Mortgages are a mystery to many of us. The lenders that supply the money are distant and unseen, yet there reach is almost limitless. So rising prices many lenders have been extending longer and longer amortization periods. It is about time we figured out what amortization is and how it actually affects us?
The concept of amortization is relatively simple; Amortization is the period, usually in a number of years that it takes to repay your mortgage in full. A typical mortgage was amortized over 25 years. Shorter amortizations do exist, such as 10, 15, and 20 years. Yet longer amortizations of 30, 35, 40 and 50 years are becoming more and more common.
So what does the amortization period really mean for us? Obviously the longer the amortization period the lower are monthly payment is. In this regard our borrowing power is vastly improved. We can borrow more money over a longer period of time and we will pay less money on a monthly basis.
The major drawback of the longer amortization period is that many individuals will never pay off the mortgage they have on there home. The idea is that property values will continue to appreciate and that is how you will recover the investment in your home. This in reality is a rather costly prospect.
For instance a $200,000 home at a 6% interest rate will cost $1279.61 monthly for a 25-year amortization. This means that it cost you $383,883 to purchase your home. That same mortgage over 40 years would have monthly payment of $1100.43. The overall cost now becomes $528,206.40. That is an overall increase of $144,323.40 in the cost of borrowing for the longer amortization period.
As a consumer you need be very aware of the cost of borrowing. The impact of a longer amortization period, although it allows us to increase our borrowing power provides for some significant long-term costs.
