Mortgage Amortization Period: What It Is and Why It Matters
Mortgage amortization period is the number of years it takes to repay the mortgage in full.
A typical mortgage amortization period would be 25 years, meaning that it would take 25 years to repay your mortgage. Since the lender is charging you interest on your mortgage, the longer the amortization period the more you will pay in interest.
What mortgage amortization period should you choose?
With how long amortization period should you go? It depends on what you can afford each month.
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Our simple mortgage calculator helps you compute your payments and the total cost of borrowing (total interest) per different amortization periods. In addition, to help you better understand how your mortgage amortization period can influence the amount of money you save/spend, below we provide a simple example explaining the calculations involved. Let's say you have a $200,000 mortgage at a 6% interest rate. With a 25 year amortization period, your monthly payment would be $1,279.61; that means that over the 25 year life of your mortgage, your total payments will be $383,883. |
However, if you shorten the amortization period to 20 years, your monthly payment increases to $1,424.38; bad news, right? Not necessarily. Because you are now only paying for 20 years, instead of 25 years, you have reduced your total payments from $383,883 over 25 years to only $341,851; that's a savings of almost $42,000.
Going a step further, if you could pay off your mortgage in 15 years, your monthly payment would be $1,679.77, but your total payments over 15 years would be only $302,359, for a saving of over $81,000!
And remember, in your payments you are paying back both principal an interest. In our example, the first $200,000 you repay is the money you borrowed when you bought your house; the rest is the interest. So, as you can see the savings are significant when you shorten the amortization period.
So, what amortization period is best for you?
When you first purchase a home cash is tight, so a 25 year amortization may make sense (use our simple mortgage calculator to figure out how big a payment you can afford each month). However, if your financial situation improves by the time you need to renew your mortgage, it may make more sense to shorten your mortgage amortization period.