Buying your first home: Three steps to successful mortgage shopping

-Table of contents

 

Step 1: Know what you need and want in a mortgage

Amortization period

The amortization period is the length of time it takes to pay off a mortgage in full.

The amortization period is not the same as the mortgage term, which is the length of time your mortgage agreement will be in effect (for example, five years).

If your down payment is less than 20% of the purchase price of your home, the longest amortization period allowed is 25 years.

Although a longer amortization period means lower mortgage payments, it is to your advantage to choose the shortest amortization period—that is, the largest mortgage payments—that you can comfortably afford. You will pay off your mortgage faster and will save thousands or even tens of thousands of dollars in interest in the long run.

The following table shows how much interest is paid (over different amortization periods) on a $200,000 mortgage, assuming a constant annual interest rate of 4.5%.

How amortization affects the interest you will pay
Mortgage amount Amortization Monthly payment Total interest paid
$200,000 25 years $1,107 $132,084
$200,000 20 years $1,261 $102,594
$200,000 15 years $1,526 $74,633
$200,000 10 years $2,069 $48,251

In the above example:
  • increasing your payment by just $154 from $1,107 to $1,261 per month means you would be mortgage-free five years earlier and save nearly $30,000 in interest
  • increasing the monthly payment by $419 from $1,107 to $1,526 would allow you to be mortgage-free 10 years earlier and save over $57,000 in interest.

There are other ways to pay less interest, such as using your prepayment privileges and choosing an accelerated payment frequency.

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