When the thought of a mortgage comes up, the first thing people tend to consider is the interest rate charged on the mortgage. However, when choosing a mortgage lender, there are more factors to think about than the interest rate. For instance, the length of the loan can mean different things for different people. While a short-term mortgage is suitable for some, others may need to choose a loan with a longer-term.
What You Need to Know About Terms in Mortgages
You might be surprised to learn that the amortization period is not the same as the term of the mortgage. The amortization period is the length from start to finish. The majority of mortgages have an amortization period of 25 years. This means that if you play as the original guidelines show, it will take 25 years to pay off your loan. But did you know that there can be differences throughout your mortgage? In between, you may need to negotiate different payments for set periods of time.
A mortgage term (not amortization period) is usually set for five years. This means that you pay on the principal plus interest at a specific rate for those five years before negotiating another five-year term of payment. The actual amount of time for a mortgage term can vary from months to decades. RBC offers as long as a 25-year term on mortgages.
Is a long term mortgage for you?
The 10 years fixed term mortgage is popularly offered by banks. The interest rate on these mortgages ranges from around 4 to 7 percent. The interest rate is a little higher than you might find with a five-year term. but there is a sense of security in knowing that your rate will stay the same for ten years.
Shorter Term Mortgages Offer Lower Rates
A short term mortgage has lower interest rates, but over time, the rates can change, and the amounts you pay can change when it is time to renegotiate your mortgage. Still, your monthly premiums will be lower, and it could save money in the long haul.
To Break or Not to Break Your Mortgage
If you are watching the interest rates drop and stay low while your current mortgage stays the same, you might be considering breaking the mortgage and obtaining a new one for the lower interest.
You should understand that breaking a mortgage comes with a penalty. The penalty entails paying for three month’s worth of interest payments or using the IRD formula to calculate your penalty. An IRD is the interest rate differential or the difference between the initial rate of your mortgage and which mortgage is available at the current time. The penalty will be chosen according to which comes out at the highest cost, and you will have to pay the highest cost.
Will the penalty be worth it?
You need to know how much interest you will pay over the cost of your current mortgage if you continue with it versus how much you would end up paying with a lower rate. If you find that you save more by paying the penalty and switching to the lower rate mortgage, then the change maybe your best option. Still, before you make that decision, make sure there aren’t other fees that are associated with the potential to cause more financial harm than good.