The Long and Short of Mortgage Amortization

Mortgage Amortization – is short or long better?

You’ve found your dream home and financing has been approved at a great rate, but how long should you amortize your payments? Amortization is the length of time if takes you to pay off your entire mortgage and affects how much interest you will pay over the life of the mortgage.


Longer amortizations make for more manageable monthly payments but result in higher total interest costs.

By contrast, shorter amortization will see you mortgage free faster with lower total interest costs, but the higher monthly payments can be restrictive.

Compare payments on a $400,000 mortgage at 3% interest:

Amortization
Monthly Payments
Interest Paid
15 years
$2,759
$96,575
20 years
$2,215
$131,520
25 years
$1,893
$167,893

Long Amortization strategies

Even if you can afford the shorter amortization, there are several reasons why a longer amortization may be smarter and sometimes profitable!

 

Leverage Prepayment Privileges to manage unexpected expenses

Many lenders allow borrowers to make optional, extra payments that go directly to paying down the principle. If used properly they can help you manage unexpected expenses.

 

Instead of committing to the $2,215 payment (20 years), you could chose the lower minimum payment of $1,893 (25 years) plus and optional $322 for total $2,215 per month. This will pay off the mortgage in virtually the same amount of time, but if you run into unexpected expenses (vehicle repairs, job loss, dentist bills), you can “turn off” the extra payments until your budget is back on track.

 

This strategy requires discipline to make sure the extra is “on” as much as possible. For the less disciplined, the forced savings of a shorter amortization might be a better choice.

 

Leverage Higher Return Investments to pay your mortgage

With rates at historic lows, mortgage money is the cheapest money you can get. Rather than using all your hard earned cash to pay off a 3% mortgage, choosing lower payments with a longer amortization allows you to put the extra cash in an investment that promises higher returns. A 6-8% return could more than cover your mortgage interest and put money back in your pocket.

 

This strategy requires informed market decisions and a higher risk tolerance. A crystal ball for future rate predictions is also helpful.

 

The long and the short of it

At the end of the day, the right answer for you depends on your short and long term goals. If you’d like to go through some scenarios to help you decide, I’d love to help!

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