The amortization period on a mortgage is the total length of time it will take you to pay off your mortgage. If your down payment is less than 20 percent of the purchase price of your home, the longest amortization period allowed is 25 years.
In comparison, the term of a mortgage (which ranges from six months to 10 years) represents the length of time for which your mortgage agreement with a lender is valid.
Some people choose a longer amortization period because it lowers their mortgage payments: the longer the amortization, the lower the mortgage payments. This can mean, for some, the difference between buying and not buying a home.
However, the longer it takes you to pay back the mortgage principal to the lender, the more interest you will pay — which can affect your ability to save for other important things, such as retirement.
The table below shows how much interest you would have to pay on a $200,000 mortgage, depending on the monthly payment and amortization period chosen:
|Amortization period||Monthly payment||Total interest payments1||Total payments1|
1. over the amortization period, assuming monthly payments on a $200,000 mortgage with an interest rate of 6%.
Another way to look at it is to compare how much of the amount borrowed (the principal) would be paid off in the first few years, depending on the amortization period. Using the above mortgage as an example, the table below shows how much of the principal would be paid off in the first five years:
|Amortization period||Principal paid back to the lender
after 5 years1
1. This example is based on a $200,000 mortgage with an interest rate of 6%, and assumes monthly payments.
2. This figure represents the percentage of the original amount borrowed paid back to the lender. It is calculated by dividing the dollar amount of principal paid back to the lender after 5 years by the original amount borrowed (in this example $200,000) and multiplying the result by 100.
Here are ways to reduce your total interest costs over the long run, no matter what amortization period you choose: