Amortization – What is it?
Investopedia defines Amortization as follows: “The paying off of debt in regular installments over a period of time.”
Basically amortization is how long a mortgage loan takes to pay off. Most Buyers in the Vancouver Real Estate Market start out with a 25 year amortization which will take 25 years to pay off.
At the start of the mortgage the property owner will be paying mostly interest and very little principal and at the end of the amortization the opposite is true.
With a mortgage with a longer amortization (ie 35 years), the monthly payment will be lower, but the amount of interest paid per month is higher and the principal repayment is lower. Over 35 years this could result in a huge (double the amount borrowed or more) amount of interest for a property owner to pay. Reduce the amortization and the monthly payments increase, but the principal repayment also increases while the interest paid declines and the debt is paid off in a shorter period of time.
The embedded amortization calculator below will allow you to play with various scenarios to help you better understand how amortization works.
For a video version of this entry, visit Mike Stewart, Realtor’s Blog
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