Mortgage Lifespan (Amortization)

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Last updated Feb 15, 2018

Loan Lifespan is the number of years it takes to pay off the loan (see diagram above). Banker types call is “amortization”. Why is the lifespan important?

Shorter Lifespan Longer Lifespan
  • Less total interest paid
  • Higher payments
  • Mortgage is paid off sooner
  • More total interest paid
  • Lower payments
  • Mortgage is paid off later

So yes, you will pay more interest over the life of the loan with a longer lifespan if you don’t prepay your mortgage at any point in time, but mortgage interest is the lowest interest rate available to consumers. If you need to choose between taking a few more years to pay off your mortgage and holding balances on credit cards or car loans, then you should take a long-lived mortgage and not take on other more expensive debt.

Also, long mortgages provide flexibility. You can always pay them down more quickly. To extend the life of a short-lived mortgage, you would have to re-apply.

House rich and cash poor? Long lived mortgages leave you less cash poor. Yes it may cost you in interest but it’s worth it if you have money today for a romantic getaway or special programs for your kids.

Example:

So that you fully understand the impact of mortgage lifespan on your finances, we will compare two mortgages after the first 5 years that are identical except for the lifespan.

Loan Amount:                                        $300,000

Fixed 5-year Mortgage Rate:               3.50%

Payment Frequency:                              Monthly

25 Year Lifespan 35 Year Lifespan
Monthly Payment $1,500 $1,240
Loan Balance After 5 Years $259,000 $276,000
Total Cost of Borrowing $48,710 $50,130

As you can see, by choosing a longer lifespan you reduce your mortgage payments by $260 a month or $3,120 annually for five years and the interest cost to you is only $1,420.

Keep in mind, you haven’t paid down your mortgage as much, but if three thousand makes a difference to daycare, a romantic vacation, or simply to pay for some new appliances, you may not mind paying your mortgage off 5 or 10 years later. Remember, you can always accelerate your repayment at a later date when you get a bonus, inheritance, gift or win the lottery.

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