WHAT AMORTIZATION PERIOD IS RIGHT FOR YOU?
How much time do you need?
Amortization. Whoa. This is one of those scary, ten-dollar words that makes people say whoa. It’s got five syllables, it involves large sums of money… and it’s got mort in it – didn’t I learn in French class that mort means death?
Yes you did. The thing is, amortization has a very simple meaning. It basically boils down to paying down a debt little by little, and at the end it’s all paid off. A 20 year amortization means it will take that long to pay off the mortgage, if no extra payments are made.
It can’t be that easy, can it? I make my payments every month, and at the end I own my property free and clear. Well, there are property taxes, and utilities, and upkeep, of course… but looking at the mortgage lender, yes you’re free and clear at the end of amortization. A lot of people assume this is how it’s always been.
As a general practice, however, amortized mortgages (with zero owing at the end of the contract) are relative newcomers to the financial scene. Before the Great Depression, most lenders offered low monthly payments but demanded a large lump sum at the end — much like how car leases work today.
Especially during the 1930s, thousands upon thousands of people in Canada and the United States were unable to come up with this massive “balloon payment”. So many people lost their homes, in fact, that governments stepped in to regulate how mortgage lending works.
Amortization meant slightly higher payments each month, but guaranteed a zero sum at the very end of the contract. And that mort part? It refers to the death of the loan, not the death of the borrower!
Because of this predictability, you can ask the lender for an amortization schedule, which shows how much of each payment goes to interest and how much goes to principal for the entirety of the life of the loan.
In a 25-year amortization, this can mean pages upon pages of numbers — again, this makes a lot of people say whoa. Don’t panic! We’ll talk about how to read a schedule in a future blog post, and even give you a few tips on how to significantly reduce how much time it takes you to reach that elusive zero balance.
In future blog posts, we will talk about interest (the amount of your payment that goes to the mortgage), principal (the amount of your payment that goes toward the house) and more of ten-dollar words like lien.