I want to talk to you about amortization. What is it and how can we potentially change it so you have more cash flow in your budget?
What Is Amortization?
Amortization is the length of time it takes you to pay back the full amount of your mortgage plus the associated cost of borrowing (interest). A typical mortgage amortization period is 25 years.
Amortization is Just a Number
In a previous video, I mentioned that amortization is just a number and I want to go a little bit deeper into that.
When you have less than 20% down when purchasing a house, are capped at a 25-year amortization. That is the max you can go.
If you’re putting more than 20% down, that’s a conventional mortgage, and oftentimes you can go up to 30 years.
In an environment right now where rates are quite a bit higher than what they were five years ago, people are going to experience a bit of a payment shock when renewal comes up. You could be 10, 15 or even five years into your mortgage—most people will likely have this experience.
This is where we can look at refinancing your mortgage to increase your amortization to get your payments down so you have more cash flow in your budget.
Now, this doesn’t necessarily mean if you increase your amortization to 25 or 30 years that you’re going to have a mortgage for that long.
You can reduce the effective amortization by doing things later on like lump sum or accelerated payments. These are an option when you are in a good cash flow position and you have no debt.
Why Bumping Up Your Amortization Can Make Sense
Generally, your mortgage is the lowest-interest debt that you may have. You may have credit cards at 10%, 12% over or 18%.
We want to look at paying those off first. So, this may mean extending your amortization on your mortgage to get those payments down, free up that extra cash, and put it against those other debt payments.
Then, when it gets to a time where you have more cash flow, you can take that extra money and lump sum that mortgage. When you lump sum, that drops the effective amortization.
There are a lot of other strategies we can look at for extending your amortization, reducing your payments, and freeing up cash flow.
Please send me a message if you have any questions about how to do this with your mortgage.