Tuesday, January 25, 2011

What is a Mortgage Term?

You will often hear the words AMORTIZATION and TERM used together and we have already learnt what AMORTIZATION is (remember: Amortization Period = the amount of time it will take to pay back the money you borrowed). 
A TERM or MORTGAGE TERM is the length of time of your current mortgage agreement with your bank.  This does not necessarily mean that your Term will be the same amount of time as your Amortization Period.  Terms are generally shorter than Amortization Periods - usually 1-5 years long.  This is because with an ever-changing economy and fluctuating interest rates, it would not be ideal for either you or the bank to lock in for such a long period of time. 
Committing to a Term that is shorter than your Amortization Period ensures that you can keep up to date with current interest rates and are able to get out of your contract if necessary. During an Amortization Period, you may have many different Terms – for example, the most typical scenario for First-Time Homebuyers would be to have a 30-year Amortization and a 5-year Term.  In other words, if you kept renewing every 5 years, you would have 6 terms during the life of your mortgage (5 x 6 = 30).
Once a mortgage term ends, you have a choice to RENEW your mortgage term with your current bank or you can SWITCH/TRANSFER to another bank and enter into another mortgage agreement (more on these two things in upcoming posts).  The new bank will lend you the money to pay back your previous bank.

No comments:

Post a Comment