30 Sep What’s the optimal amortization rate?
When discussing mortgage options with my clients, many of them ask me what the best amortization rate is. I respond, “it depends” First off, one must have at least 20% down or 20% equity in their home before qualifying for a 30 or 35 year amortization, and in some cases, the banks/lenders that offer extended amortizations are not offering best rates. Therefore, “it depends” on your goals, and what’s best for your current situation.
But, if the client qualifies for a 30 or 35 year amortization, and the bank/lender is offering a competitive rate, and mortgage product that’s suitable for their needs then the answer is…as long as you can get.
Why? By setting your amortization at 30 to 35 years, you drive your monthly payment down, reducing your overall costs. Then this is where the strategy kicks in, and as a broker I help you become mortgage free sooner. We increase your payments and take advantage of your pre-payment privileges. Your paying more than the bank/lender is expecting, and that increase in monthly payments goes directly towards paying down the principal of the mortgage.
Let’s look at an example using my strategy:
Lets start with a mortgage of $500,000. Payment of $1,500/month based on a 30-year amortization. However, you choose to pay accelerated bi-weekly based on a 25-year amortization. Your bi-weekly payment is $900. However, 15 years into the mortgage you lose your job, struggle to find new work, and rely 100% on your spouse’s income. You then approach the lender to “re-amortize” your mortgage, meaning 30 years less time elapsed, so effectively 15 years. However, in the 15 years that have elapsed, you have been making accelerated payments so your mortgage balance is lower than it would have been otherwise. As a result your re-amortized payment is $1,000/month. Effectively you’ve built-in payment reduction insurance at no cost! Please note: you could also use this strategy if rates were to rise substantially and you want to lower your payment!
Here’s another reason to choose a longer amortization: If you have a rental property, a longer amortization will reduce your monthly payments and therefore increase your cash flow. The rental pays for itself every month and the interest is tax deductible. Plus, who cares how long it takes to repay the mortgage? Every month the rental is building equity and eventually you’ll have enough equity in the property to refinance it and get a down payment to buy another property.
Please feel free to reach out if you have any questions.
Have a great week.