The ABCs of Mortgages

Term

The amortization of a mortgage is divided up into smaller time periods called "terms". Mortgage terms usually range from six months to five years, but some institutions will offer seven- or 10-year terms. The term is the period of time during which, with fixed-rate mortgages, the interest rate and payment amount are fixed. With variable-rate mortgages, the payment amount may, or may not, change; you should review your agreement to check when the payment amount may change. At the end of the term, you can renew your mortgage for a new term, at prevailing interest rates.

Generally, the longer the term, the higher the interest rate. Because it is not possible to know what the interest rates will be over any given period of time, many consumers seeking certainty choose a longer term with a fixed interest rate so that they know in advance, at least for a specified period, how much they will have to pay for their mortgage. This helps them to plan their finances better and enhances their feeling of security. However, during periods when interest rates are expected to fall, many consumers choose variable-rate mortgages so they can take advantage of lower rates without renegotiating their mortgage.