People tend to be concerned with the length of amortization on their mortgage and think, “35 years? That’s way too long to be paying for my house.” Ultimately, the amortization you choose while applying for financing is not the be all, end all. If you choose to get a longer amortization, the lenders will approve you for a higher mortgage amount. This means you will have more flexibility when searching for the ideal home. If you apply for a mortgage with an amortization of 20 years, you might only be pre-approved for $250,000 (depending on your down payment, income, etc.). However, if you apply for a mortgage with an amortization of 30 years, you could get pre-approved for $300,000.
Consider this. You are pre-approved for the $250,000 mortgage with a 20 year amortization and are shopping for a home. You find the ideal place but can’t negotiate for less than $260,000. If you can’t come up with $10,000 cash you would not be able to finance this place. On the other hand, if you had been pre-approved at a 30 year amortization you would have far more flexibility and the deal could still go forward.
As I previously mentioned, people are often concerned about the length of amortization as the idea of paying off a house into one’s 50’s is often troublesome. The great thing is, even if you are pre-approved for a 30 or 35 year amortization, there are ways to shorten the period by making prepayments towards your mortgage. If you have extra cash from a tax return, a gift, a bonus or you have some savings you can add it directly towards the principal amount of your mortgage.
Most lenders give three options for making prepayments on your mortgage (rules may vary between lenders):
1) You can make a lump sum annual prepayment on a regular payment date of a minimum of $100 and up to 20% of your mortgage principal.
2) Once a year you have the opportunity to increase your payment amount up to 20%.
3) On any regular payment date you may pay double the amount of your usual payment and it will go towards your principal amount.
By choosing to take advantage of one or all three of these prepayment options you could cut your amortization period in half or create that 20 year amortization your might have initially preferred.