# Shorter term amortization vs Longer term amortization + principle payments



## dixon7800 (Jun 25, 2015)

Im going to be getting a new house in a few months time and debating which amortization length i should choose. 

Its between the 15 or 20 year amortization or 25 year amortization + putting 1k extra every month or 2 towards the principle payment.

What would you choose?


----------



## Just a Guy (Mar 27, 2012)

Best idea is to get the longest amortization possible.

Once you do that, tell the bank to set your payments as if it was a lower amortization (say 20 year, bi-weekly rapid). 

If anything goes wrong, you can reset your payments back up to the longer time period without any renegotiation or issues. 

If you lock in at the lower amortization and something happens, your hooped.

Your payments and your terms don't have to match.


----------



## dixon7800 (Jun 25, 2015)

Just a Guy said:


> Best idea is to get the longest amortization possible.
> 
> Once you do that, tell the bank to set your payments as if it was a lower amortization (say 20 year, bi-weekly rapid).
> 
> ...



Interesting, I didnt know that the payments and terms dont have to match. Lets say I went that route and my 25 year amort monthly payments are $2000 and i set the monthly payments to be at $3000, that would mean an extra $1000 goes towards principle every month correct?


----------



## Mortgage u/w (Feb 6, 2014)

dixon7800 said:


> Interesting, I didnt know that the payments and terms dont have to match. Lets say I went that route and my 25 year amort monthly payments are $2000 and i set the monthly payments to be at $3000, that would mean an extra $1000 goes towards principle every month correct?


You are limited to how much extra you can increase your payment. Look at your mortgage benefits. Usually, you are allowed 15% or 20% payment increase without penalty. So if your payment is $2000, you can't increase over $2300 (15%) or $2400(20%) without incurring a penalty. Most lenders offer a combination of benefits - payment (%) increase, doubled up payment and lump sum payment without penalty. Speak with your lender to see if you can incorporate 2 or more benefits at once in order to maximize your payment. And yes, the extra is applied directly to the capital.

Best strategy is as mentioned in previous post: take the highest amortization available (30 years if loan is conventional) and then increase your payments as needed. An insider secret is to have the lender "set" the payment before you finalize the mortgage - this usually, does not affect your benefits so you can increase your payments even further later on.


----------



## bgc_fan (Apr 5, 2009)

dixon7800 said:


> Interesting, I didnt know that the payments and terms dont have to match. Lets say I went that route and my 25 year amort monthly payments are $2000 and i set the monthly payments to be at $3000, that would mean an extra $1000 goes towards principle every month correct?


I'm not sure if Just a Guy is talking about something different, but what you can do is look at your mortgage terms. Most mortgages offer the chance to increase your payments by a certain percentage on a yearly basis. If you can't make those level of payments, you can always default back to the original payment amount. For example, I think the first mortgage I had, the terms allowed me to increase the payment amount by 10% each year. So right away (based on a $1000/month), I would up it by the 10% and so the payments would be $1100, with the $100 going to principle. The next year, I increased it by another 10%. On another mortgage, I believe they allowed doubling of the payment.

In addition to that, most mortgages allow some pre-payment without penalty, say 20-25% per year. So if you had extra cash, you can pay it down under those terms. The only thing is to look at the stipulations: some allow lump-sum only, while there are others that allow cumulative payments over the year as long as the total does not exceed the pre-payment amount for the year.


----------



## nobleea (Oct 11, 2013)

I suspect my bank was bending the truth a bit, but when I increased my payments by the allowable 20% each year, they indicated that this was not reversible.

I was pretty sure it was reversible but I didn't feel like debating that and had no intentions of bumping the payment down in the future.


----------



## heyjude (May 16, 2009)

nobleea said:


> I suspect my bank was bending the truth a bit, but when I increased my payments by the allowable 20% each year, they indicated that this was not reversible.
> 
> I was pretty sure it was reversible but I didn't feel like debating that and had no intentions of bumping the payment down in the future.


This is why I prefer to save up and put a payment against the principal once or twice a year.


----------



## dixon7800 (Jun 25, 2015)

bgc_fan said:


> I'm not sure if Just a Guy is talking about something different, but what you can do is look at your mortgage terms. Most mortgages offer the chance to increase your payments by a certain percentage on a yearly basis. If you can't make those level of payments, you can always default back to the original payment amount. For example, I think the first mortgage I had, the terms allowed me to increase the payment amount by 10% each year. So right away (based on a $1000/month), I would up it by the 10% and so the payments would be $1100, with the $100 going to principle. The next year, I increased it by another 10%. On another mortgage, I believe they allowed doubling of the payment.
> 
> In addition to that, most mortgages allow some pre-payment without penalty, say 20-25% per year. So if you had extra cash, you can pay it down under those terms. The only thing is to look at the stipulations: some allow lump-sum only, while there are others that allow cumulative payments over the year as long as the total does not exceed the pre-payment amount for the year.


When you say doubling of the payment do you mean every month im allowed to put $4000 as payment on my $2000 actual mortgage payment?

The lump sum payment to my understanding is only allowed once a year within that 20% ish threshold is that correct?


----------



## dixon7800 (Jun 25, 2015)

Mortgage u/w said:


> You are limited to how much extra you can increase your payment. Look at your mortgage benefits. Usually, you are allowed 15% or 20% payment increase without penalty. So if your payment is $2000, you can't increase over $2300 (15%) or $2400(20%) without incurring a penalty. Most lenders offer a combination of benefits - payment (%) increase, doubled up payment and lump sum payment without penalty. Speak with your lender to see if you can incorporate 2 or more benefits at once in order to maximize your payment. And yes, the extra is applied directly to the capital.
> 
> Best strategy is as mentioned in previous post: take the highest amortization available (30 years if loan is conventional) and then increase your payments as needed. An insider secret is to have the lender "set" the payment before you finalize the mortgage - this usually, does not affect your benefits so you can increase your payments even further later on.


If I set my payment higher to begin with, say 3k every month instead of 2k (my actual 30 yr amort payment) does that extra 1k go towards principle and none to interest?
This may be a more viable option for me if that extra amount goes directly to interest while still allowing me to increase or lower it later if need be.


----------



## none (Jan 15, 2013)

Set your payment period to coincide with how often you get paid at work. Every month - do monthly - every two weeks - do that.


----------



## heyjude (May 16, 2009)

dixon7800 said:


> The lump sum payment to my understanding is only allowed once a year within that 20% ish threshold is that correct?


That has not been my experience. I can go online any time and make a prepayment without incurring a penalty, so long as the cumulative amount for the mortgage year (in my case, 20%) has not been exceeded. On the anniversary date, the eligible prepayment amount resets to 20% of the principal. In any given mortgage year, you use it or lose it.

It's important to ask about all these details before signing the mortgage contract. Ask for the features that are important to you.


----------



## Bowzer (Feb 25, 2015)

I took a 30 year mortgage, but double up the payments every month, and I also make 1 lump sum allowed per year which was 10% of the original mortgage amount. 

Like others have said, I'm being aggressive, but if something with my business goes south, I can cut that way back without any trouble from the bank so all these extra payments are optional.


----------



## RCB (Jan 11, 2014)

I've bumped up the bi-weekly payments on our Scotia mortgage every year, by no more than $20 per payment. Those bumps are NOT reversible on our 5 yr closed, so kept minimal. I once made a less than 15% lump sum payment. Between those actions and decreasing interest rates since we obtained the mortgage in 2003, it has caused the mortgage to go from being paid in 25 years to 14 years. I was not comfortable locking us in to large payments through bumping or changing the ammortization period.

Keep in mind that if you make an annual lump payment of 15% of the original mortgage amount (what MY mortgage allows) for 5 years, that comes to 75% of the original mortgage amount, 6 years is 90%. This without locking into a higher payment.


----------



## Shayne (Apr 3, 2009)

Some lenders have different rules so that will change how you can make prepayments. We used Merix 8 years ago and took a 40 year amortization just to maximize our cash flow. The have a yearly 20% prepayment privilege and we called every month with the amount we wanted to prepay. This allowed us to control our cash flow and if we suffered job loss our regular monthly payments would be very low. Seven years later our mortgage is paid. 

My 2 cents is go with the longest amortization possible and select a lender that will allow you to prepay 20% a year. This maximizes your cash flow.


----------



## Mortgage u/w (Feb 6, 2014)

dixon7800 said:


> If I set my payment higher to begin with, say 3k every month instead of 2k (my actual 30 yr amort payment) does that extra 1k go towards principle and none to interest?
> This may be a more viable option for me if that extra amount goes directly to interest while still allowing me to increase or lower it later if need be.


Yes it will go directly to your amortisation. But you need to validate with your lender because not all of them allow this "cheat" without dipping into your repayment benefits.


----------

