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Amortization and Term of Mortgage

What is the difference between Mortgage Amortization and Mortgage Term

Mortgage loans are a very common type of loan. Many people who couldn't purchase a home with their own funds can qualify for one with mortgage lending.  A mortgage is a loan secured by real estate. It is used to purchase, refinance, or borrow against a home or other real estate. Isn't it great to buy a house you can call your own? But how to get a mortgage? You can go the traditional route and talk to a bank.  But is that your best option? Or, an even better question is – Do you know you have options? Well, we want you to know that you have a lot of options.  When you enlist Best Rate Mortgage Brokers in Red Deer, we will show you all of the options available. Many you may not have been aware of.  Our team will guide you to your new home with the perfect mortgage.   Mortgages are typically long-term loans, lasting anywhere from five to twenty five years and beyond. The entire length of the mortgage for repayment is known as the “Mortgage Amortization.” Whereas the period in which the rate has been secured is called the “Mortgage Term”. Let’s discuss these two in more detail. 

What Is Mortgage Amortization?

  Before moving forward to the differences, let's learn more about them individually. Let’s understand what is referenced by mortgage amortization.  The amortization is the length of the commitment that a borrower agrees to pay off a home loan. It is typically expressed in years and can range from five to twenty five years. Now the main component of the mortgage agreement will cover off many different terms and conditions.  All of these conditions and terms will apply throughout the entire life of the mortgage.  Often the mortgage amortization will disclose the full cost of the loan to the borrower, in how much interest can be projected to be paid in accordance with the terms.  It will disclose how much of the payments will be applied to principle and how much will be paid towards interest.   

Generally, the longer the term, the lower the monthly payment, but the higher the total interest paid over the life of the loan. It is important to understand the implications of the mortgage amortization when shopping for a home loan to optimize financial savings. This is when you need some expert help, with mortgage experience and knowledge.  And the Best Rate Mortgage Brokers in Red Deer are here to provide that assistance to you. We can help you to fully understand the ins and outs of mortgage amortizations and terms that will apply.  

What Is the Mortgage Term?

There are several things to note about the Mortgage Term. To start with, the Mortgage Term is the set period terms of payment arrangements contained within the full amortization. For instance, if the mortgage amortization is 25 years, there may be 5 terms of 5 years each, where the interest rate is locked in and the monthly payment amount is determined.  It is rare that the interest rate of a mortgage loan is locked in for the full life of the mortgage.  It is typically up for renewal at the end of each mortgage term.  And the remaining balance of the full mortgage loan will once again be amortized over the remaining life of the mortgage and new rate and payment amounts will be agreed upon.  Often at the end of the mortgage term, the entire mortgage can be paid out in full without penalty or transferred/refinanced elsewhere without penalty.  

Each payment in the mortgage term is composed of both principal and interest. The principal portion reduces the loan balance, while the interest portion is the fee charged for borrowing the money. What to keep in mind is that as the loan balance is paid down, the interest portion of each payment also decreases. It stands to reason then, that the length of the mortgage amortization will impact the amount paid in interest to the lender.

Throughout the mortgage, the amount of principal and interest included in each payment will shift until the mortgage is paid off. The length of the mortgage amortization and the term interest rate will determine the size of the payment and the total amount of interest paid over the life of the loan. 

Difference Between Mortgage Term and Mortgage Amortization

  The above information may be confusing.  We get that.  Another reason having a trusted Mortgage Broker in Red Deer makes a lot of sense and provides valuable assistance when applying and negotiating a mortgage loan contract.  But there are 2 significant differences between these two terms.

    ●        Amortization will always look towards the end of the mortgage, where the loan is completely paid off and settled.  It does not lock in any rate but is used to determine the required payment amounts to meet the payout requirements in the distant future.  It will also reflect any specific terms and conditions that will be in effect over the full life of the mortgage.

  ●        Mortgage term will always look at the current interest rate that has been locked in and determine what the current payment will need to be to complete the payoff of the mortgage.  It is the period of time within the amortization where the rate is locked in and will not be renegotiated until the end of the current term.  

In Conclusion

To conclude, mortgage term and mortgage amortization are two different components of a mortgage loan. It is important to understand the implications of both when shopping for a home loan to ensure you find the right mortgage that suits your financial needs. If you need help navigating the world of mortgage lending, enlist the assistance of the Best Mortgage Brokers in Red Deer.  Call us Today or start your online application now!  
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