Mortgage Term

A mortgage term represents the period of time a mortgage contract is essentially in effect. In most cases, the mortgage term is between six months and five years, but some financial institutions feature longer terms. The choice of term depends on whether the borrower expects interest rates to go up. A mortgage with a shorter term is better if you expect that interest rates will remain low and want to renegotiate your term and interest at the end of the mortgage. A longer term is a wiser choice if you expect interest rates to increase. Then, it makes sense to take advantage of the present lower rate over a longer period.

There are three options once the mortgage term expires. The remaining balance has to be paid in full, modified, or renewed. The mortgagor and the mortgage lender are obliged by law to the conditions of the mortgage over its term. Several months before expiration, the lender sends the mortgagor the papers that are required for renewal. However, neither the financial institution nor the borrower is required to renew the mortgage. If they wish, the mortgagor is allowed to transfer the mortgage loan to another financial establishment, and no penalty applies.

It should be noted that the mortgage amortization period is different from the mortgage term. The amortization period represents the amount of time that takes the mortgagor to pay off the mortgage in full. It is based on monthly payments as specified in the mortgage contract. In this sense, the amortization period is longer compared to the mortgage’s term.

In general, the mortgage term encompasses the period of time a mortgagor commits to the lender, the mortgage rate, and the terms and conditions of the mortgage. The chosen term determines the mortgage, acting like a reset button. At the end of the mortgage term, the mortgage loan may be renewed, and a new interest rate will apply.

Note that choosing an extra long term is not the best option, tying your money for a very long period of time. If you sign a thirty year mortgage, you end up paying a large amount of money in interest charges. This makes it more difficult to build equity, which is your home’s current market value, less the outstanding balance on your mortgage. As a home owner, you can build equity by freshening up the house décor, adding landscaping, or making renovations. The best way to increase equity, however, is to reduce the outstanding balance of your mortgage. Having low monthly payments is not the way to achieve this. In fact, long term mortgages are risky from the point of view of financial institutions, and you may be offered a high interest rate. This means that if you extend the mortgage term by just 5 years, you may end up paying a lot of your potential equity to your financial institution in interest charges.

Choosing a short term mortgage – from two months to five years – requires discipline on your part. With higher biweekly or monthly payments, meeting the contributions means that you need to sacrifice more. Then, you may risk falling behind on payments if it happens that money is tight. A long term makes sense if you are a young person who starts without a lot of capital. If you have good income prospects and many years of work ahead of you, you should be able to make the mortgage payments, keeping your budget well structured. A short term mortgage, on the other hand, is a better option for persons nearing retirement who do not want to be burdened with mortgage payments when they do not work any longer.