Confusion arises when it comes to understanding the difference between terms and amortization periods. Let us discuss these concepts at length.
The term of your mortgage will typically be shorter. The term is the duration of your mortgage agreement, at your agreed interest rate. This will be a very specific length of time, although you will have several choices.
A 6-month mortgage is a very short-term mortgage. A 10-year mortgage will be one of the longest terms, generally with a higher rate of interest to represent the higher degree of uncertainty in the economic outlook. After your mortgage term expires, you will need to either pay off the balance of the mortgage principal, or negotiate a new mortgage at whatever rates are available at that time.
Amortization on the other hand is the total period of time it takes you to pay off the entire mortgage.
The amortization period is typically 15, 20 or even 25 years, although it can be any number of years or part-years. You could establish that you are able to make a certain payment each month of say $950 for your $130,000 mortgage at 5.5%. In this case, your amortization period will be just under 18 years. Or you could tell your broker that you’d like to be mortgage-free in just 10 years. With an amortization period of 10 years at the same interest rate, your $130,000 mortgage will cost you about $1,407 per month. That’s a tougher monthly payment, but you would save thousands of dollars in interest. (More than $35,000, in fact.) As you arrange your mortgage, then, keep in mind that your amortization period may be fairly long -- although the shorter you can make it, the less you’ll wind up paying for your home in the long term.