How would shortening my amortization affect my mortgage?
What most people don’t realize, is that it may be possible for them to shorten their amortization, allowing them to pay off their mortgage faster and save money on interest.
Let’s compare how changing your mortgage’s amortization affects a $200,000 mortgage with a 5-year fixed rate term, a rate of 5.39%, and an amortization of 25 years.
The monthly mortgage payment would be $1,208.01, and at the end of your 5-year term, you will have paid off $21,919.09 off your principal, and paid $50,561.51 in interest. If you were to shorten your amortization to 23 years, the monthly payment would be $1,258.83 (only $50 more), and you will have paid $25,404.45 off your principal at the end of your term, as well as $50,125.35. You’re not saving a huge amount in interest in this period of time, but you’re paying your mortgage off much faster.
Interest savings over the entire life of your mortgage, however, are significant. If your amortization is 25 years, you’d pay $162,401.14 in interest. If you were to shorten that amortization to 23 years, you’d pay $147,439.39. That’s a savings of $14,961.75!
Pretty big difference, right?
Now let’s take it one step further, and suppose that you were to shorten your amortization to 20 years.
Your monthly payment will $1,356.69, so still relatively manageable, and at the end of your term you will have paid $32,115.94 off your principal and $49,285.46 in interest. Not only do you save $1,276.05 in interest, but you’ve paid your mortgage down by $10,196.85 more.
Remember we said that if your amortization is 25 years you’d pay $162,401.14 in interest over the life of your mortgage? If you amortization is 20 years, you’d pay $125,606.99 in interest. That means you save $36,794.15 by choosing a 20 year amortization over 25 years.
Think of what you could do with almost $37,000 extra in your pocket…
While shortening your amortization period may not provide the same significant interest savings as the other strategies we’ve discussed so far, it gives you the freedom to put your “monthly payment money” to good use somewhere else (like that car you’ve been wanting to test drive) once your mortgage is paid off quickly.
Please note that in order to shorten your amortization without penalty, you must do so either upon renewal or when you are refinancing for another reason. Therefore, this is a good strategy to employ at renewal.