Mortgage Amortization

What is Mortgage amortization?

When setting up your mortgage loan the mortgage amortization is the length of time the lender sets your payments at to pay back the loan.  Typically 25 year amortization is the norm when taken out a new mortgage however a borrower can choose a amortization as low as 5 years and as high as 30 years.  Over the past 3 years we have seen the amortization rules go from 25 up to 40 years and back down to 30 years.

What effect does amortization have on a borrowers payment?  The lower the amortization the higher the mortgage payment.  Some borrowers will chose a higher amortization to keep their monthly mortgage payment lower.  With lenders now offering 15% to 20% pre payment privileges annually you can still be aggressive with paying down your mortgage even if you choose a higher amortization.

Some borrowers need a higher amortization to qualify for the loan amount they need.  When you set up your mortgage the lender will look at two ratios to qualify you and to see how much you can borrow.  They are known as Gross debt service ratio (GDS) and the Total debt service ratio (TDS).  GDS ratio includes your monthly mortgage payment along with property taxes, maintenance cost if purchasing a condo and heating.  A borrower cannot have this ratio more than 32% of their gross monthly income.  TDS ratio includes all of GDS along with other monthly debt  payments such as visa cards, car loans etc.  This ratio cannot be more than 42% of a borrowers gross monthly income.  If a borrower uses a 25 year amortization to qualify and cannot get the loan amount they need they can increase the amortization which in turn will help the borrower to qualify for a larger loan.

Having a longer amortization can mean paying more interest so if you are choosing a longer amortization to keep your monthly payment lower or to qualify for a larger mortgage loan please remember to take advantage of pre payment privileges to pay down your mortgage sooner.  Remember most of the lenders interest is collected in the first 10 years so paying even $100.00  extra per month goes directly against your principle and as a result will reduce your amortization i.e. pay down your mortgage sooner.

 

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