought, or be eligible for your mortgage quicker than you intended. So you get into your dream house sooner than you anticipated. A longer period of amortization means each regular payment is only similar or even lesser than paying rent, but it also means paying more interest over the span of the mortgage.
Whatever the amortization period you chose when you first got your mortgage, you can always change it. You can always shorten the period of amortization and employ alternatives like accelerated payment, giving additional payments like Double Up, or a per annum lump sum prepayment of the principal, to minimize interest costs. Also, regularly re-evaluate your amortization approach especially when mortgage renewal time comes. As your job and salary improves, you can raise the amount of your regular payment by as much as 10% once annually. All of the said prepayment features help to shorten your amortization period by years, and cut your costs on interest.
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When used in the context of a larger financial transactions of consequence amortization is the process by which loan principal decreases over the life of a loan, typically an amortizing loan.
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