Mortgage Lifespan (Amortization)

Loan Lifespan is the number of years it takes to pay off the loan (see diagram above). Banker types call it “amortization”. Why is the lifespan significant?

So yes, you will pay more interest over the life of the loan with a longer lifespan if you don’t prepay your mortgage at any point. Still, mortgage interest is the lowest interest rate available to consumers. If you must choose between taking a few more years to pay off your mortgage and holding balances on credit cards or car loans, you should take a long-lived mortgage and not take on other, more expensive debt.

Also, long mortgages provide flexibility. You can always pay them down more quickly. To extend the life of a short-lived mortgage, you would have to re-apply.

House rich and cash poor? Long-lived mortgages leave you less cash-poor. Yes, it may cost you interest, but it’s worth it if you have money today for a romantic getaway or special programs for your kids.

Example:

So that you fully understand the impact of mortgage lifespan on your finances, we will compare two mortgages after the first five years that are identical except for the lifespan.

Loan Amount:                                        $300,000

Fixed 5-year Mortgage Rate:               3.50%

Payment Frequency:                              Monthly

As you can see, by choosing a longer lifespan, you reduce your mortgage payments by $260 a month or $3,120 annually for five years, and the interest cost to you is only $1,420.

Remember, you haven’t paid down your mortgage as much, but if three thousand makes a difference to daycare, a romantic vacation, or to pay for some new appliances, you may not mind paying your mortgage off 5 or 10 years later. Remember, you can accelerate your repayment later when you get a bonus, inheritance, gift, or lottery win.

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