HawthorneVillager.com :: View topic - 40 year amortization...?

Matt wrote:

Soooooo if after 5 years you have made 10 months worth of extra mortgage payments, if you loose your job or something happens, you can miss 10 mortgage payments with no penalty. Are they being nice? No, they just want to recover the extra interest that you have saved by making the extra payments in the first place. It is a nice security blanket.

Does this apply to regular 25 year amortizations as well?

I will have to check with my bank. I can probably be disciplined enough to do some prepayments (company bonuses, etc) and this would be good to know in case I do lose my job (which is always a threat, working in the tech industry).

Your mortgage payments are devided into two parts, money that pays for interest and money that goes to pay down your principle.

The money that goes to the interest is determined by your interest rate and your remaining principle.

......

Now your payment is $1500 (either 1500 or 1250 + 250).

Since the rate and principle are the same in both cases, the ammount of interest you pay is the same. Since you are paying the same ammount/month, the ammount that goes to pay down your principle must also be the same. What increasing the ammortization allows you to do is play less to the principle every month. This will reduce your monthly payments, but you will keep your mortgage longer, and ultimately pay more interest.

By adding the prepayment, what you are doing is artifically shortening the ammortization. If you add $250 (as in your example) you would pay off your 40 year mortgage in 25 years.

I'm pretty sure that you won't pay down the mortgage any faster if you are making the same payments and the interest rate is the same. But as Steve said you will be using some prepayment room, so if you might not be able to increase your payments as much in the future.

Mike & Sophie wrote:

It depends on if the "extra" payment goes directly to principal... Many times bonus payments on a mortgage go directly to principal, so if that is the case in with this mortgage you will be paying more to principal each month, pay things off sooner, and save on the interest.

Marc

Author:	Vida [ Sat Feb 03, 2007 12:56 pm ]
Post subject:	40 year amortization...?
Can anyone with a banking/financial background help me? I initially got pre-approved with TD for a 25 year amortization loan at 5.75% (this was long before my closing). Recently I went to a mortgage broker and secured the much better rate of 4.95% over 5 years with Firstline CIBC. The problem is. . . my broker is encouraging me to take a 40 year amortization and to max out my prepayment options bi-weekly and annually instead of taking a 25 year amortization. He told me that it would be a better financial move as I would be paying down the principal faster. For instance: my payments for 25 year would be approx. 1500/month my payments for 40 year would be approx. 1250/month with $250 prepayment monthly. Is there really a benefit to paying this way when it comes to interest? I can't find any info. online claiming that a 40 yr. amortization is beneficial for this. Wouldn't everyone be getting these terms if there was that benefit? HELP!

Author:	Steve Heath [ Sat Feb 03, 2007 8:49 pm ]
Post subject:
The benefit to doing a longer amortization with prepayments is that you have a lower monthly payment but are making the same headway. There is next to no difference in the amortization schedules, which you can verify for yourself by going to one of the bank websites and using their mortgage amortization calculation tools. The pros of doing this are: - Lower minimum payments so if you need to drop down for some reason, you can... especially handy if you are unsure about income levels (ie, commission based jobs). The cons are: - If you lack discipline to make those payments your mortgage will take longer to pay off. - If you find yourself with an unexpected windfall, your prepayment room on the mortgage is now partially used. (ie, if you are taking out a $200,000 mortgage and are allowed to put 15% of the original amount on as an extra payment any year, that's $30,000 total. By paying $250/month, that number drops to $27,000 in available prepayment room). Basically the pros and cons are so minor that I don't think it really matters one way or the other. One thing you might want to think about though is paying weekly instead of biweekly... that does add up over the 25 years. Again, check out the amortization tables for your actual numbers and decide yourself if it's worth it for your personal situation.

Author:	christinajackson [ Wed Feb 14, 2007 4:53 pm ]
Post subject:
Steve raises a lot of good points. One other factor you need to consider is the Insurance Premium if you are not providing a downpayment of at least 25%. When your mortgage is insured (ie. CMHC) the premium increases with the longer amortization. Make sure you are asking the broker to confirm all of the fees involved.

Author:	Matt [ Thu Feb 15, 2007 8:18 am ]
Post subject:
Check with your banks about the extra payments with the 40 year amortization. Most places will allow your extra payments to be used to cover any delinquent payments. Soooooo if after 5 years you have made 10 months worth of extra mortgage payments, if you loose your job or something happens, you can miss 10 mortgage payments with no penalty. Are they being nice? No, they just want to recover the extra interest that you have saved by making the extra payments in the first place. It is a nice security blanket. Matt

Author:	Matt [ Thu Feb 15, 2007 10:15 am ]
Post subject:
GreyingJay wrote: Matt wrote: Soooooo if after 5 years you have made 10 months worth of extra mortgage payments, if you loose your job or something happens, you can miss 10 mortgage payments with no penalty. Are they being nice? No, they just want to recover the extra interest that you have saved by making the extra payments in the first place. It is a nice security blanket. Does this apply to regular 25 year amortizations as well? I will have to check with my bank. I can probably be disciplined enough to do some prepayments (company bonuses, etc) and this would be good to know in case I do lose my job (which is always a threat, working in the tech industry). The amortization does not affect this. It usually is determined individually by the bank. It is in their best interest to allow it. They will make more money on interest but not having your principle paid down faster Matt

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Author:	Dream [ Thu Feb 15, 2007 10:19 am ]
Post subject:	Re: 40 year amortization...?
Mike & Sophie wrote: Your mortgage payments are devided into two parts, money that pays for interest and money that goes to pay down your principle. The money that goes to the interest is determined by your interest rate and your remaining principle. ...... Now your payment is $1500 (either 1500 or 1250 + 250). Since the rate and principle are the same in both cases, the ammount of interest you pay is the same. Since you are paying the same ammount/month, the ammount that goes to pay down your principle must also be the same. What increasing the ammortization allows you to do is play less to the principle every month. This will reduce your monthly payments, but you will keep your mortgage longer, and ultimately pay more interest. By adding the prepayment, what you are doing is artifically shortening the ammortization. If you add $250 (as in your example) you would pay off your 40 year mortgage in 25 years. I'm pretty sure that you won't pay down the mortgage any faster if you are making the same payments and the interest rate is the same. But as Steve said you will be using some prepayment room, so if you might not be able to increase your payments as much in the future. It depends on if the "extra" payment goes directly to principal... Many times bonus payments on a mortgage go directly to principal, so if that is the case in with this mortgage you will be paying more to principal each month, pay things off sooner, and save on the interest. Marc

Author:	Matt [ Thu Feb 15, 2007 11:10 am ]
Post subject:	Re: 40 year amortization...?
Dream wrote: Mike & Sophie wrote: Your mortgage payments are devided into two parts, money that pays for interest and money that goes to pay down your principle. The money that goes to the interest is determined by your interest rate and your remaining principle. ...... Now your payment is $1500 (either 1500 or 1250 + 250). Since the rate and principle are the same in both cases, the ammount of interest you pay is the same. Since you are paying the same ammount/month, the ammount that goes to pay down your principle must also be the same. What increasing the ammortization allows you to do is play less to the principle every month. This will reduce your monthly payments, but you will keep your mortgage longer, and ultimately pay more interest. By adding the prepayment, what you are doing is artifically shortening the ammortization. If you add $250 (as in your example) you would pay off your 40 year mortgage in 25 years. I'm pretty sure that you won't pay down the mortgage any faster if you are making the same payments and the interest rate is the same. But as Steve said you will be using some prepayment room, so if you might not be able to increase your payments as much in the future. It depends on if the "extra" payment goes directly to principal... Many times bonus payments on a mortgage go directly to principal, so if that is the case in with this mortgage you will be paying more to principal each month, pay things off sooner, and save on the interest. Marc Where else would or could the extra payment go to? It has to go to the principle. All bonus payments go directly to the principle. Matt

Author:	woodclan [ Thu Feb 15, 2007 11:55 am ]
Post subject:
We are going with the 40 year amortization. Not exactly what I want to do but we are using it as a safety net since my eldest may start college in September and my middle one university in a couple of years. This way we have lower payments but can make extra when we have a few extra $. Hopefully when it comes time to renew in 5 years, we can then switch to a 25 year (although it will be the youngest's turn for college/university!) Anyhow, we just don't want to get to tight with the payments and not be able to do other things...

Author:	Steve Heath [ Thu Feb 15, 2007 1:18 pm ]
Post subject:
Another option if you are making prepayments and the bank won't let you skip payments later is to just get a home equity line of credit. If, after the emergency, you can catch up and pay off the LoC, do so. If not, you could lump it into your mortgage during the next renewal. It depends on the timing, if interest rates go down between your mortgage and the renewal, LoC may be a lower interest rate... if it goes up, it will be a lot higher.

Author:	Vida [ Thu Feb 15, 2007 7:50 pm ]
Post subject:
Thanks for all of the answers everyone. I don't think that there will be a difference either way so I will probably just go with the 40 year for now since it will give me some flexibility as a first time homeowner. I can't imagine myself having an extra $30,000 anytime soon so I am not going to worry about using my prepayment room right now. I just wanted to make sure that I was educated (by someone other than my broker) on all of the pros and cons before I signed the papers.

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