Lengthening Amortization

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Dominion Lending Centres recently published an interesting article on how lengthening your amortization can lead to financial flexibility. To read the full article, please click here.

“…There are two types of amortizations: the paper, and the effective.

The paper amortization is the number written on your initial mortgage payment contract, and the effective amortization is the actual, real-world version of your payments.

These two numbers can significantly vary over time.

It is worth considering setting, or re-setting at renewal or refinance time, the paper amortization to the maximum possible timeframe. This is typically 30 years in conventional financing or 25 years in high-ratio financing, with the latter being defined as a purchase with less than 20% down.

Now, although you likely have hopes and dreams of paying off your mortgage within the first 10, 15, or 20 years, your contract on paper should always extend to the longest period of time. If for any reason you ever wanted to lower your minimum payment and stretch the amortization back out, you would not be able to; it’s a one-way street. Your amortization cannot be extended further than the initial contracted number of years, as this would break the mortgage. This would potentially trigger a pre-payment penalty, as well as leaving you with a higher interest rate than when you originally began the mortgage.

These are the two main reasons for wanting to lengthen an amortization and lower minimum payments.

Reason #1: Good News

After receiving some sort of good news, lengthening an amortization can be beneficial for long-term success or financial growth…”

“…Reason #2: Bad News

In contrast, there can also be discouraging or unfortunate reasons for needing to lengthen an amortization and lower minimum payments. For example, there could be a problem in health, a loss of employment, or any other situation which would result in a lower overall income. Even with potential disability insurance, lower minimum payments are often necessary.

A simple e-mail or phone call to your bank can reduce your payments back to the minimum. If your original contract was for 30 years, this is the timeline you’re able to re-amortize back to with no fees, no costs, and no problems.

Remember, this is a one-way street. It is simple to shorten the effective amortization, but difficult and potentially very costly to extend it beyond the original contracted figure.

The freedom to lengthen your amortization and lower minimum payments allows for financial flexibility. Ensure you have the control over this call from day one…”

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