New Home Buyers Need to Understand Amortizations

THERE IS A LARGE misunderstanding among new home buyers about extended amortizations.

An amortization should be looked at two ways:

1. As a first time home buyer, an extended amortization can enable you to get into a home that you otherwise would not qualify for, due to limited or lower income. This in no way means that you will take 30 or 35 years to pay off that mortgage. In Canada, we have TERMS with our amortization schedules. You choose a TERM, i.e., 3 yr fixed or 5 yr fixed, or 5 yr variable, etc. At the end of your TERM, you will be able to renew AND renegotiate your rate and amortization. So, let’s say that in the 5 years of your TERM, you get pay increases, or other income that will allow you to afford a lower amortization. It is at the end of the existing term that you would request it be lowered.

2. The second use of an amortization is the opposite. Let’s say you have sold your existing home and realized a large equity appreciation (profit). You are using that appreciation (money) as a down payment on your next home. This larger down payment on a move up home, allows you to seriously reduce your amortization and start planning for mortgage freedom. This is when you sit down with me and we discuss the many strategies that are in place to pay your mortgage down as quickly as you can.