Which Mortgage Term is Best?
(Ten-minute read time)
The process of getting a mortgage can be an exciting but also nerve-wracking time. A lot goes into the mortgage process, and making the right decisions early on can help you save money throughout your mortgage agreement. A crucial element of a mortgage is choosing which term will work best for you and your current financial situation. Both short and long-term mortgages come with advantages and disadvantages, so consider your options carefully before deciding.
What is the Difference Between Mortgage Term and Mortgage Amortization?
The mortgage term means the length of the contract between you and your lender. The mortgage contract defines the interest rate and details the rules for prepayment and the options you might have included. The mortgage contract also explains the penalties for default and for paying off the mortgage early. You will have a term with whichever lender you choose for your mortgage, and when your term expires, you can pay off the entire mortgage, or you can look for another mortgage.
Amortization refers to the expected time to pay off the entire amount owing. Usually, your amortization will be either 25 or 30 years, and during that time, you will likely have many mortgage contracts with a variety of terms depending on what works best for you. Your rate and the other rules for your mortgage will change during your amortization with each new term. For example, a 25-year amortization would need five 5-year mortgage terms to be fully paid off. It’s common for people to choose different terms and sometimes change their amortization depending on life’s circumstances.
Shorter-Term Vs. Longer-Term Mortgages
Mortgage terms can vary from just a few months to five years or more, and it’s important to know that the length of your mortgage term impacts your interest rate. Here’s a brief rundown of both mortgage terms.
Shorter-Term Mortgage
In Canada, most mortgage holders utilize a shorter-term mortgage, five years or less. The shorter your mortgage term is, the more frequently you will need to renew your mortgage contract. Also, with a shorter-term mortgage, you can:
Choose the type of rate – either a fixed or variable interest rate
Take advantage of a lower interest rate when you renew your mortgage contract
Longer-Term Mortgages
A longer-term mortgage is a mortgage with a term that is greater than five years. The longer the mortgage term, the longer you must maintain your initial mortgage agreement conditions. With a longer-term mortgage, you are:
Confined to a fixed interest rate
Locked in at an interest rate for a more extended amount of time
Required to pay a significant prepayment penalty if you happen to sell your house within the first five years of the term.
What are the Pros and Cons of Short-Term and Long-Term Mortgages?
To better understand what you’re getting into with shorter-term and longer-term mortgages, here is a list of the pros and cons of each to help you make an informed decision about which term is better for you and your financial situation.
Shorter-Term Mortgages
Pros:
Lower interest rate
Flexibility
Short-term, variable mortgages offer more freedom than longer-term fixed mortgages. Read more about the difference between variable and fixed mortgages.
Able to adapt to life changes easier
Can help improve credit score
Cons:
Less stable than longer-term mortgages
Interest rates can change for variable mortgages
You may pay more in transaction costs
Can be costly to alter or modify the terms of your mortgage agreement.
Long-Term Mortgages
Pros:
Can offer more financial stability than shorter-term mortgages
Easy to budget for
Allow you to form a stronger relationship with your lender
Cons:
More rigid rules and obligations
Less freedom or “wiggle room”
You may pay higher interest rates
Can be costly to alter or modify the terms of your mortgage agreement.
What Mortgage Term is Most Popular and Why?
On average, most Canadians opt for a shorter-term mortgage. According to Statistics Canada, almost three-quarters of Canadians had a short-term, fixed-rate mortgage in the last five years. Most homeowners who choose this option over a longer-term mortgage do so because of the freedom it grants them. Whether it’s moving for work, increasing family size, or trying out urban or rural settings, homeowners like having more financial freedom when it comes to their homes.
A study recently done by the Canadian Association of Accredited Mortgage Professionals estimates that the average Canadian will own between 4.5 to 5.5 houses over their lifetime. A shorter-term mortgage allows homeowners the ability to move around and not feel stuck in one property for too long.
Contact the dedicated professionals at WealthTrack If you have any questions regarding the different kinds of mortgage terms or anything else related to mortgages and discover your dream home today.
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