Mortgage Term vs Amortization
Many people are often confused between the mortgage term and the amortization period of a mortgage. In Canada, a typical mortgage will be structured with a 5 year term and a 25 year amortization period.

Mortgage Term:
The mortgage term is selected by you, the mortgage holder. The mortgage term is defined as the length of time you commit to the mortgage rate, lender and the terms and conditions set forth by the lender. Depending on the mortgage term that you select, it will have a direct impact on the mortgage payments. Mortgage terms can vary is length from as short as 6 months to as long as 10 years, sometimes even longer. The majority of mortgage holders will choose a 5 year mortgage term. Typically, shorter mortgage term lengths tend to offer lower interest rates and longer mortgage terms typically offer higher interest rates. This is due to the fact that longer mortgage terms offer more stability to the mortgage holder. After the mortgage term expires, the mortgage holder is required to renew the mortgage at the new mortgages rates, whatever they may be at the time.

Amortization Period:
The mortgage amortization rate is also selected by the mortgage holder and also offers various options and flexibility. The amortization period is defined as the amount of time (normally years) it takes to pay off your entire mortgage. A typical mortgage amortization period is 25 years in Canada. However, there are many options that can fit the needs of just about anyone. Amortization periods can range from 3 months to up to 30 years. Due to the recent downturn of the US housing market, Canada has reduced the maximum amortization period from 35 years to 30 years, as of March, 2011. The majority of mortgage holders will choose an amortization period of 25 years. Longer amortization periods will result in more interest paid, but lower monthly payments and shorter amortization periods will result in less interest paid, but higher monthly payments.

Short Term Vs. Long Term Amortization Examples

30 Year Amortization Period:
Mortgage Amount: $500,000
Interest Rate: 4%
Monthly Payment: $2,387.00
Total Interest: $359,349.00

25 Year Amortization Period:
Mortgage Amount: $500,000
Interest Rate: 4%
Monthly Payment: $2,640.00
Total Interest: $291,757.00

15 Year Amortization Period:
Mortgage Amount: $500,000
Interest Rate: 4%
Monthly Payment: $5,062.00
Total Interest: $107,471

Mortgage Definitions, Home Buyers Tools, Tips and Useful Info: