What is term and amortization?

Often times, clients say they don’t understand the difference between term and amortization when talking about mortgages. It is a fair point – a common confusion -, but one that needs to be clarified to be able to know all the options available.

A mortgage term is the length of time, usually in years, you commit to the mortgage rate, lender, and associated mortgage terms and conditions. In other words, usually one to ten year terms in the parameters of a mortgage. After the expiration of the mortgage term, the remaining balance of the mortgage will need to be renewed, refinanced or paid in full. If you renew it, it must be done at a new rate available at the end of the term.

Amortization, on the other hand, relates to the rate at which the mortgage is paid off. Most borrowers start with a twenty-five year amortization period. That means the mortgage will be paid off in full after twenty-five years based on the monthly payments and level of interest rates in the initial mortgage.

The fastest way to pay off a mortgage is to shorten the amortization rate. Most people tend to think of amortization rates in terms of five year multiples. But there is no rule to that effect. As a borrower, you can pick any amortization rate you want from one year right up to twenty-five.

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