When it comes to make important shopping decisions for your mortgage, you have 3 important factors to consider, the amortization period, interest rate and the term. They are equally important in your final decision.
However, when deciding what amortization period is best for you, you need to understand the difference between 25-year and 30-year amortization mortgages. Here’s a brief overview.
25-Year Amortization
Did you know that nearly 68 percent of new home purchased opt-in for a 25-year amortization period or less? What make this term a popular choice for Canadian homebuyers is that a majority of buyers want to hit mortgage-free status sooner, rather than later. When compared to a 30-year term, you can essentially pay off your mortgage 5 to 10 years sooner, saving thousands in interest.
If fixed-rate 5-year mortgages rate are low, then this term would make the most sense, as it’s shorter. It also puts you in a better financial position if rates should rise, as your principle mortgage amount would be paid off more at a lower rate. You can easily build up your home equity quicker, grow your savings account and get a guaranteed rate of return.
With a shorter 25-year term, you can expect your monthly payments to be higher than a 30-year term. So, this is also an important consideration as you’d have to ensure you can still afford your monthly payments is your health took a turn for the worst or you became unemployed.
30-Year Amortization
In 2012, Jim Flaherty the Finance Minister, reduced the maximum 30-year amortization period to 25-years. However, it doesn’t mean that 30-year term options are no longer available, quite the opposite in fact. If you have a 20 percent down payment, then a 30-year term is still an option available to you for consideration. This option would help you to avoid mandatory insurance through CMHC, while also allowing you to build more home equity.
If you have a good sense of your financial spending and are desciplined in your spending and saving behaviour, then a 30-year mortgage term is something you should probably consider. Keep in mind that you also have the ability to off your 30-year term in 25 years (paying the same total interest as a 25-year term) if your lender has good pre-payment privileges, such as:
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Double-up payments
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Payment increases
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Lump sum payments
With a 30-year amortization period, you have greater flexibility. As a first-time homebuyer you don’t need to worry about job loss with this added flexibility since you can make the minimum mortgage payment should the need arise in financial hardships. But, keep in mind only making the minimum payment would result is paying more interest.
Conclusion
If your intent is only to pay the minimum amount of either a 25-year or 30-year term for the entire period, then obviously a 25-year mortgage term is the better choice. Not only will you save tens of thousands of dollars, but you’ll also pay your mortgage off earlier. However, if you intent is to make pre-payments than a 30-year mortgage term can certainly lower your monthly payments, allowing you to save money to make large lump sum payments towards the principle mortgage amount.
If you’re still unsure about what mortgage term to choose, then speak to the mortgage brokers at AKAL Mortgages.
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