Home Buying? Buyers' Resource Guide

Mortgage Terms and Fees

Over the course of your amortization period, you may have many different mortgages. The term is simply the length of time that interest rates, payment schedules and obligations to the lender exist. When the term comes to a close, you will have the option to renew your mortgage at your current or new lending institution. You can also put a lump sum toward the principal without restriction, or pay off your entire mortgage without penalty. If you wish to change the structure of your agreement during the term you may have to pay a substantial fee to the lender.

Choosing Security or Flexibility

Mortgages are available with closed, open and convertible options, with fixed or variable rates. The options you choose will reflect your beliefs about the market -- is it going up or down? -- and your short-term goals and desire for long-term security.

Amortization

This is the amount of time over which the entire debt will be repaid. Most mortgages are amortized over 15-, 20-, or 25-year periods. The longer the amortization, the lower your scheduled mortgage payments, but the more interest you pay in the long run.

For payment comparison over various amortization periods, refer to the schedule of payments.

Schedule of Payments

There Are Ways to Reduce Your Interest Payments:

1. Negotiate a shorter amortization period.
(That's the number of years over which you'll pay off the total amount of the mortgage. Don't confuse this with the term of the mortgage, which can run from 6 months to 10 years and must be renegotiated.) A shorter amortization period will mean higher monthly payments, but you'll be paying more principal with each payment. Consider this:

Just as an example, let's say you borrowed $100,000 at 10% interest.

Amortization Period

Monthly Payment

Total Payments

Total Interest Paid

25 years

$895

$268,500

$168,500

20 years

$952

$228,480

$128,480

15 years

$1,063

$191,340

$ 91,340

10 years

$1,311

$157,320

$ 57,320

5 years

$2,148

$128,880

$ 28,880

2. Accelerating your payments.
Opt for a weekly or biweekly payment schedule. More payments per month mean less overall interest.

Let's go back to our $100,000 loan at 10% for 25 years.

Payment Schedule

Amount

Total Interest

Mortgage-Free

Monthly payment (12)

$895.00

$168,500

25 years

Biweekly payments (26)

$447.50

$118,927

18 years, 10 months

Weekly payments (52)

$223.75

$118,111

18 years, 9 months

3. Put lump sum payments toward your principal.

When negotiating your mortgage, ask how frequently you can make a lump sum contribution. Most financial institutions allow a percentage of your overall mortgage to be contributed on your annual mortgage anniversary date. Depending on the type of mortgage you select, you may also be able to negotiate additional monthly, or even weekly, payments. These payments will rocket you toward mortgage freedom.

Here is another example assuming you have an $80,000 mortgage at 8% with a 25-year amortization, and you're able to put an additional $2,000 lump-sum payment toward it every year.

 

No Lump-Sum Payments

$2,000 Annual Payments

Mortgage-Free

25 years

14.8 years

Total Interest Paid

$103,165

$55,549

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