Before you buy a home in Winnipeg, Manitoba, you need to become familiar with various terms. This includes the differences between mortgage term and amortization. A mortgage term refers to the amount of time you are committing to a particular rate on a loan with a lender. This timeframe can span from 6 months to 10 years. However, 5 years is the most common length of time.
Amortization refers to the amount of time it will take you to pay off your entire loan, making the minimum monthly payments. If the home is CMHC issued, that timeframe will be up to 25 years. If it is through a private lender that isn’t CMHC issued, the term can be up to 40 years.
What to Expect from a Mortgage Term
The terms of the mortgage are very important, and consumers need to read through all of them to make up their mind about the best offer they can get. It is never advised to get into a mortgage that you can’t afford. Make sure there is enough room in the budget for it, for savings, for other financial obligations, and for any emergency expenses that may come up.
At the end of each term, a renewal will be done. This is the time for the new terms to be negotiated. The goal is to be able to reduce the overall interest rate so that the monthly payment can be reduced. That means more money in your own pocket and it also means that you will be able to have more disposable income.
However, there is no guarantee that the amount will go down. If the interest rate increases, then your payment may go up. This is another reason to have funds in savings and to make sure the budget isn’t overextended.
What to Expect from Amortization
The amount of time it takes to pay off your loan on the home from start to finish won’t change unless you alter the overall loan terms. For example, if you get a lower mortgage term, you can still continue to pay more towards your loan each month. The extra money you pay will go towards the principle on the mortgage and that can shave months or years off the overall amortization schedule.
Should the mortgage be completely refinanced at some point, then that can extend the overall payoff on the mortgage loan. For example, if you have been paying in it for 5 years but start the loan all over with a refinance then it takes more time to pay off the loan. However, this refinancing could get you a lower payment and more breathing room within your budget for the long term.
When it is affordable, a higher payment and shorter amortization period is recommended. This will provide more equity in the home in less time. By paying off the home in less years, it also means that a great deal of the interest will be saved. That is money that remains in your own pocket rather than going to the lender.