What is mortgage amortization?Â
Buying a house is so much more than just a financial transaction to obtain a piece of property. It also comes with understanding new terminology that is important to the entire homeownership process. One of those new expressions is the word ‘amortization’ and being aware of your amortization period can play a significant role when you’re obtaining a mortgage.
What is amortization?
Amortization can be best demonstrated with a schedule, with a predetermined end date. It is also referred to as the amortization period, and it represents the length of time it will take you to completely pay off your mortgage. That end date could be 25 years, but it could be a much shorter amortization period depending on each person’s financial situation and how aggressively they choose to pay down the outstanding balance. Homebuyers who pay less than the minimum 20% down payment have a maximum of a 25-year amortization.
Going back to the idea of an amortization schedule, you’ll see your monthly payments divided into two parts, one part is the how much is put towards the principal amount; the other part is how much is put towards the mortgage interest. An amortization schedule is easier to forecast when your interest rate is fixed.
Calculating amortization
The formula for calculating amortization can be daunting, so it could be better if you approach your mortgage broker and request a calculation and schedule of your amortization. There are many resources online in Canada, such as a mortgage amortization calculator, that will help you figure out what your amortization period is. Whether you’re just calculating for your current mortgage or for a new piece of property, it will give you a good idea of how much of your monthly payments will go towards the principal and how much towards the interest.
The difference been amortization period and mortgage term
In essence, the term of the mortgage is the length of your contract. Usually, the length of a term in Canada is not more than five years, but you can choose a longer term or a shorter term based on your needs. When the agreement expires, you are expected to renew your mortgage. The only time you won’t have to renew is when you’ve completely paid off the home loan. In some cases, you can’t always choose your amortization, but you have more freedom when you’re choosing a term.
On the other hand, amortization is the period of time it takes for the house to be paid in full. You can have multiple terms within an amortization, but it can’t be the other way around. While both amortization period and mortgage term are important in the mortgage discussion, they are two distinct concepts.
Why you should know about amortization
Planning your finances when you’re making such a big purchase, such as towards a piece of property, is really important for any Canadian to do. Not only does it allow you to plan and budget for upcoming payments, but it can also help you manage your debts.
One other thing that amortization allows you to see through a forecasted schedule is how much equity you build over time and how much equity you’ll have at a certain point in your mortgage journey. Home equity can be advantageous because banks and lenders will allow you to access it in the form of a loan. With that loan, you can put it towards the house, renovating it and increasing its value in the market.
Home equity loans with Alpine Credits
Once you have paid down at least 25% of your property’s value, you could be eligible for a home equity loan from Alpine Credits. You’re not obligated to access it, but it does open new financial opportunities for you such as debt consolidation, business loans, or even home renovation. The more that you have paid towards your mortgage, the more your loan will also be. Put simply, the larger the portion of your mortgage you have paid off equates to a growing value of home equity you have in your property, and this is what lenders will consider when offering you additional financing.
Contact one of our Financial Solution Specialists today and they can get you started on the process of getting a home equity loan. In the conversation, you’ll also be able to ask them anything regarding home equity.